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Congress Addresses Naked Shorting; Seek SEC Terminations and talks of Market Collapses – May 30, 2005
Has naked shorting become so widespread that the Wall Street system could collapse? Is it time that folks at the Securities and Exchange Commission were given their walking papers? These are just a few of the latest eye raising possibilities members of Congress are stating in memos drafted to constituents concerned about Naked Short Selling abuses.
South Carolina Congressman Joe Wilson stated in a May 19, 2005 memo to constituent B. Moody “It is believed that if only a few instances of this practice [naked shorting] would occur, the market could handle such losses. But if the practice is widely used and major losses take place, the system could be in dangerous collapse.”
Now consider Regulation SHO, the timeline to this regulatory change, and some of the controversial policies and you start to wonder about the magnitude of the problem.
The SEC approved Regulation SHO in June 2004 but provided a 6-month window of opportunity for Wall Street to come in compliance with the new rules. The date for compliance was January 3, 2005. SHO rules, while new to the SEC, were only a duplication of pre-existing rules at the SRO level. The only addition to prior Wall Street regulations is a controversial “grandfather” clause.
The SEC, after providing 6-months to clean up the books slowly, without imposing harm to the members, demonstrated a concern that 6-months would not be adequate to settle the magnitude of open fails. The SEC indoctrinated a “grandfather clause” into the June 2004 release that essentially pardoned all of the “large pre-existing fails” from mandatory close-out provisions. It must be understood that by law all trades are to settle within 3-days with only minor exceptions. In this particular case, the 6-months to clean up the problem was too short.
It is therefore theorized that as Congressman Wilson pointed out, the problem is of a magnitude great enough to cause a possible collapse of the system. If it were not so pervasive, the SEC would not have had to illegally pardon past fraud to protect only minor losses. Since the SEC had no means of separating out the magnitude of companies affected, they had to create a blanket pardon to all abusers. Wall Street abusers! In doing so, the SEC sacrificed businesses and investors.
A similar response by Missouri Senator James Talent, speaking on the quality of the SEC management in a memo about naked shorting, only further explained the situation at hand. “What Enron did was clearly illegal; several different government agencies had the power to prevent it but failed to do so. As far as I know, no one in the government was held accountable for this failure.” Further stating “In other words, firing a few people at the SEC will light a fire under law enforcement more than hundreds of pages of new regulations.”
If the firings are to take place, I already have my wish list drafted.
In all, Senator’s Bennett, Shelby, Sarbanes, Talent, and Collins have all questioned the SEC on naked shorting that we are aware of. Representatives Baker, Frank, Tierney, Wilson, and others have done the same from the House Branch of Congress. Ironically, with all these states being represented, and members of the Senate Banking Committee [Shelby, Sarbanes, and Bennett] and House Financial Services Committee [Baker and Frank] seeking answers, why has there been a lack of congressional hearings over this? Where is the accountability of Government Senator Talent mentioned?
The Securities and Exchange Commission, under the helm of former Wall Street giant William Donaldson, created laws that violated the rights of the investor and violated the guidelines handed down to the SEC by Congress. They did so secretively and with willful neglect of their duties. They cheated the investor to protect the wealth of the criminals.
The SEC was caught misleading Senators inquiring about what was happening and maliciously attacked those that spoke out against their actions. Annette Nazareth, Director of the SEC’s Division of Market Regulation mocked the abused as she protected the giants of Wall Street. A systemic problem not only exists but, according to the General Counsel of Bear Stearns, the regulators have known about this problem for years and have ignored it. Regulators looked the other way because it was in the interests of Wall Street.
Bear Stearns General Counsel: “To give you that brief introduction in Reg SHO, the history how we got to where we are today. For the past several years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients, were not following already established rules.”
Is the problem about one or two companies or is it systemic? Certainly recent enforcement actions would indicate it is systemic. Certainly having over 20 companies entrenched on the SHO “threshold list” for 100 consecutive trading days is more than simply isolated. These companies are not unknowns; they are your Delta Airlines, Martha Stewart Living, Netflix, Taser, Global Crossing, Krispy Kreme, and others. The SEC is allowing the manipulators to walk away from the manipulation because it is in the best interest of……?
Congressman Wilson stated that the markets could handle the losses if only a few companies were involved. Today, the markets are not taking any losses as the SEC has pardoned their illegal trading. The SEC has bought the violator’s time to recover gracefully from the “raid” they committed on unsuspecting shareholders. The SEC gave Wall Street a bazooka and gave the shareholders slingshots. It truly is a David vs. Goliath story with the Federal Government arming Goliath.
Ironically, as Senators and Representatives begin to see the light, it is the Senate Banking Committee Chairman Richard Shelby that continues to deny the existence of a problem.
In a memo to me dated May 24, 2005 the Senator stated “Currently, securities regulators are conducting investigations to thoroughly examine naked short selling practices.” In reality, the SEC and NASD created a joint task force that reviewed this practice in January of 2004. They already examined the problem. The SEC knows how pervasive naked shorting is which is why they illegally grandfathered past abuses.
The Senator went on to say “I assure you that I will continue to monitor the implementation of Regulation SHO to ensure the SEC is addressing short selling abuses.” Funny, some 20+ NYSE and NASDAQ listed securities have been a threshold security for 100 consecutive trade days and nobody seems to have a problem with that? These companies trade their entire public floats over and over, drop 50+ percent in market cap, and the fails cannot be closed. Somebody is benefiting from those settlement failures and it is not the shareholder. Maybe Senator Shelby can check into the trade details and understand who owns the fails in these and other companies. Certainly that would be a better monitor than asking the rogue agency what is going on.
Finally, the Senator closes out the memo claiming that “The Senate Banking Committee remains committed to working closely with regulators and market participants to ensure sound business practices in our capital markets.” Missing from this statement are the investors. While investors are the ones frequently violated the Senate is working closely with a poorly committed Government agency [SEC] and the Wall Street crooks who consistently deny us fair markets. Sounds logical. Wall Street does heavily finance Congress. Some inside the beltway claim that the power of Wall Street has already stopped any and all open public hearings on this matter. Committed?
All of these memo’s can be found at www.investigatethesec.com in the media links section under the heading; Congress writes the SEC and responses.
The only other open question on this issue – Where is Dateline NBC and their “exclusive story”?
For more on this issue please visit the Host site at www.investigatethesec.com .