Friday, November 04, 2005

In The Commission Of A Felony...

I had an interesting email from one of the more authoritative sources on the FTD and Reg SHO situation, and he introduced a possible explanation for the SEC's grandfathering provision of all past FTD's, in violation of their congressional mandate under Rule 17A.

Any attorneys out there, feel free to chime in on this - I'm not a lawyer, and don't even play one on TV.

And I also don't support nor disagree with this theory - I just want to test it for logical and legal consistency before I introduce it into the Naked Short Selling Primer as a possible explanation for this inexplicable grandfathering.

So here it goes:

The far more ominous logical explanation is that the SEC grandfathered not out of concern for the system, but rather to limit its own liability under the law - that after years of permitting felony short selling/securities fraud manipulation, the SEC ultimately came to realize that it had committed collateral crimes, and could be held accountable - as accessories to the felonies. This explanation posits that in passing Regulation SHO, the SEC wasn’t just grandfathering the previous illegal short selling to protect the short sellers, but rather it was, much more importantly, protecting the SEC itself. And it focused the ire of the victims on the rule violators who financially benefited, rather than upon the regulator that had permitted the felonious activity for years.

The legal argument would go like this (simplified): The felony committed and suborned in this situation is USC 18, Title 514, the commission of counterfeiting of a commercial security, a Class B Federal Felony. By permitting this felony to be an endemic part of the modern market system, and by knowingly failing to enforce rules designed to prevent counterfeiting of a commercial security, the SEC aided and abetted those who have done so, subjecting it to risk of civil and criminal redress. The allowance of a large float of FTD's to be part of the markets is a de facto enabling of counterfeiting (wherein the bogus IOU/Markers are represented as and have the effect of legitimate stock shares, on the auction price of the security as well as on the long term size of the float), and thus creates an accessory risk for the Commission. Arguments have been advanced that, as in the Elgindy case, naked short selling was used for money laundering for Middle Eastern arms dealers, thus constituting treason during a time of war (according to the Patriot Act), a Class A Felony - that the Commission was ignorant of the outcome of its permitting the counterfeiting does not absolve it of the legal jeopardy arising from that outcome, any more than the driver of a getaway car in a bank robbery is absolved of the murder of a teller during the robbery - even though he was ignorant of the ultimate crime committed.

Now, again, I'm not an attorney. But does this hold any water? Would the SEC, and more interestingly, specific individuals within the SEC responsible for these actions, be immune from prosecution and civil action resulting from acting as accessories to countless felonies, if this is correct?

Help me out here. Just because Wall Street doesn't use the word fraud to describe fraud, preferring more tame euphemisms, doesn't make the commission of fraud any less fraudulent. So using that theory, just because Wall Street doesn't use the term counterfeiting to describe the creation of markers represented to investors as genuine shares, essentially bogus facsimiles with none of the attendant rights of genuine shares, doesn't mean that they aren't counterfeits.

Wouldn't that be up to a jury to decide? And if this legal theory is correct, wouldn't the SEC's role in enabling and then perpetuating that action also be the province of a jury's deliberations?

Is this guy full of it, or is there merit to this line of reasoning? Appreciate any comments from knowledgeable sources - the usual trolling and flaming will be deleted, so spare us that - but any reasoned debate would be appreciated.


Blogger bob obrien said...

A friend sent me an email pointing out that the SEC can't pardon itself for felonious conduct - but by pardoning the DTCC from the implications of allowing its Stock Borrow Program from being abused and turned into a de facto electronic share counterfeiting mechanism, that it introduced one more layer to point to for plausible deniability.

The question there is whether that grandfathering is legal, in that it violates Rule 17A - and I haven't seen anything authorizing the SEC to violate Congressional mandates like 17A.

The SBP was designed to address TEMPORARY settlement failures, as a stopgap until the real shares show up.

Professor Boni's paper indicated that the average age of an FTD was 56 days. That is not a temporary settlement failure due to legitimate market making nor lost certs. That is systematic creation of transactions with no intent to deliver shares on settlement date, in order to drive the price down as part of a trading strategy.

That is illegal.

Can you retroactively pardon illegal behavior, against the expressed instructions of Congress? I don't think so.

As to the counterfeiting issue, if you create a large supply of markers that are the initial, commissioned part of a transaction, and allow those to trade and affect the price of the stock, how does that withstand the sniff test of counterfeiting?

What is a counterfeit security?

A fraud, a fake, a bogus security that is used with the intent to trick the buyer into exchanging his money for it, believing it to be genuine. A quick test would be the attendant rights of a legitimate share - the right to vote, the right to legal redress, the ownership right to a specific percentage of a company's equity. The markers have none of those rights, and yet when advertised in the auction market for sale, are identical to legitimate shares.

That is a fraud, at least to my limited view.

It is interesting that the DTCC has a mechanism to handle over-voting - the niggling problem of getting more votes than there are genuine shares. Think about that. Carefully. There is a mechanism to dilute legitimate voting in order to not have to alert the holders of markers that they don't own the real thing.

That sure starts to smell an awful lot like institutionalized fraud and counterfeiting to me.

Now, admittedly, the DTCC tarts itself up with plenty of self-important rhetoric and rules and grandiose proclamations, but let's not forget that the DTCC is nothing more than a for profit entity owned by the brokers. It is not a government agency, and it is not a charitable organization. It is the alter ego of the participants, a creature of the brokers, created by the brokers, owned by the brokers, to clear and settle trades.

A while ago this creature decided that it would be "more efficient" to pay its owners, and itself, at clearance, and not worry about the inconvenience of delivering what was sold.

And the SEC blessed that decision. It was a great decision from the standpoint of the DTCC and the brokers, because now they could get paid without delivering anything.

The SBP was created to solve the obviously large problem of many brokers not complying with delivery requirements.

It has since been abused to the point where it is a $6 billion per day problem child, and fails stay open for months, or years, creating a ghost float of counterfeit markers in the system.

My pet peeve is the non-CNS system, where the brokers decided that the minimal scrutiny required by the DTCC when failing to deliver was unwelcome for the real larceny, and thus created a mechanism where everyone could get paid, and the delivery would be accounted for outside of the system, on the honor system (ha ha ha).

That is a much bigger problem than the SBP problem, IMO, and where the real land mine lies.

Both the non-CNS system (ex-clearing) and the SBP effectively violate Rule 17A's requirement for prompt settlement, including transfer of registered ownership. By violating that requirement, they create counterfeit shares, by any other name, in that the owners of the markers believe that they own real shares with all the rights discussed, and yet own nothing but a contractual liability - an IOU.

Because they aren't informed of this, investors are being defrauded, and the markers have all the essential elements of counterfeits.

Hence the counterfeiting discussion.

Am I off the reservation here? If so, where?

10:04 AM  
Blogger SECFOInfo said...


I don't buy it. The grandfather isssue was pure/raw power pressure from the industry.

I think you have to get past the legal gyrations. Too much gray area for any worries at the SEC.

10:20 AM  
Blogger bob obrien said...

I don't disagree.

But what is the specific legal problem with the argument?

10:29 AM  
Anonymous Anonymous said...

The SEC has been very careful to say they don't regulate the settlement of shares as it is outside their realm of responsibility and authority.

They regulate SRO's and can require them to list problem stocks, but they claim they don't have authority to force settlement.

What about trades that originate outside the US where the SEC clearly doesn't have authority. I believe there is very little naked shorting in the US. It's all in Canada, Europe, Carribean, etc.

Personally, I think state police raids on buy side brokerages who send out confirmation slips on trades that haven't settled (fraud) would wake the industry up.

They should be required to send statements to their customers along the lines, "Sorry ol' chap, but we were unable to secure the shares you bought in three days. No, we're going to continue to keep your money. Cheerio!"

10:52 AM  
Blogger gvtucker said...

No question that companies shouldn't be on RegSHO forever. There is no logical reason for it. I can understand limited grandfathering, just so you don't have disruptions in the market.

But the grandfathering shouldn't be unlimited. Anyone who has been short a hard-to-borrow security has gone through the painful process of a buy-in when the borrow disappears. It doesn't force you to buy everything back, for sure, but there are times when you have to buy back, say, 5% of your position because the borrow isn't there any more.

And anyone who has worked an institutional trading desk and has seen a trade not settle 1 day beyond the assigned date knows the fire drill panic that ensues.

There's no reason why a stock should be on Reg SHO forever. There should be a specified period for resolution of outstanding trades--say, 30 days or so--and beyond that, there should be some kind of buy-in on unsettled trades. It doesn't have to be 100% for sure, but it should be something that forces trades to settle--say, 5% of the SHO trades. Do that once a week until the stock goes off the SHO list.

If that happened I don't think that there would be a market disruption, aside from a few panic situations while the market adjusts.

11:02 AM  
Anonymous Anonymous said...

I think an avenue of inquiry worth exploring is the DTC's role as a trust.

It is illegal for a trust to own assets they hold in their own name, but they own shares in the name of their parent (DTCC AKA Cede & Co.)

I believe this trust arrangement is regulated by the state of New York State Banking Department. Someone should let them know that share assets are effectively being held in the name of the owners of the trustee.

11:03 AM  
Anonymous Anonymous said...

gvtucker, why should shorts of SRO companies only have to buy in 5% per day. Why should I care if it creates buy side volatility?

Would you tell a bank robber that if he makes monthly payments, you won't send him to jail?

I say arrest the naked shorts and regulators and bought prestitute media behind this and demand the whole thing be settled immediately.

11:18 AM  
Blogger gvtucker said...

anonymous--not all of the trades on the SHO list are a result of thieves taking part in a cladestine naked shorting conspiracy. What I'm proposing solves the problem.

11:29 AM  
Blogger mfairview said...


The problem seems to be the fact that MM can naked short for liquidity reasons. Why not queue up all the buys and fill them when someone wants to sell (and vice/versa)? That way you get the product at time of payment. I don't agree that you should give all the money up front for an IOU. Or at minimum, interest can be charged on that IOU until delivery (or start at T+3) as an incentive to deliver.

11:46 AM  
Blogger Jer. 9:24 said...

Lots of issues here, and Bob is focusing on an issue that needs to be pounded into the thick heads of those in charge at the Senate Banking Committee. If anyone has a brave and enterprising contact at FBI or DoJ, that might help. No need to waste time with the SEC. They would rather see more victims raped while they supposedly study the effectiveness of their new rules against rape. Don't want to be too tough on those enterprising rapists, now, do we?

There are plenty of violations of laws and regulations in this arena by the industry (including DTCC), their regulators, and of course their mutual friends the manipulating but "liquidity" generating (so important to Donaldson!) hedge fund and similar customers.

I believe the most simple criminal violation to prove and get convictions on would be the mailing of a brokerage statement that purports to show a broker has possession (on behalf of his customer) of, say, 25,000 shares of OSTK, without a clear notation that settlement has not taken place, when in fact the buying broker--the customer's fiduciary--knows or should know that in fact no settlement has occurred and thus he does not have his customer's shares, even though the seller has the customer's money and the broker has his customer's commission payment. This is clear and easily demonstrable felony mail fraud. Imagine how easy it would be to prove: Here's a copy of my statement, showing X no. of shares of XYZ. Subpoena of brokerage records shows settlement has not taken place (especially in the ex-clearing arena) and yet the broker claims in writing, mailed (no doubt across state lines) to the customer, to have completed the transaction, and even charged the customer for it. Motive? Easy to show. I won't waste time going thru it unless anyone can't figure out at least one motive.

It is highly unlikely that anyone at SEC will face liability, either civil or criminal for their role in perpetrating these frauds. It is nearly (but not totally) impossible to sue the SEC civilly, and in any event won't result in restitution for the victims of their malfeasance.

Unless you can prove improper communications among SEC powers and industry players (including of course the SEC's masters at DTCC), or show the nexus between the more likely real world scenario of "future jobs for present favors" that we see, for example, at FDA (e.g., an SEC guy lets the crooks slide, agrees to a wrist slap for an egregious violation (a la Refco) or derails an investigation in exchange for a job at a major Wall Street firm--or a law firm that represents such Wall Street firm) it's gonna be really tough to nail a government employee.

Of course, if someone at the FBI or DoJ would do the work, which I don't foresee, to wire tap some of the SEC offices, check for unusual spending habits, etc., they might pick up a crook or two.

There seems to be a little movement in the prosecution of PIPE players who shorted ahead of their own and others' deals, which of course is criminal insider trading, as well as market manipulation and fraud (manipulate a price down to get a better purchase price on the PIPE, for example, in one case I know of).

Will the feds have the gumption to trace the funds, emails, phone calls, etc., to offshore (especially Canada back in the day) brokers who did the deeds? Follow any leads to SEC or NASD offices? Unsure.

The SEC demonstrated it was not serious re Regulation SHO when it declined to put any teeth into the regulation. Imagine, not even withholding the mark from shorts until they cover, or even until they settle the trade with a borrow? Unbelievable that an honest and sincere regulatory agency would object to that. With no teeth in the Regulation, and with a history of non-enforcement of the pre-existing rules against such activity, why is ANYONE surprised that Reg. SHO is a failure? It was set up to fail.

As someone else noted, the SEC all but demanded the NASD pull its proposed rule change to require a buy in at the market for all fails over T + 3 + 10. The SEC, no doubt with tongue in cheek, said they were going to solve the problem with Reg. SHO.

Let's put our hope in the State regulators, and in the public who as they become aware will raise so much hell the faces in D.C. will have to respond somehow.

You have to wonder, how long will the SEC allow the industry to make it look at best foolish and at worst complicit in federal crimes?

12:17 PM  
Anonymous Anonymous said...


The NASD proposed exactly that in 2004. A standard time to settle at which point the Regulators must 'approve' special circumstances. That standard of time was 10 days past normal settlement.

The SEC asked the NASD to rescind such a proposal and opted for the "grandfather clause" instead.

As for how settlement failures are cleared on SHO companies, I suggest you evaluate teh trading volumes in Cal-Maine (CALM).

While on SHO the stock started at 8.5 Million short and closed off the list at 1.1 Million shorts.

The stock traded down 50% in the 9 months it was on SHO and traded 4.5 times the public float over that 9 month window of time. The average daily trading volume was 213,000 shares. Since coming off SHO on September 26 the stock has gone dry. Average trading volumes have reduced to 60,000 shares - near 4 year lows.

It is clear that the Institutions "worked" the stock to close out the fails and now that teh fails are below limits - no further "working" is required.

Numbers don't lie and the numbers are out there.

12:19 PM  
Anonymous Anonymous said...

Better question to all that disbelieve this is a problem.

Under SHO the threshold list contains stocks that are oversold with settlement failures.

1. If the stocks are moving down, it cannot be bona-fide market making that caused the fails (exempt from borrowing) because MM's are supposed to be flattening out the markets thus they become "buyers" in a declining stock. So they cannot be responsible for the fails.

2. Those responsible for the fails have failed to make good with a borrowed security. Why? In many stocks listed as a Reg SHO security the short positions increased as the stock tanked (TZOO as an example). If new shorts could borrow for settlement how come fails could not? The SEC should have halted ALL future shorting on threshold securities to provide opportunity and demand that FTD seek out and borrow existing shares.

12:24 PM  
Blogger Tommy said...

There are some fundamental flaws in your thinking that of your legal friend's arguments.

1. Firstly, IOUs, FTRs, FTDs (front end), et al, do not create fake and excess shares AT ALL. These are mere names for excuses, by the brokers, for any number of things. They are also notification notices to brokers.

2. The one and ONLY way, fake excess shares are introduced and created, is when brokers naked short to their own clients - 'back end' naked shorting as I call it. That is, they confirm settlement for more shares to their customers - than the brokers have shares to settle with. And do so without customer notification – secretly. Naked shorting without notification to the recipient. Really awful.

3. Important to keep in mind is that individual buyers can only buy through their brokers or rather from their brokers, not from other market participants. When customers get a settlement confirmation from their broker, it means that the broker - not anyone else - the broker – claims settlement (delivery) of shares to the client.

4. When there are no real shares to back up the settlement confirmation, it is a lie and also an act of naked shorting to the clients. It is far worse than when the broker gets an FTR notice. At least the broker is notified. But customers are not. So there are two wrongs here. Naked shorting or FTDing to clients per 17A and REg SHO and lack of notification.

5. Again, it's important to keep in mind then that excess fake shares are not created by front end FTDs, IOUs, FTRs or any such thing. This would be a major error in logic, IMHO.

6. So again, the one and ONLY way, fake excess shares are introduced and created, is when brokers naked short to their own clients - 'back end' naked shorting or FTDing as I call it. That is, they confirm settlement for more shares to their customers - than the brokers have shares to settle with. Naked shorting without notification to the recipient.

7. Regardless of the excuse, if brokers confirm settlement of more real shares to their clients than there are real shares to settle with, they're naked shorting to their clients, failing to deliver or settle them, failing to notify their clients of these facts and introducing fake and excess shares.

Not IOUs, not the SBP, not FTRs not front end FTDs.

The original FTDer (front end naked seller) can only succeed if the there is also a quiet back end naked seller - the brokers.

Without the back end naked sellers - the brokers to their clients as above - there would not be a large number of open FTDs, as the front end FTDers need back end brokers FTRing brokers. Otherwise customers would demand either cancellation or delivery in great numbers.

The front end needs the back end to function, and they do because they both make money in the process.

In certain cases, the broker can be both the front end and the back end FTDer at the same time - when they just confirm settlement without doing a thing. Naked shorting to clients right out of the gate without even an IOU excuse.

So creating a large number of markers, front end FTDs, FTRs, IOUs, etc does not by itself translate into extra shares. The brokers have to quietly and secretly naked short to customer accounts for that to happen.

The fact that there are over votes also speaks to this and also to the fact that the brokers do not notify their clients at all about what’s going on - including the lack of voting rights.

Back end FTDs - brokers to clients – naked shorting to clients – does create excess shares if done secretly and quietly without notification. It’s the only way fake shares circulate in customer accounts, as it’s the only way they can get in there in the first place.

Front end FTDs, FTRs, IOUs etc., certainly don't create fake shares.

Just wanted to set the make corrections to the stage so we can all act on it better.

1:00 PM  
Anonymous Anonymous said...

As a number of other posts point out, going after the buy side broker dealer for mail fraud could be productive. OSTK's chairman could file a complaint with the police if his broker dealer sent him a confirmation slip for his trade.

Another strategy would be to write to the auditors of publicly traded broker dealers that disclose an unsettled trading liability and ask them about revenue recognition policies for commissions on unsettled trades.

1:29 PM  
Anonymous Anonymous said...


If this were actually true, I am certain that many SEC employees would have known about it. I am about 99% certain that at least one of those employees would have blown the whistle on this. I also suspect that Cox would have made this visible almost immediately after he took over the SEC. I say that because - as an innocent man who had nothing to do with this - I can not see why he would risk becomming culpable by keeping his mouth shut.

My believe, which I have held since I first saw the details of reg SHO, is that Donaldson was doing his Wall Street buddies a very big favor by initiating this sham rule which seem to accomplish nothing. If he wished to do so, a guy who runs four hedge funds as does David Rocker could create FTC positions in all four of his hedge funds. And, if he needed to keep the pressure on, all he than needs to do is lateral the ball to a guy like David Einhorn who runs three hedge funds, from which he could than naked short the same company from all three of his hedge funs. He could than pass the baton onto another hedge fund manager who runs multiple hedge funds, etc. etc... I can not believe that Donaldson was not aware of this gaping hole in reg SHO. What really amazes me is that the SEC has thus far not chosen to investigate the shenanigans of the two or three hedge funds who are most resonsible for this. These people could have been prosecuted under the old regulations. The laws that they have been breaking involve a broad conspiracy to manipulate stock prices and defraud invistors. reg SHO was never really needed to begin with...

3:09 PM  
Blogger bob obrien said...


I hear what you are saying, and perhaps it is just terminology, but what do you call it when Broker A lends his customer's shares out of the DTC account via the borrow program, passing the voting and other rights off to the new buyer, and doesn't tell his customer that the shares the original holder thinks he has now are only IOU's?

Per the DTCC, no "sale" has taken place, just a loan, and yet now you have original holder A and new buyer B who both believe they own the same real share. One of those is being defrauded in that representation, and yet there is no naked shorted share, per se.

I agree with you that a big part of the problem is that the buyer's broker lies to the customer, and represents to his customer that he has shares, when he really only has a marker representing a future share to be delivered. That is the ex=clearing lie, and is also fraud.

We need to simplify this - the buying brokers aren't "naked shorting" to their customers, they are lying about settlement. Simple. If they aren't getting real shares come settlement date, and the trade isn't broken and all funds returned to the client's account with an apology, the buying broker is lying to the customer - who thinks that the trade is settled as he hasn't been told otherwise.

Are we in agreement on that, and can we simplify our descriptions to include that? The act of passing off the trade as settled via a marker when it hasn't creates a de facto counterfeit shares - a facsimile for a real share which has been delivered, when none has.

Your point, if I follow it, is that the counterfeit is created by the buying broker when he represents to his customer that the trade has settled when it hasn't. I agree with that. Frankly I don't care which broker does it - I say kill 'em all and let God sort it out, or in this case a jury.

But then again, I'm a little testy of late given my complete comprehension of how bad this situation really is.

3:49 PM  
Anonymous Anonymous said...

Good point, Bob. We should agree on terminology. The simpler it is, the easier it is for people to understand.

I like the word "marker" or "receipt", but counterfeit seems to better fit what is happening here. The buying brokerage lies to his customer about settlement. He doesn't naked short to his customer.

Besides the problems with continuous net settlement, the stock program and x-clearing, there is also simple kiting.

The Operation Bermuda Short group was said to have 300 different companies that kited stock from one brokerage to another across a half dozen countries and jurisdictions.

To anonymous 7 - it would be trivial for the SEC or DTCC to prove there isn't a problem by just releasing the numbers. The fact that they obfuscate tells me something's up. Where there is smoke, there is fire.

I bet there are employees from the SEC that are reading this. I wish one of them would anonymously post the scoop on what is going on behind the scenes.

4:28 PM  
Blogger Tommy said...


You said that brokers are not naked shorting but lying about settlement - Bob they're doing both. These are two separate acts. They could naked short to you and tell you about for instance.

I think we need to clarify exactly who a customer buys from - exactly. It is my impression that a broker customer technically buys from the broker - and nobody else.

All the market information etc, is all nice and good, seeing "your order" in the order book etc., but it's not. It's the broker's order in the book. Nothing happens without their consent. Technically you buy from your broker. Your broker may even on occasion say that they sold to you from their own inventory. It's happened to me at Schwab a few years ago.

So taking that seller/buyer arrangement, a customer can not enforce FTDs from broker to broker or clearing system to broker. It's not "your" order that received an FTR from the NSCC or Morgan Stanley or a failure to settle notice - is it?. No, it's the broker's trade.

If the broker does not have sufficient inventory or shares when confirming settlement to you, he is naked shorting to you - nothing with which to settle – and lying about it - both. He could tell you what he’s doing, but he doesn’t. He could choose not to lie and still naked short. See these are two things he's doing the motivation is to keep us happy and quiet so he can collect more commission and interest income.

Best case is the broker can claim they're merely shorting and not naked shorting as they have a marker or IOU that they claim is he equivalent of the real share. But that's a lame excuse and doesn't change the fact that they confirmed settlement of real share and not a marker, IOU or whatever and these are not the equivalent of real shares as we know - so it's still a naked settlement confirmation, a naked short trade to you in exchange for your purchase money and commissions - and they lie about it to you as well.

Now I did not mention reverse naked shorting - or rather theft of securities - when the broker removes securities bellow a level of previously settled shares, not sufficient to cover customer claims on all shares in order to lend them out and earn extra money by doing that.

But reverse naked shorting also produces fake shares, the same way customer naked shorting does. It’s just done after settlement instead of during settlement.

Perhaps we can agree on some easily understood descriptive terms :

1.Initial naked shorting
2.Broker to Customer naked shorting
3.Broker stock removal

Number 1 does not create any fake shares, but 2 and 3 do, as this is a manipulation of customer accounts AND false statement to customers via these manipulations.

7:13 PM  
Blogger Tommy said...

This is what Larry Thompson said :

Once a loan is made, the lent shares are deducted from the lender’s DTC account and credited to the DTC account of the member to whom the shares are delivered. Only one NSCC member can have the shares credited to its DTC account at any one time.

The assertion that the same shares are lent over and over again with each new recipient acquiring ownership of the same shares is either an intentional misrepresentation of the SEC-approved system, or a profoundly ignorant characterization of this component of the process of clearing and settling transactions.

So a sale or transfer from one broker to another IS made. This thinking is just wrong to say that lending of shares will have more than one broker on record at the DTC. It doesn't compute to me at all.

If you borrow shares, the can be DTCed to you right away, per lenders instructions to the DTC. You in turn give them an IOU.

I'd like to further refine the terminology we can all hopefulluy agree on:

1. Initial naked shorting
2. Broker to Customer naked shorting
3. Unauthorized share removal

7:33 PM  
Blogger bob obrien said...


But there is no transfer of record ownership on the DTCC Stock Borrow - if there were, it wouldn't be a loan, it would be a sale. Thus, the Borrow program violates 17A if the security is represented to the new buyer as genuine, or it violates 17A to the original owner (and the DTCC is just calling a sale a loan, in violation of IRS regs and a host of other regs). It has to be one or the other. And the broker is lying to the customer, either the original owner's broker, or the new one.

In ex-clearing, Thompson's description doesn't apply, and given that it represents about 80% of the naked short sales, that is the area which interests me more.

8:31 PM  
Anonymous Anonymous said...

How can one grandfather Grand Theft?

This is like the Secret Service telling a counterfeiter...
"We just issued new currency, but the old bills you counterfeited can still be used by you, but don't countefeit the new money!"

2:12 AM  
Blogger Tommy said...

There is a transfer of ownership in the SBP. The shares are presented to the buyer as real - because they are.

If the buyer buys from the short seller, the shares are transfered again. Real shares. No misrepresentation here at all.

The SBP violates nothing, so once and for, lets get off that horse please. If we can't agree on that, we're of two minds on a lot of things because this is very fundamental.

The 80% unsettled trades and ex clearing unsettled trades remain just that - unsettled.

But we as individual investors can not claim direct harm because of that because we are not a party to all those primary FTDs between brokers and clearing agents.

But we can claim harm due to the misrepresentations that brokers make to us.

1. Mail and Wire Fraud
Due to the false statements across sate lines in the broker statements and Internet sites confirming settlement to us, when in fact there were not enough shares for our broker to do so and they falsely made statements to induce us to accept settlement, when non occurred

2. Violation of 17A and REG SHO
Because brokers naked shorted to us, in violation of the above regs, because the brokers lack the real shares with which to settle.

3. Violation of SEC rule 15c-3
Because brokers remove "our" shares that were previously correctly settled to us, to lend them out for shorting purposes and again Wire Fraud because they fail to mention the removal of the shares in subsequent statements. SEC rule 15c-3 requires brokers to keep all fully paid for securities in their possession.

4. Probably more, can't think of any right now - Good night

2:34 AM  
Blogger bob obrien said...


I understand that the shares in the borrow program are real.

My point was that if there IS a transfer of registered ownership, then it isn't a loan. It is really a disguised sale. If there ISN't a transfer of registered ownership, then it is a sham. I believe the former is the case.

If the former is the case, then what the DTCC is calling a loan is actually a sale wherein the old owner loses their registered ownership without being told. The new buyer receives the record ownership. BOTH believe that they are owners of genuine shares, with voting rights. If the former is true, then the original owner has LOST those rights and hasn't been told.

Now, that seems like a disguised sale to me (when it goes past a few days it isn't temporary and isn't a loan - the test being the transfer of record ownership), and it raises interesting IRS questions - if these are all disguised sales deliberately mischaracterized by the DTCC as loans, then there are huge tax implications.

Whether the fraud to the original owner by not alerting him that he now holds a marker rather than the original share constitutes counterfeiting is debatable. I believe that it likely does, as a facsimile is being represented to him as genuine. The new buyer receives a genuine share so I have no truck with that portion of the transaction.

As to the non-CNS (ex-clearing) transactions, the whole system trades in markers all the time. That's what is being sold and bought. The fraud there takes place when only a portion of the markers are redeemed for genuine shares, and the rest convert into open-ended IOU's for shares (from the selling brokers) and a lie to the buyer from the buyer's broker (when his statement represents his account as having the shares).

That is where I maintain the counterfeiting takes place - from the buyer's broker to his customer, when he misrepresents a non-delivered share marker as a share.

Are we in agreement in this?

7:45 AM  
Anonymous Anonymous said...


I have been reading through your board and the naked shorting website. Before the last week I had never even heard of you. As a newbie to this topic I will leave you with the following thoughts.

(1) You have convinced me that there is a problem here but not on the scope. It seems to me that there are a few select companies like NAVR, OSTK, and other where naked shorting is a problem. But if it is not a problem at Wal-Mart, Coke, IBM, or other widely held stocks then how is it really a problem for the overall market? It seems to me an intelligent investor would simply avoid stocks on the SRO list and put their money some place else, with a calm mind. I am not saying that naked shorting is right but as an average investor I have a hard time getting worked up about it. To use your analogy, I think rape is wrong and I am glad their are laws against it but I don't stop dating women simply on the off chance one might get raped some night while out by herself.

(2) While the valuation issue is not at the heart of the discussion it is not totally off base either. One of the arguements for shorting (naked or not) is that it helps to bring stock valuations in line with a "true" market value. It is interesting, as an outside observer, that all the companies you mostly talk about are companies that have accounting problems (like NAVR) or questionable business models (like OSTK and FMD). Again, I am not saying that naked shorting is right but I can see how an outsider can say to themselves, "What do I care? Those companies are junk away". And yes, that might be the same as a coal miner saying, "Why that is just a little old dead canary." but many people do think that way, like it or not.

(3) Finally, I think to myself, what am I supposed to do, even if the market is one huge lie. Should't I be milking that cow for all she is worth while I still have a chance. Would you have me stick my money under a mattress?

Bob, I think you are highly intelligent and well meaning but you depress me. If this is a really big problem for the country, help me to see that and then show some leadership so I don't feel so lost.

10:42 AM  
Blogger Tommy said...

"That is where I maintain the counterfeiting takes place - from the buyer's broker to his customer, when he misrepresents a non-delivered share marker as a share."

- I totally agree with this statement. Though not even a marker is needed. Could be anything and nothing.

"The fraud there takes place when....(Brokers) lie to the buyer from the buyer's broker (when his statement represents his account as having the shares).

- Agree with above as condensed. The in between I don't as brokers can do whatever they want amongst themselves. If any fraud happened between brokers, it has nothing to do with us.

"My point was that if there IS a transfer of registered ownership, then it isn't a loan."

- No, a transfer of registered ownership can also be a loan. It doesn't necessarily have to be a sale. If the transferor requires the transferee to return title at will, is that really a sale? And if both parties entered into the transfer with the understanding it was a loan and not a final sale for sales consideration and treat the transfer as such on their taxes, all indicates it is indeed a loan. At the very least, both ratify it as a loan through their behavior.

The facts are that the transfer is intended as a loan by both parties, it is treated as a loan, the consideration is not sufficient for a sale, both sides say it is a loan, transferor retains ultimate control of the share. It is a transfer of title as far as the DTC is concerned, but not a sale in the eyes of the IRS or anyone else. Both can be true at the same time and do not conflict, are not mutually exclusive.

"Whether the fraud to the original owner by not alerting him that he now holds a marker rather than the original share constitutes counterfeiting is debatable."

- It's not debatable. It DOES constitute counterfeiting, and a violation of SEC Rule 15c-3. Anything that a broker does where ultimately customers wind up with more shares than their brokers really have, results in the same thing - Counterfeiting shares and buyers being in an open unsettled situation. If the broker represents settlement with nothing to back it up - even if after he was correctly settled to earlier - the timing doesn't matter - then the client is in a undelivered status, the exact equivalent of being naked shorted to. It is naked shorting because the trade has already cleared but not settled because there are no shares to settle with - exactly what naked shorting is.

Whether the unsettled customer positions happen because of violations to 17A or to 15c-3, doesn't matter - the result is the same.

1. The DTCC doesn't misrepresent or disguise the loan/sale. They represent they transfer title of shares in the SBP from transferee to transferor when directed to do so in a prearranged order. If this is really a sale or a loan is beyond them. The original loan could become permanent with additional consideration, etc., the possibilities are endless and not in the control or knowledge scope of the DTCC.

2. Customers buy only from their brokers and if brokers don't have enough shares to settle with, they are be naked shorting to their own customers. If it happens during settlement, it's a violation of 17A. If the broker falls short after settlement, it's a violation of 15c-3. Both above would also constitute mail and wire fraud for misstating account statements. The latter is not a trade per se, but it is putting the customer in an unsettled position due to the unauthorized removal of shares, with the exact same effects as not settling to begin with. Violations to 17A and 15c-3 have the exact same effect, it's just a timing issue.

11:00 AM  
Blogger n-tres-ted said...


Please keep in mind:

Brevity is the soul of wit.

9:05 AM  
Anonymous Anonymous said...

I once had a some share warrants that I had purchased a large positio in. I also bought the shares and I'm pretty sure my brokerage was shorting them to me.

Close to expiration, they called me and told me I had to sell them because they were going to expire worthless. I got in a big argument with the broker and told him to mind his own business.

The next day, I put in to buy a big block at market (online) and went for lunch. When I came back, my order still wasn't filled. I called and complained and suddenly the offer started climbing without filling me. I called again and said I would pay the going price.

The warrants ended up running and went up about 5x. I went to compliance and put in a complaint. They sent me a letter two weeks later that after extensive investigation, they had determined that they had done nothing wrong.

It's a great system when they investigate themself.

9:07 AM  
Blogger teachericjp said...

anonymous: I really don't believe you just heard of Bob in the past week. What you're saying makes no sense at all. It sounds as if you believe these illegal activities are okay just so long as they don't harm your stocks. Well, here's what happened to me: I bought stock in NFI (and i continue to do so) knowing that it is on the SHO list. However, I also have some shares in CKCM. When I purchased them at 17, I watched them rise to 28 or so. Then on excellent news I watched the stock plummet and then two weeks later, they showed on the SHO list. So now what? That list just keeps on growing. So, taking your advice, we can just buy the stocks that are not on the SHO list just so that at a later date, we can get "raped" by the same people the SEC is protecting. I don't think you are being genuine. My reasons: you seem to want to tell people to just let this happen and move onto another stock. That is what the manipulators would like. Also, once the average investors hear about this corruption, they're not going to be as calm as you are being. They're going to be outraged. Why do you think the press is being censored about it?

9:46 AM  
Blogger bob obrien said...

Teacher et al:

A poster on the NFI board had an excellent idea - an information-based chain letter for dissemination to your email list. Check out

for a suggested pass at it, along with my suggested changes here. When the final rev is completed, I'll post it at NCANS for distribution.

The mainstream press is effectively muzzled by the oligopolistic entrenched powers-that-be on Wall Street, so for this to become widely understood we will have to do our own heavy lifting and do it the old fashioned way - from person to person.

That is actually a return to dis-intermediation, wherein we don't wait for some benign press God to offer up knowledge or news, but rather become the messengers ourselves. That drives the media nuts, as with Dan Rather, where they lose control of the ball and are savaged by an informed public.

A lot of time and money has gone into keeping a lid on all this. We can blow that lid off with a few mouse clicks. That is tremendous power, and one of the things that governments and entrenched power bases fear - when the sheep awake and learn what has been done to them by their protectors.

I strongly support this grass roots activism approach, and believe that it is well worth the effort. Most have never heard of the FTD issue, thus cannot be called upon to make intelligent decisions, as ignorance protects the perpetrators. By offering a chain letter approach we can ensure that there is dissemination, and thus any ignorance is self-inflicted.

8:50 PM  
Anonymous Anonymous said...

Bob, I couldn't get your link to work, but this is a phenomenal idea. A well written chain letter this week could have the mainstream media scurrying for damage control next week.

I couldn't get your link to work, though.

The secret to a good chain letter is to make sure it replicates. Since the average person doesn't like to read, it means we need something in the first paragraph and headline that is compelling enough for them to pass it on to their friends.

You also want to seed it. In other words, orchestrate a group of us to all send it to all of OUR friends at the same time.

I saw someone post that to believe the regulators would allow billions or even trillions of dollars of counterfeiting is so unbelievable, that most people choose not to believe.

I'm not sure how to get past that.

Also, I'd try and make it personal and reference the reader's personal investment losses.

I think I saw the post on NFI's thread you refer to about how the powers that be are afraid that the people will talk to their neighbors instead of the all powerful state that is beholden to the few.

I couldn't agree more.

8:09 AM  
Anonymous Anonymous said...

The chain letter sounds like a bad idea to me because I've already done that and seen the results (see below). A better idea is to get David Patch on CNBC another time and _then_ send a letter out with links to the interview (and the past one). The general public thinks chain letters are scams but believe what they see on T.V. Also the Patrick Interview on Fox although short is good.

As I said I've already sent most of the information to my friends in the form of detailed letters with links and most still don't believe or just don't 'get it' because its too complicated and people think it doens't apply to them. I believe only a few percent of the people I've sent to actually took any action. Most think I'm nuts and a victim of a scam.

Think about it do you own little test and measure your readers reactions.

10:01 AM  
Anonymous Anonymous said...

Most people like to think what everyone else thinks. When you tell your friends about naked shorting, they don't necessarily think you're nuts. They just don't want to take on a belief that goes against the norm.

That tells me the chain letter should start out with "You probably already know that the SEC has proven there is massive counterfeiting of public shares, but you may not know you can protect yourself by asking for your certificate. Also, you may have less informed friends that don't know, so it is imperative you share this information with them."

IE. have the letter start out with the assumption that the belief in the conspiracy is the normal mental state.

CNBC, etc. are really effective, but do you think they are going to keep airing interviews that hurt their owners? Think about that one long and hard.

If any hedge funds, regulators, politicians or media are reading this, take this as notice that change to the system is inevitably coming and it is time for you to take a leadership role.

11:17 AM  
Blogger Tommy said...

I've refined my thinking on my previous posts :

Let's quickly examine naked shorting :

1. Timing and notification of naked shorting
When a sale is posted through a clearing firm to a broker, broker to broker or from a broker to a client, it is merely cleared T+0 through T+3 . So the seller has 3 days to settle. Only on t+4 is it clear that a naked short trade has occurred, if the seller has not delivered.

In Broker to broker and clearing service to broker trades, when there is a fail to deliver and unsettled situation at T+4, at least brokers are notified.

2. Broker to client (us)
But when it comes to broker/client trades, brokers don't notify or treat their clients - Perhaps they think we're too stupid and don't have the same rights.

The same 3-day settlement timing on trades applies from broker to client. I've seen such notification myself from my brokers on occasion, trade will settle on x-day, or 3 days to settle, something like that, depending on the broker and what the trade exactly is, etc..

The moment the trade is confirmed by the broker, it is merely "cleared". The broker has 3 days to settle with me, deliver me his shares. Unless I hear otherwise from my broker, after T+3 - the broker has settled (delivered) with me.

3. Frauds on Clients
Assuming that the broker did not have enough shares with which to settle in the first place, there are two wrongs the broker committed in relation to the client:
a) The trade in fact remains unsettled at T+4 and is thus the equivalent of a naked short broker to client. Violation of 17a and REG SHO.
b) His failure to advise me of this unsettled trade between myself and my broker and showing my account as settled for this trade, when it's not settled due to the broker not having shares with which to settle, is fraudulent information to me. Wire and mail fraud statutes

Removing shares previously settled:
When, after I have been correctly settled with on a previous trade between myself and my broker, the broker fails to maintain enough shares on hand to back up my claims on certificates of real shares, my broker is then violating SEC rule 15c-3. He is also entering into naked position against me, as the shares that were once there, are now gone. The position he now represents to me in my account is now a fraud, wire and mail fraud as well, IMHO.

To determine if a broker is guilty of any of the above or not, is easy to determine, if one has the data.

Subtracting all accounts that allow borrowing of shares, the broker must have at least as many shares as the rest of his clients show in their non-borrowable accounts - at any given moment in time.

If the broker has or has had fewer shares, than the number of shares in these types of accounts, at any one time, he has done at least one of a,b or c - as described above. And perhaps more than one.

Theoretically, if a broker has 100% borrowable accounts, he need not have any shares on hand ever, as an example - just IOUs.

But I doubt large brokers are in this situation. Many shares of the REG SHO listed companies are surely purchased in non-borrowable broker accounts as well.

11:31 AM  
Anonymous Anonymous said...

Headline for viral email

Time Magazine Exposes Share Counterfeiting,9171,1126706,00.html

"As you are undoubtedly aware, the SEC proved in January 2005 there is massive counterfeiting of shares in our public markets.

What you may not be aware of is that if you invest, this counterfeiting has likely cost you $X.

Now there's a chance for you to make some about a short squeeze where the crooks cover."

IE. the viral email should cover these points

- comes from a credible source (Time, SEC) and is proven fact.
- the scam has hurt the reader
- the reader can make money if they pass this email on and lobby to rid the system of this corruption

3:42 PM  

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