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DTCC Continues Public Campaign – Stop blaming us; it’s not Our Fault – January 26, 2006
The Depository Trust Clearing Corporation (DTCC) is supposed to be that “black operation” on Wall Street. Investors shouldn’t know who they are and what goes on inside. The non-profit Organization, with a Board Membership consisting of the likes of Michael Bodson of Morgan Stanley (NYSE: MS), Frank Bisignano of Citigroup (NYSE: C), and Randolph Cowen of Goldman Sachs (NYSE: GS) has become the National Clearance and Settlement System for our capital markets.
A 2004 end of year report identified $1.1 Quadrillion in settlements passing through the agency. Early indicators are, 2005 was an even better year.
But this mega Wall Street money machine, which last year announced a $163 Million fee reduction to member firms based on the financial strength of the organization, is also battling a public campaign regarding the issues of naked short selling. The Organization continues to feel vilified over a lightly, almost comatose, covered issue and yet feels the need to repeatedly publicly denounce any involvement in abusive trading practices.
The DTCC, touting honesty, integrity, and the “trust us” mentality, has resorted to public campaigns protesting what it claims to be unfair characterizations of complicity in aiding naked shorting abuses. The “White–Collar” honor guard of Wall Street feels the sense of urgency to publicly defend the DTCC operation and do so repeatedly.
This week was no different as the DTCC published yet another Press Release January 24, 2006; “Regulators Say SHO is Working”. The article appearing to have taken friendly excerpts from a recently published article by Carol Remond of the Dow Newswire on Regulation SHO and centers around a November 30th Open Public Forum moderated by the NASAA which coincidently Remond also happened to cover in what appears to be rather sparse publications by Remond.
The oddity in this latest public defense of their operation is that to some degree the DTCC has fallen well below the radar on naked shorting. Little fanfare has come their way over recent months and yet this “Who’s Who” of Wall Street still felt the need to publicly defend the Operation. When that happens, Red Flags enter the sky like a Fourth of July Fireworks show in Boston.
Why protest when nobody is pointing the fingers and use a 2-month old forum as your venue of cause? The NASAA forum didn’t even receive mainstream media coverage at the time of the event and is now the primary basis of argument. Bizarre! Feeling guilty about something guys?
Stockgate Today is published on the website dedicated to the naked shorting issue, www.investigatetheSEC.com, and is also channeled through several other sites such as www.TheSanityCheck.com and www.TheFaulkingTruth.com. While I am not sure about the other sites, we do track the DTCC’s viewing of investigatetheSEC.com site and they are a frequent visitor of the site having logged on almost daily for several years. But by visiting, they can also see that there has not been a single discussion about the DTCC in many months.
So why the public protest, why the plea to be left alone? The DTCC appears to dedicate more resources, and covers the naked shorting saga more than any other public media source. Again, Bizarre! The DTCC is the black operation on Wall Street and yet they are the most vocal in protesting a “non-Issue” as naked shorting is routinely referred as being.
I quickly worked through the DTCC press release and was somewhat amused almost to the point of sympathy at the attempts to defend the system through the use of inaccurate statements. “Trust us” carries new meaning when you misrepresent facts in your public presentation of materials in attempts to defend your operation. The DTCC concluded the release by providing a link to a newly dedicated section on naked shorting offered on their site (www.dtcc.com/ThoughtLeadership/keyissues/naked_short_selling.htm).
I suggest everyone visit this display of a one-sided public plea, you too can walk away amused and concerned at the same time. Just look out for the Caution sign “Spin Doctors at Work” as you enter the site.
But to be fair…
I attempted to provide the DTCC an opportunity to correct or clarify some of the questions I had regarding this release and the newly formulated naked shorting section. I contacted Stuart Goldstein, Managing Director of Corporate Communications for the DTCC and Steve Letzler, Domestic Media Inquiries for the DTCC with some questions that quickly came to mind.
Questions asked of Goldstein and Letzler included:
According to the Press Release, the DTCC contends that they were not invited to speak at the NASAA Public Forum held in November to discuss the issues of Naked Shorting. Mr. Lambiase, Director of Securities for the State of Connecticut and moderator of the forum, specifically identified to the audience attending the forum that the DTCC was invited to attend but had declined the invite. Panelist Dr. Susan Trimbath, former Operations Manager for the DTCC, also confirmed the DTCC invite during the forum discussions.
Does the DTCC continue to deny this invite took place? Why would Mr. Lambiase, who contacted the SEC, NASD, and NYSE to attend as panelists, leave out the DTCC and then publicly state that he had extended such an invitation? It is, after all, the DTCC that is specifically identified in many of the lawsuits regarding naked shorting.
The Press Release, and a chart provided on the website, identify that 10% of all Failures to Deliver on record at the DTCC exceed 30 days and <1% exceed 200 days. DTCC General Counsel Larry Thompson has publicly stated that the value of the Fails to Deliver under the DTCC umbrella average approx. $6 Billion daily in aged and new failures.
Is the DTCC therefore making claims that nearly $600 Million in fails have extended beyond 30 days (mark to market) and $60 Million in fails have extended beyond 200 trade days (mark to market)? I further asked Mr. Goldstein if he was aware of the market value of the initial fail that was transacted nearly one year previously. The critical point to this question is that of leverage and manipulation. For example:
In 2004 Rodney Young, CEO of Eagletech Communications, was granted discovery of the DTCC settlement history for Eagletech under a US District Court subpoena. The DTCC data sheets provided highlighted fails exceeding 250 trade days. Looking back into the market at the time of the initial trade, the fails were executed at a sell price of nearly $11.00/share. The fails were then covered a year later at $.50/share or a 20X profit multiplier to the seller.
To use this 20X multiplier on the aged fails over 200 days, and assuming that represented $60 Million, the mark to market value of those trades at the time of the fail would represent $1.2 Billion. No small number. The loss in value on these extended and abusive fails could represent as much as $1.14 Billion on less than 1% of all Fails to Deliver (FTD).
The data presented by the DTCC also fails to account for the means in which a fail is resolved.
Let’s say for example Broker A has a FTD of 1000 shares of Company ABC. The fail reaches 13 trade days and they go in to cover the FTD. What is subsequently purchased from Broker B to cover the fail results in yet another FTD of 1000 shares. Broker A appears long in the account 1000 shares that are owed and uses the long, even though they are a FTD, to settle the DTCC fail. Yet a second FTD is created, this time to Broker B. What is the age of the actual 1000 share fail to the initial buyer? Zero!
This scenario actually happens regularly. The fails are washed between firms and the age of the fails is reduced but the fact remains that the original buyer is still short beneficial ownership. Buy-ins are not taking place for guaranteed delivery because of a premium cost to the member in a guaranteed delivery execution. Therefore, buy-ins are allowed to simply roll the fail over and re-start the clock. The DTCC failed to disclose this tidbit of data, why?
The DTCC site literature also appears to use the fact that the SEC authorized the stock borrow program as a rationalization to justify any potential abuses that may have taken place under their watch. They approved it so don’t blame us.
Unfortunately for the Investing public, the SEC has made a considerable number of “mistakes” that have cost us dearly over these past decades and thus we must all look within the operations to challenge the integrity of the system. That is why Securities laws are routinely changed and updated as time passes. The DTCC would appear more content to blame the SEC for any abuses taking place under the present system instead of fixing the loopholes now identified and used for manipulation.
I asked Mr. Goldstein if the DTCC had the authority to modify the rules of the Stock Borrow Program (SBP) to limit the time in which the DTCC loaned shares were used to settle a FTD. The SBP is only a stopgap to cover FTD’s and thus is not part of the normal course of business. Can the DTCC re-write the laws restricting a loan to ## trade days at which time a DTCC initiated buy-in was created? If the DTCC is the lender, control the contract on the loan.
Finally, Mr. Goldstein was presented with the most recent regulatory enforcement activities in which illegal shorting transpired. Anthony Elgindy, Rhino Advisors, Guillaume Pollet, Friedman Billings & Ramsey, Scott Ryan, John Mangan, Hilary Shane, John Fiero, etc… all orchestrated fraud leveraged off the use of a FTD to manipulate stocks. FTD’s the DTCC has claimed no responsibility for. Could the DTCC have modified operations to reduce/eliminate these past, present, and future acts of abuse?
I suggest you go on to the DTCC website and review the time consuming effort the DTCC put into a public campaign to defend the Wall Street operation. As you read their comments and listen to their excuses, think of the questions above that were never responded to.
How do FTD’s persist for 200 trade days and get written off as non-problematic? How many of those FTD’s the DTCC speaks of are associated with similar fraud not yet investigated and resolved by the regulatory agencies? And finally, why does this agency feel compelled to frequently preach to the public their innocence?
Mr. Letzler did take the opportunity to clarify a previous comment he had made on the phone when he stated that buy-ins were a rare event. According to an e-mail I received 1/25/06 Mr. Letzler added, “We get more than 4,000 notices of intent to buy-in daily. Once a notice of intent to buy-in comes in, firms have two days to make the delivery or be bought in. In most cases, they make delivery, so there are only a relatively few numbers of buy-ins that actually have to be executed.” And yet 10% of all FTD’s exist for greater than 30 days and 1% greater than 200 days. I guess the buy-ins on those was simply…forgotten?
Data provided under a FOIA request revealed the DTCC FTD’s reached highs of over 1 Billion shares in 2004. Ten Percent of 1 Billion is a lot of shares not successfully being bought in.
If the DTCC has nothing to hide, let the books do the talking for them. Open them up and prove your point. Don’t hide behind the lack of transparency provided to date and then ask us to put our trust in you. We are approaching a”Prove It” moment, as the general public trust of Wall Street is still rather shaky. Recent regulatory activities further minimize the DTCC claims and with the future NASD CEO Mary Shapiro identifying that abusive short selling will be a primary focus for 2006 we are assured that more regulatory activities are to come.
For more on this issue please visit the Host site at www.investigatethesec.com .