We live...in a material world...
1) The DTCC never responded to any of the scores of emails requesting clarity as to how the 82% of FTD's the Stock Borrow Program doesn't lend shares to are handled. Presumably those are the FTD's that stay on the record as FTD's. There really is only one way they could be handled - some sort of proxy is created (likely just a debit in the selling participant's account) for a real share, and is then credited to the buyer's broker's account, with some sort of a notation - the DTCC explains that the FTD's are the buying participant's duty to call, which indicates that the buying participant has to have a way of knowing it is an FTD.
I believe that the de facto counterfeiting and fraud occurs when the buying participant (broker) represents to his buyer that he has shares, when in fact he has nothing but an IOU - that would be the creation and representation to the buyer of a non-share as a share, for the purpose of tricking him/her into parting with his cash (and not having to say "oh, well, there isn't any real share, just a promise that at some point a share will be delivered, but you still have to pay for it as though it is real, and we still get the commission as though it is real"). That is the definition of counterfeiting - the creation and passing off of a non-genuine article as a real article to a buyer. Pretty straightforward. Create a fake, represent it as genuine. Simple.
2) The loopholes in the system for Market Makers, Specialists, Foreign Arbitrageurs, and Financial Institutions to legally naked short/FTD amounts to a non-regulation against FTD's. IF the SEC wanted to stop FTD's, it would be simple. They could pass two simple rules:
Number one would modify the current rule against failing to deliver at T+3 and simply require that shares be in hand prior to a sale, or if not, be immediately bought in at T+4, and the seller additionally fined 33% of the share price. Right now there's no penalty of note, and thus no disincentive (if I could print hundred dollar bills and only be admonished not to do it anymore as the penalty, I'd have the presses running 24/7 - who wouldn't - it would be free money time. That is why there are stringent penalties against doing so...) to Failing to Deliver.
Number two would eliminate the loophole for specialists, market makers, financial institutions, and international arbitrageurs. That would subject these entities to the same rules as the rest of us. Now, the arguments against doing so are usually liquidity arguments - and they are specious. Either the exchanges are auction markets, where the supply and demand of a security establishes the price, or they aren't - they are rigged markets where artificial supply can be created at any time, ostensibly to supply liquidity, which is a euphemism for saying make the maximum number of trades (and commissions) without being burdened with actually having shares to sell. In that rigged market, the specialist/MM could literally create as many shares as they like (which we have seen with JAG and Global Links and many, many others) and simply fail indefinitely. That isn't a fair market where supply and demand determine the price - it is a rigged game where the dealer can make as many aces as he likes, whenever he likes, by simply claiming that he again has four aces. In that kind of a market there cannot be any semblance of fair value, and the auction model is a farce. That is the market we currently have.
It is important to understand the DTCC's imperative in all this. They are the plumbing of the system, the back office. It is not a sexy nor particularly interesting job. Their primary driver is to create mechanisms to enable the maximum number of trades possible in the minimum amount of time possible. I believe that is how the Stock Borrow Program came into being, and that it's been abused by the participants in a wholesale manner. In my opinion the DTCC is trying to cover up the depth and scope of the problem, as they are afraid that they may be culpable. I do not believe that the Borrow Program was created with larceny in mind. I believe that larcenous participants understood the opportunity, and ran with it, creating a contingent liability of huge proportions now, which the DTCC and the SEC are trying to figure out how to fix. The easiest and the least painful option for the industry (which owns the DTCC) is to allow the participants off the hook for their malfeasance, at the expense of the the retail buyers and the affected companies. Of course, that is also rewarding lawlessness, and condoning criminal stock manipulation, but let's not get too bogged down in those details.
In order to mask the gravity of the situation, one must eliminate all the evidence of wrongdoing. A big step to creating an effective cover-up would be to eliminate the mechanism that can show that an offense was even committed. There are several stunningly simple ways of doing so, which I will outline.
The first is to eliminate all paper certificates, using an excuse like "it will increase transactional efficiency", or "it will reduce costs". If you can eliminate paper certificates you can eliminate the only real confirmation of ownership of the genuine article - a share. You can also eliminate the embarrassing mechanism used to demonstrate industry-wide larceny: the demand for certificates, and the resulting failure to deliver them. That is akin, in my earlier card example, of not requiring the dealer to ever show his cards to prove that he has his claimed four of a kind - he can just claim it and win, every time, as he has done away with the cards.
As we have seen at the NCANS site, with the email exchange between E-Trade and Wells Fargo, E-Trade simply refuses to deliver the shares when pressed via a demand for paper certificates. If that mechanism was removed, the barrier for E-Trade (in that example) is gone, and no mechanism exists to ensure that the buyer receives his property, vs. an electronic proxy/forgery/counterfeit. That would be great for the participants that have sold "shares" with a cost basis of zero (as there is no share) and yet has been paid for the goods - what a convenience to never actually have to deliver anything. It would really eliminate the last barrier to being able to defraud buyers with complete impunity!
In May, the DTCC announced a drive to convince the states to drop their requirement for corporations to issue paper certificates. If there is no state requirement, it's only a hop, skip and jump to eliminating all paper certificates with the stroke of a pen.
So, in a coordinated fashion....go to the states, and get each and every Governor to sign off on the idea that it paper certificates are bad. Trot out SEC apologist Annette Nazareth, whose view is that there is no FTD issue, use the transactional efficiency argument, and highlight how much money everyone is going to save. And that's exactly what has happened.
The only two states that remain unconvinced are Louisiana, and Arizona. All the rest have bought off on the idea that paper is bad, and inefficient - which it may well be, but it is also the only tangible proof of a real share of stock that a buyer can get, and that a corporation can issue. Otherwise it is just a series of electronic ticks, all of which look the same to the system - legitimate ticks, and newly minted IOU/FTD ticks.
The second method to cover up the abuse of the stock borrow program would be to pardon all past instances of FTDs, which the SEC effectively did by grandfathering the pre-2005 FTD's. So that is done, in one nice fell swoop. But the first, the going state by state and getting them to drop their requirement for paper, is not quite done, even though they are trying very hard to do it quietly.
Folks, the mainstream media has ignored this. The last line of defense is you. You need to write or call your Governor and express to him that he has been hoodwinked into signing off on something that will allow a small section of New York to fleece investors with impunity, and that the reason they went state by state is because they figured that the Governors were rubes, too provincial and clueless to understand the actual play that was going on. Refer them to this article. Have them email me if there are any questions. It is not too late, but we are on the edge of the precipice, staring over the edge, and the momentum is not in our favor.
Action is required. As it always seems to be to keep the predators on the Street from doing a wholesale land grab. Your action will make a difference. It was framed as a drive to increase efficiency, and handled almost as an aside - drop that silly old fashioned paper, and get with the 21st Century program. They neglected to mention that removing the requirement that corporations issue paper would remove the last bit of tangible proof a buyer could get that he got shares and not hot air. They almost pulled it off.
Almost. The question is will you let them finish the job, or can this be stopped in time?
Your Governor has the power to pull his support from this initiative. He should. You should tell him why.
If the DTCC can't stop 82% of the FTD's from being handled in an unknown manner, and houses like E-Trade openly admit that they can't and won't deliver shares that they sold (but only when pressed for certificates), eliminating the one mechanism that would prove ownership seems like a bad idea, doesn't it?
For the record, I have no problem with the idea of dematerialization - when there are no more FTD's. Change the rules so that stock can't be easily created electronically in an "unknown" manner, and perhaps the transactional efficiency of going paperless has merit. But not when you have an unknown float of electronic forgeries floating around the market. Fix that first, then put on the boaters and play political rally with the dematerialization idea. For my money, creating a way to trade even more shares even faster while you ignore the problems your "improvements" (like the Borrow Program) has introduced (FTD's) is a disastrous proposition.
Settle the trades. Then we can talk. Simple.