Regulation SHO, Illegal Shorting, and Clear Evidence of Fraud – May 2, 2005
The list of public companies denied the right to fair market practices continues to grow. With the daily publication of the Regulation SHO threshold list is the continued evidence of regulatory neglect and securities fraud. The only remaining question, where are the Congressional Oversight Committee’s and how far out of control will it get before they step in?
At the present time, 27 listed companies have resided on the Regulation SHO threshold list for a period of no less than 70 trading days [4 Calendar Months]. For each the failures to settle, failure to deliver, has exceeded 0.5% of the shares issued and outstanding for a period that far exceeds the normal settlement cycle, 3-days, and is far beyond any legal limits set forth by the SEC or Congress. Yet, the SEC protects the violators of settlement as if it is they that have the rights and not the investor. They [violators] are undertaking ‘important and secret trading strategies’ that we the investors do not need to know about.
In addition to the 27 companies with excessive fails above 70 trading days are those 39 other public companies that have been on the list for a period of no less than 50 trading days. Companies with greater than 50 days in oversold settlement failures include household names like Delta Airlines, United Air Lines, Martha Stewart Living, TASER, Global Crossing, Krisby Kreme, and Netflix.
(For the complete updated listing of companies and time duration on the list go to www.buyins.net)
So what gives with the SEC’s Regulation SHO and why have they circled the wagons at the agency and played Mickey-the-Dunce to the glaring evidence of abuse? Why has the SEC gone into stealth mode when they have historically gone public to champion their major reforms?
To start with, lets talk securities law. The laws the SEC appears to have forgotten exist.
The SEC guidelines require that all trades, with few exemptions, are cleared and settled within 3-days (Rules 15c3-3, 15c6-1, and Section 17A of the Securities Act of 1934). The goal behind such rule making is to protect the financial safety of the investor and the overall safety and integrity of the financial markets. Yet, we have stocks with excessive persistent fails that the SEC is completely ignoring by their own evidence. Evidence of excessive fails dating back to October of 2004 and before.
The NASD, in July 2000, provided a guidance memo to the industry members [00-45] regarding the reason codes to be applied to Rule 15c3-3 settlement failures. In the guidance memo, the terms provided prior to mandatory buy-in settlement requirements never reached or exceeded 50 trading days. Most were limited to a meager allowance of 14 days including such causes as “lost certificates” or “death”. There were even acceptable reason codes like “can’t buy-in” - which begs the question, if a stock is trading in the open market daily why can’t a stock be bought in within a 14-day window by a seller who did not own the shares already sold? What are the buyers buying on these days where an illegal seller can’t buy-in a fail? Are the buyers simply purchasing more non-existent shares? More fails? Am I missing something?
By the SEC’s own admissions in June 2004, the large “pre-existing fails” were so pervasive and potentially damaging, they provided 6 months of implementation time - and – an additional grandfather clause to allow the fails to slowly be closed out. So far, after 10 months [June 2004 SHO Release – Present] the large fails have not been reduced below acceptable levels in some of the major public companies. Companies whose stocks have churned their public float over greater than 5 - 10 times and whose market cap losses have neared 50% or more.
So who owns these fails in the system and how has the SEC and Self-Regulatory Agencies sanctioned them as benign? Where is the Depository Trust in complying with the Securities Act of 1934 mandate for prompt and accurate settlement of trades?
While the DTCC claims the fails are not their problem, certainly the guidelines of their very existence indicate it should be if it is not today. If DTCC wants to void itself of responsibility for trade settlements than we should certainly be looking for an alternative operation that will live to the spirit and the letter of the Securities Act of 1934. The DTCC, while a not-for-profit corporation, certainly generates income that pays handsomely the salaries of the executive team and provides significant revenues to Wall Street. Unfortunately the DTCC is also mandated to protect the investors who, at this point in time, are being defrauded by a systemic problem of settlement abuses. We the People are not getting our monies worth out of the DTCC.
One can surmise from recent SEC and NASD enforcement proceedings against Friedman, Billings, and Ramsey and SG Cowen & Co., evidence of fraud would point directly to the Private Placement (PIPE) financiers who are “assisting companies” with operating capital. While the companies identified in the SEC enforcements against these firms do not appear on the SEC’s Regulation Threshold list today, one could easily conclude they would have been had the SEC been more pro-active in 2001. Further begging, if the SEC has missed these select illegal activities for the past 4 years and tens of thousands of complaints, how many others have they been missing or --- ignored?
For the record, SG Cowen actually handed over the evidence to the SEC in 2001 and the US Attorney has received a criminal plea of guilty by the managing director of SG Cowen (G. Pollet) yet the SEC is still working the case. Ask yourself how a criminal conviction and guilty plea can precede a simple civil enforcement action by the SEC. The SEC only has to prove fraud and the US Attorney not only proved fraud but criminal intent.
The other opportunity beyond the Wall Street PIPE dealers [Hedge Funds] for creating the settlement failures would be the Market Makers. Under Securities Law Market Makers are provided the opportunity to sell short without delivery for settlement [naked short] in instances where they are flattening out “temporary imbalances” between supply and demand. These exemptions are intended to be temporary in nature and are not to be used in house account trading strategies over the long term. The practice is also supposed to work both ways. Market Makers are also supposed to become buyers when imbalances on the sell side occur. A condition set forth in exchange for the short sale exemption. Bona-Fide market making is making a market on both sides of the market.
In review of the companies remaining daily on the threshold list, most have seen tremendous losses in stock valuations. Krispy Kreme is down 40%, Delta Airlines is down 43%, Taser is down 62%, Martha Stewart is down 31% and Global Crossing is down 25%.
Due to the continuous fall in valuations, the markets in these stocks would be considered bearish. Bear Markets do not require market makers to provide sell side liquidity. In fact, under the guidelines of market making, it is expected that they provide buy-side liquidity in order to balance the temporary sell-side volatility.
If Market Makers are thus to be considered the cause for the settlement failures presented by the SEC, the SEC is protecting their financial well being at the detriment to every investor in these securities. Market Makers have no rationale excuse to remain naked short a security for a duration of 70 trade days. Certainly not when the stock has been sold down by nearly 50% during that same window of time. At some point a forth grader could point out that the trades were not for liquidity but were trades that were made as a market strategy and thus do not qualify for the exemption.
Taking the Market Makers short position one-step further, theoretically they could have become trapped in a stock valuation increase at a time when they held, on their books, excessive short positions. They could then force upon themselves additional short selling executions to control stock rises that would impact their pre-existing short position. Doing so would be considered stock manipulation. It would also explain the raiding of stocks on “good news” days.
If by using the short sale exemption, a market maker can sell short into the investors coming into a stock, to protect their economic position they would not be acting in a bona-fide market making strategy but in a self-preservation mode at the expense of the investing public. The first step of a “Bear Raid” would be to control any possible buy-side pressures and that control would show up as settlement failures. For any member to control a stock valuation for house account preservation is in violation of not only securities laws but of the public trust afforded to them in these markets.
So then, is this who the SEC is protecting? Is it the Market Makers or Hedge Funds? Who else has the luxury of selling short without delivery? Certainly not “Joe Average Investor”.
While the SEC will not speak of this issue publicly the silence they have taken is the ultimate in admitting failure. The SEC has not claimed the “Success” they so repeatedly undertake when they change the laws to account for other fraudulent acts. Instead, in this case, the SEC has their scarlet letter. The publication of the Threshold Security list daily and the easily accessible volume trade reports on Yahoo and elsewhere, clearly prove, without a shadow of doubt, that illegal trading and Wall Street collusion is taking place. The SEC reform bombed!
For the record, the SEC has painted us all as nut cases who don’t understand the markets. They have vindictively attacked any and all that complain, trying to quiet the story by tarnishing reputations through SEC enforcement threats. But the SEC is missing one critical piece of data. The evidence is out there and all it takes is one Federal Judge to force the SEC to disclose what it has as the evidence.
The SEC can de-list companies for not maintaining their filings but a good corporate attorney can also subpoena the trade records and identify the massive fraud the SEC covered up in taking such actions. De-listing companies while massive settlement failures exist is the epitome of SEC negligence. The actions taken were not about investor protection but an industry-wide self-preservation of the illegal acts of fraud and manipulation.
Our Congress also owns responsibility for this issue. Investors across the US and elsewhere have written to them asking for hearings and investigations. The Senate and the House both have oversight committees responsible for evaluating the actions of the SEC. Why have they not acted on behalf of the investing public?
When Senator Sarbanes of the Senate Banking Committee received a response from the SEC that was false and misleading, why did the Senator sit on it without taking corrective measures? The Senator has the oversight responsibilities and he let the SEC lie to him. Ultimately the Senator only placated the constituent that was being represented. Senator Sarbanes never truly sought out what was best for the constituent when he accepted the lie and moved on. The Senator has not been alone in these transgressions.
How does the SEC justify the magnitude and duration of settlement failures? Whom are they protecting? And is the SEC guilty of criminal violations of aiding and abetting securities fraud? All good questions for Government agencies like the Department of Justice to look into.
Last week President Bush called for the privatization of Social Security. What better place to put your retirement income than a “good old boys” club of bandits out to destroy the US Economy. Ask the President what he knows about naked shorting, his staff has attended meetings in April 2004 and a white paper was written for the President last year under a request by the White House. Maybe the President can explain why he wants our futures placed in the hands of criminals when he sits back and watches Wall Street steal us blind.
Step out of the crowd and be heard. Ask your Congressman to protect your rights to fair market practices and request formal public hearings on these abuses. It will only get worse if Congress continues to ignore the issues.
For more on this issue please visit the Host site at www.investigatethesec.com .
ps. I highlighted the entire article. It is that important. Many of these articles are.