From: C. Austin Burrell
Sent: Wednesday, February 23, 2005 11:11 AM
To: Duncan MacCalman
Subject: Observations on Keeping Your Head On Straight When All Are Losing Theirs (and this isn't' a Revolution YET). Edited 2
An Open Letter on the Shorting Scandal:
Like many who have come to the Naked Shorting Manipulation Issue, I had a major problem at first of simply not believing the industry and its regulatory agencies would allow fraud of such enormous scale to have been perpetrated. I finally got over this problem, but it was extremely difficult, in no small part because I had viewed the SEC to be almost sacrosanct. This was the second big hurdle I had to overcome, and it was d**ned difficult.
I have known, indeed, been friends with a number of former senior SEC personnel, executives, and counsel of impeccable personal credentials and integrity. Today, they are uniformly appalled by the SEC's failures, incompetence, arrogance, bias and in many cases, suspicions of far worse, the appearance of corruption and wholesale conflicts of interest. The old SEC we knew had one mission: To protect the individual investor at all costs.
That mission has been lost in a morass of institutional and political issues created by the financial revolution seeded by ERISA in 1974. When I first came to the industry, it was to work as an administrator for the Block Trading Desk at Bache and Company. I was, to my good fortune, given additional responsibilities for administration of Over-The-Counter Trading, Options Trading, and Corporate Bonds. Within a short time, I was doing that work on the side and executing orders for regional accounts. Later, I would be responsible for block trading coverage of 13 Southeastern States for White, Weld, eventually leading me to listed options marketing to institutions, trading options and related equities for institutional options accounts, handling options and cash arbitrage account trading, and eventually selling clearing and execution services internationally.
This last job would lead me to start my own company and to sell its concept to a major Wall Street firm, where I started and ran a broker-dealer and registered investment advisor for them. In that job, I would use extensive computer, math and accounting skills in a number of special assignments that included building the first AI expert system emulation for trading mortgage-backed securities, on the first SUN LAN on Wall Street. Throughout this career path, my first love was development stage companies, beginning with a proposal to buy the first European and Middle Eastern franchise for revolutionary exercise equipment in 1975, to the first application of holography for Computer Aided Design, and many more transactions along the way.
In twenty-nine years, I have had the opportunity to work on an enormous range of projects in more than 30 separate domains. Through the steps along the way, I worked on major trading system initiatives for Wall Street, on clearing systems for international stock exchanges and the first entirely electronic exchanges, on stock indexes for major publications globally, on every form of imaginable intellectual property, ultimately sitting on the Boards of four public and three private companies, all in their early stages of development. The real point of all this is that I had been there, seen it and done it, or at least I thought so until I ran into this shorting scandal. When I first encountered this, I had to go back into my technical charts to find a parallel, and it was the 1929 Crash.
I remembered the stories from some of the old timers I met when I first came to Wall Street, who lived through that period. One of those stories related to the magnifier effect on the Crash caused by criminals and professional stock manipulators SELLING AND SHORTING "WATERED" STOCK to take advantage of what they considered excessive valuations. Well, the 2000 Crash was a bigger one than 1929 on a percentage basis. The central contributing factor to the scope of this 2000 Crash was the illegal sale of unregistered securities, via the mechanism of using holes in the DTCC system that permitted naked shorting by non-US persons and entities, broker-dealers, market makers, hedge funds domestic and international claiming the arbitrage exemption and more. In essence, this became obvious to professionals in 1998 through 2000.
The bad guys found a way to electronically counterfeit stock never registered by, known to, or issued by the real underlying company. And investors never knew the difference. I had the experience of living through a volatile and typically short-lived dot.com, and what I saw was that real investors never sold their stock. So where did this stock that was sold come from? I was able to analyze where the selling had come from, to whose benefit. The answer was ugly. DTCC was re-hypothecating a single share over and over again, collecting a fee from the Stock Borrow program in the process.
Hedge funds, and others globally, jumped on the dying body of American securities markets in droves. In July, 2000, before I had a really had a hard handle on the scope of this fraud, I warned a CEO of a Major Stock Exchange that DTCC was dirty on the shorting, not knowing at the time he was on the Board of that entity. Counterfeit/kited shares were being created wholesale by naked shorting, with DTCC taking it to the bank on both sides.
Any trader with experience will tell you that the market is ultimately a zero sum process. That means in layman terms that for every dollar lost, there is a dollar made somewhere else.
If American retirement accounts lost 50% of their value, that value went into someone else's pocket. The ultimate canard (cover-up lie) is that these accounts had "Paper Losses", like they weren't real. This is absolute horse manure, a pure form of political BS, designed to give politicians and bureaucrats cover for malfeasance, incompetence and in more than a few cases, venality.
So where did this money go? In an ill-conceived move to "globalize" US securities markets, the NASD, the NYSE, the AMEX, and others offered open access to US markets to persons and entities (such as offshore hedge funds, etc) who had no imperative to comply with US Securities Laws. The result was as if our market was a budding elm tree hit by a billion locusts, who stripped the life out of those segments of the markets that didn't know they had a problem, that didn't know how to protect themselves, and that got no help from their own US Regulators, including the SEC, the NASD and the DTCC.
At the bottom of this crash, some $17 Trillion dollars were gone from US investments' market caps, and this didn't include the sector hit the hardest, the small public company stocks. Over 5000 companies in this segment were bankrupted, more if you use the more aggressive estimates of 7500 plus. Some of these companies had officers and directors who would not go quietly into the night, but chose instead to fight. It has been ugly. There have been thousands of outright lies by those who were supposed to protect us, instances of criminals warned by regulators to avoid arrest, of bribes paid to other regulators to look the other way, ad infinitum, ad nausea.
Now, with everything crashing in on them, these same parties who absolutely denied the existence of any naked shorting problem are reversing their positions ever so slowly, so as to protect those who stole so much. And what has been the attitude displayed towards those who made these problems public? They have been systematically attacked for speaking out, harassed, denied financing, had their lives threatened repeatedly, been sued by the Government and worse. Their only defense has been an active plaintiff's bar who have championed these parties out of funds coming from their own pockets. One very bright observer of Naked Shorting has labeled this "Reverse Regulator Syndrome". This week, the SEC put out the most insulting and morally offensive proposed rule yet, one that would bar companies from putting restrictions on their stocks that would impair their effortless transfer, in an honest effort to protect themselves from professional thieves.
Annette Nazareth of the SEC's Market Regulation Unit said that actions taken by companies to protect themselves in this manner from criminal predators were improperly impairing a more important goal of getting to paperless, electronic, straight through settlement. Her position is the "Stalin" analog: "To make an omelet, you have to break a few eggs." But instead of shooting Ukrainian Kulak farmers to create Farming Co-ops, she says we have to let many small companies be killed off for the greater good of automated securities markets. This Socialist clap-trap run amok, treason to its core in our American system. When the American people become fully aware of the sheer chutzpah of fraud on this scale, and who the beneficiaries are, God help them. The ACLU won't be able to save them. Some cumulative number NORTH of $4 TRILLION DOLLARS is GONE. If the thieves don't cough it up, they should be hunted for profit and sport. BEWARE THE MOB. This old Roman saying has real relevance here. The scum here need to have it screamed at them: YOU AREN'T GOING TO GET AWAY WITH THIS. To paraphrase an old movie line about prison, I remember the words: "It is an insane bunch of people, in an insane place, with insane rules, behaving insanely. SO IT HAS ITS OWN KIND OF LOGIC." I remember once hearing about the necessity for a lawyer to be able to put himself in a "Moral Vacuum", so he could represent guilty clients. The lawyers representing these bad guys have gone from a "Moral Vacuum" to a "Moral Black Hole", whose immorality is so strong, nothing can escape. Their lawyers can be treated no differently than the criminal scum they represent. Scum seeks its own level. And these types work well with insanely amoral structures.
Enough philosophizing. WE HAVE TO GET ANGRY, AND STAY THAT WAY. WE MUST ESCALATE THE RHETORIC, AND BURY LIARS WITH THEIR OWN CONTRADICTORY STATEMENTS. Mark my words, THIS IS GOING TO GET UGLY. Too much has been stolen by too many. I had hoped the system would right itself of its own accord, but I am now 90/10 this isn't going to happen. America is the loser.
Best Regards,
C. Austin (Bud) Burrell
The Quantum Matrix,
Inc. Scottsdale, Arizona
