Friday, April 22, 2005

The 82% Solution - Updated


Update: There's now a powerpoint presentation of my best take of how the stock borrow/FTD process works now up at NCANS. It is an approximation for your amusement and tittilation. Hope everyone enjoys it.

I called the DTCC today. Also emailed them. My question was simple – what happens to the 82% of the fail to delivers that the stock borrow program doesn’t satisfy?

I figured that isn’t asking the DTCC for the secret to constructing a dirty bomb, so they could at least explain that simple part of it. I mean, is there some special rule that prevents them from explaining a basic part of the clearing system? Is it top secret, eyes only?

Apparently so. No return calls, no return emails, and everyone in legal was in meetings. Funny, that. A lot of meeting over at the DTCC. Larry Thompson? Meeting. His staff. A meet-fest.

The reason I ask is because I can’t construct a model of how those fails are handled that doesn’t involve a systemic disregard for the rules that is clearly illegal. By the entire clearing system and brokerage apparatus. But that can’t be. That’s crazy talk. There’s no way that an entire industry has systematically conspired to defraud investors.

But there’s no other explanation that I can figure out. I even have a guy working on a flow chart of a fail that is handled by the borrow program, and one that isn’t. There’s no way to make it work unless the end buyer is being defrauded – is being told that they have shares in their account when there’s nothing there but some sort of a marker or IOU – and that’s fraud and counterfeiting. The classic definition – where you represent an instrument that is not genuine as being legitimate.

I’m hoping that the DTCC will be able to help me comprehend this. There has to be an easy answer. It can’t be that 5 large brokerage houses got together and just agreed to treat IOU’s as being the genuine article for their retail clients. That would mean that the entire system is predicated on a fraud. Because the next logical step is to assume that the IOU’s are traded as though they were legit shares. Which would violate a host of consumer protection laws, and subject the accounting firms that audit the brokers to huge, huge liability.

There’s no way that is the case.

Is there?

Note to DTCC: I’ll be in all day tomorrow.

BTW, given the current predicament over at Jahoo, werein apparently the bashers have taken to filing almost unlimited complaints over my posting in an effort to get my ID's banned and hence constrict my ability to communicate, if anyone has any doubts as to what ID I'm using, just email me and I'll confirm or deny it.

It does seem as though the bad guys are trying everything all of a sudden. Tells me that I'm getting warmer....warmer.....


Blogger Jer. 9:24 said...


Forgive my ignorance or lack of understanding but are you saying that DTCC admits that only 18% of the time they have shares available to provide for NSCC to 'cure' delivery failures (really just 'bandage' them, not cure them), and the other 82% of the time there are no shares available to lend to NSCC?

4:43 AM  
Blogger Jer. 9:24 said...

Also, are you ready to provide an update for those interested in your ideas about bypassing federal regulators and SRO's to get somebody somewhere to pursue justice for the victims of this fraud?

4:49 AM  
Blogger bob obrien said...

Correct. 82% of the time the fail is not cured by the borrow. My simple question to the DTCC - what happens then - has been unanswered.

There is nothing to report about the states as of yet.

11:30 AM  
Blogger Jer. 9:24 said...

If that is true, then it seems that in at least 82% of the fails, not only the sell side participant but also the BUY side participant is defrauding the bona fide purchaser. Surely the buy-side broker is informed or reasonably able to discover (and under a fiduciary duty to discern) that his client's purchase did not settle and there was no NSCC borrow to cover it. Does that not make the mailing of a brokerage statement, especially across state lines, with known or at least reckless misrepresentation as to the purchasing client's ownership of securities, criminal mail fraud, among other things?

11:39 AM  
Blogger bob obrien said...

I would think that it does in fact constitute mail fraud, but I'm not an attorney. The brokerage industry no doubt has some facile explanation, like we sold you the "rights" to the share but not the real share, but I think it wouldn't withstand any serious legal test.

But then, what do I know...?

5:52 PM  

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