Friday, April 01, 2005

A Copy of my question to Mr. Thompson of the DTCC

The following represents an email I sent to Mr. Thompson at the DTCC 4 business days ago. I have not received a response. Now, it is one thing to blather on about how everyone is lying about your stock borrow program, but it is another to go on record saying specifically how and where they are in error. I have invited Mr. Thompson to do so, and thusfar he has been conspicuous in his silence. Here is the text of the email regarding the actual mechanics of the borrow program, and my invitation to set the record straight, once and for all, and end these viscious rumors about what I am sure is an innocent misunderstanding.

So I wonder why no response...?

"I read with interest your recent interview with @DTCC. It raised some questions in my mind. The following is represented to be an accurate description of how the Stock Borrow program works between the NCSS and the DTCC. If it is not accurate, which part is innacurate, and how?

1) Assume that on April 1, Issuer has 100,000 issued and outstanding shares. On April 1, Seller S sells 1,000 shares of Issuer's stock to Buyer B. Seller S fails to deliver the 1,000 shares for settlement by April 4, which is Settlement Day. The NSCC then borrows 1,000 shares from Lender L through the Stock Borrow Program and delivers the 1,000 shares to Buyer B's Depository Trust account on April 4. Buyer B's Depository Trust account now reflects that Buyer B owns 1,000 shares. At the same time, since Lender L's loan of 1000 shares to the NSCC is not reported or visible to the marketplace, Lender L's NSCC account still reports that it owns the 1,000 shares that it lent to the NSCC. As a result, the marketplace now indicates that Issuer has 101,000 issued and outstanding shares, when in fact Issuer has NOT issued or authorized the additional 1,000 shares. These shares were artificially created by the NSCC when it borrowed 1,000 shares through the Stock Borrow Program and delivered them to Buyer B. Furthermore, two people now own the same 1,000 shares – Lender L and Buyer B.

2) Since the 1,000 shares received by Buyer B in the paragraph 1 illustration is now held in Buyer B's Depository Trust account, Buyer B can now lend the 1,000 shares to the NSCC through the Stock Borrow Program, thus, repeating the process and resulting in multiple shareholders owning the same shares. For example, assume that in a subsequent transaction on April 5, Seller S sells 750 shares of Issuer's stock to Buyer C. Seller S fails to deliver the 750 shares on April 8, Settlement Day. Therefore, the NSCC borrows 750 shares from Buyer B through the Stock Borrow Program and delivers the shares reflects that Buyer C owns 750 shares. In addition, since Buyer B's loan of 750 shares to the NSCC is not reported or visible to the marketplace, Buyer B's NSCC account still indicates that Buyer B owns the 750 shares which the NSCC borrowed for delivery to Buyer C. In sum, the marketplace now indicates that Issuer has 101,750 issued and outstanding shares, when in fact Issuer has NOT issued or authorized the additional 1,750 shares. These shares were artificially createdby the NSCC when it borrowed 1,000 shares through the Stock Borrow Program for delivery to Buyer B and then borrowed 750 shares from Buyer B for delivery to Buyer C. Furthermore and most remarkably, three people now own the same 750 shares– Lender L, Buyer B and Buyer C.

I invite our good friend Mr. Thompson to help us understand the error of this description, culled from the Nanopierce lawsuit. I would further encourage folks to send him a copy to refresh his memory. It would be unfortunate if all the media spin on this turns out to be just that, and that the DTCC's comments are a smokescreen, and that the above does accurately reflect the way the borrow program works, and that they never respond as they can't without lying on the record.

But how else are we to interpret no response by the guy interested in clearing all this up for us?

5 Comments:

Blogger Jer. 9:24 said...

This comment has been removed by a blog administrator.

8:47 AM  
Blogger Jer. 9:24 said...

OK let's try this again. It would be interesting to find out if DTCC ever refuses to lend shares to any participant through its stock "borrow" program. That is, is any participant ever told that there are no shares to be loaned?

8:54 AM  
Blogger Millerd1 said...

April 7, five working days finished since the DDDs' questions were asked of Thompson, and still no reply.

5:54 PM  
Blogger bob obrien said...

April 9, 9 days after initial email and no response.

Seems like it would be pretty simple to just say "You're wrong, and your misunderstanding is in your description of the lend from B to L - we don't do that, hence it is incorrect."

But instead, silence. And now the Professor's paper. Corroborating this take on things, all of Mr. Thompson's bluster notwithstanding.

So which is it? Does the NSCC perpetuate a daisy chain of IOU's masquerading as shares, effectively creating a counterfeit float of unknown size? Or is it all a big mistake, and if so, where, specifically, does the mistake in our chain of events occur?

The silence is deafening.

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