Monday, November 07, 2005

Time Magazine Covers Naked Short Selling - Mama, we've hit the bigtime...

Today, Time Magazine, arguably one of the most venerated publications in the world, ran a groundbreaking article on Naked Short Selling/Failing to Deliver.

The reason this is noteworthy is because it represents the first time that the mainstream media has done a fair, balanced, factual article on the practice.

What I mean by the mainstream media is a large, respected publication not generally understood to be beholden to the NY financial power circle - Wall Street, and its spin machine.

Time Magazine is the big Kahuna. It is the granddaddy of news magazines. It doesn't screw around.

And now, Naked Short Selling and its impact on the financial markets is a 3 page story.

When NCANS was created in late January this year, this topic was thought to be the province of the "tin foil hat" crowd - at least that was the way that the NY-based financial periodicals universally portrayed it. It was wild eyed crazy talk from folks who thought that Elvis was living next door, and that aliens were operating on them in their sleep. That was the spin - if you could make the topic sound ridiculous enough, maybe you could convince the world that there was nothing to the story - to paraphrase Annette Nazareth of the SEC, that it was just disgruntled investors who were pissy about their stocks going down.

I personally took a fair amount of incoming hits on this - wacky Bobo, the madcap loon, seeing ghosts and the like. Dr. Patrick Byrne was castigated by every hack shill and quisling ever beholden to a hedge fund. The press was almost unanimous in its damnation and ridicule - a small section of NY seemed to have the information control thing down pat - mock, dismiss, ignore.

Kind of hard to mock and dismiss and ignore Time Magazine, though. They do have a bit more gravitas than the C section of the WSJ, who's never seen a hedge fund short they wouldn't write nasties about, or Barron's, whose amnesia and studied determination to not comment on REFCO is a thing of wonder, or the NY Times by way of Floyd Norris, a sometimes sympathetic writer from the hedge fund perspective. Carol Remond has been good for snide spin, Seth at the Fool is a wonder of pithy vitriole, Jeff Mathews' blog and disastrous CNBC appearance spouted mockery and negativity - virtually every one of the usual suspects in the media have been prolific Rainbirds(tm) of dismissive propaganda. So uniform has the approach to the topic been that it is almost as though a single group was writing their material.

The only publication to do a serious treatment on the topic was Euromoney, a British publication of top repute. The NY Post's Chris Byron has written a number of significant pieces, and Roddy Boyd has had a Dr. Jekyll/Mr. Hyde relationship with the story with some admirable coverage.

But nobody of serious weight has given the story the time of day, other than to tout the Wall Street party line (no offense to the Post, but it isn't thought of in the same breath as Businessweek or Time or even the WSJ).

This is a watershed event. Suddenly Byrne isn't sounding so loco, and the story is getting some heavy hitter legs.

Cat is out of the bag for Wall Street. Send this to every person you know. If they mocked you as nutty or part of some odd conspiracy theory cult, perhaps Time Magazine can offer them a little perspective.

Bad people do bad things. Some of them do very bad things because the money involved is huge. And sometimes an entire industry can be co-opted when the money is big enough.

Read all about it. And then tell a friend. If they have questions, they should go to the NCANS.net website and read the Primer on Naked Short Selling.

This time is different - really. Don't believe me?

Read Time Magazine.

And write a letter to the editor thanking them for their coverage. I did. You should too.

40 Comments:

Anonymous CorwinPOA said...

Congrats DD, nice to see all your hard work paying off. Still looking forward to reading the book and watch the eventual movie.

In the meantime you should pass the info onto Trey & Matt and see if we can't get a SP episode to tide us over. Would love to see Stan and Kyle take on Eric the evil hedge fund manager! (I am serious!)

6:51 PM  
Anonymous Anonymous said...

This coverage is awesome. Refco is too big.

My concern is that this article is a "limited hangout".

It feels like the dart missed the center of the board.

The article talks about what Badian did, but doesn't really go into how pervasive share counterfeiting is or how nonchalantly the industry deals with trade confirmation.

What about court cases that were dismissed for technicalities, what about thousands of lost jobs, what about the fake stock you bought with real money in the dot com run up.

What is the role of the DTCC? The SEC? What about the companies they are aggressively deregistering before the shorts are forced to cover? What is the role of the Senate Banking Commission who think this trillion dollar theft isn't worth reviewing?

This is a good start, but we need to keep the heat on and our feet on the gas peddle.

When the apple is rotton, it isn't enough to deal with the scabs on the skin.

This is not about unregulated hedge funds or rogue death spiral traders.

This is about regulators and elite who think they are above the law.

7:44 PM  
Blogger rvac106 said...

It's a step. A huge one. And we've been soooo patient. And persistent. And now, we need to keep the pressure on. All the phrases you've heard over the years about baby steps, first steps, steps in the right direction, all coming to fruition right before our very eyes. I think I'll write to Shelby again!

8:14 PM  
Anonymous Anonymous said...

Everyone I know who is following the NS scandal is waiting with held breath for two companies to make their moves...

OSTK and CMKX.

Fantastic work Bob.

8:22 PM  
Blogger bob obrien said...

I think that the chain letter idea just got its credibility.

I think that softly softly catchee monkey.

I think that the dart landed on the edge, but the throwers now understand there's a board. That is a start.

I think that the industry has worked very hard at marginalizing the obvious larceny that has become mainstream big business on Wall Street, just as they have always done. Their concern, and it is a valid one, is that should Texas and Florida and California and Nebraska understand that a small strip of NY and Greenwich, CT are methodically robbing the country blind, and being helped by their cronies on the Beltway, that there would be a revolt in the market, and outrage that could cost them their golden goose.

They cannot afford this kind of an article.

The reason that Thompson of the DTCC has ignored reasonable interrogatives like "what happens to the 80% of trades that the Stock Borrow Program doesn't satisfy" is because they understand that if they start answering direct questions, their BS scheme will become too well understood, and then it's game over.

The web changes everything. You, and I do mean you, can now send a link of this blog to every person you know, with a quick note saying "guess what, that naked short selling stuff I was complaining about, where Wall Street counterfeits shares and then lies to us all about what is in our accounts, just had a major article written about it in Time Magazine. Read the last two articles on this blog, and read the Naked Short Selling Primer at the NCANS.net website so you understand the issue, and then read the Time piece." And that note can be sent to everyone they know.

That is the danger that the entrenched powers that be have always feared. That the sheep figure it out, and get credible folks to say "hey, the Emperor has no clothes!"

Credible people just said that the Emperor is naked.

Can't bottle up the genie now. It's out there. The DTCC and the SEC and Shelby can't just pretend that Time isn't now covering their spectacular misadventure, nor that it won't get worse from here.

It will.

More will write about it. Cancelling hearings and pretending there's no problem so your buddies can continue stealing billions won't cut it anymore.

And we need to get the message out. Write to the Time reporter and congratulate him on a job well done. Whoever follows this up with a full blown expose will get a Pulitzer, IMO. This is the biggest financial scandal of our lifetimes. And that the media has ignored it until now is nothing short of criminal.

That's over. Time to get to work. Time just fired the starter pistol.

8:35 PM  
Anonymous Anonymous said...

The key is keeping it simple. I forwarded some of these blogs to a well educated successful person and he was comparing it to someone taking extra taco sauce at Taco Bell. A cost of doing business. "It is just factored into price." LOL

I just forwarded out your latest blog but I feel it will turn many off with the thick sarcasm. I understand where you are coming from but most have no idea how brutal stock message boards are and are not used to that type of writing. I would imagine it would not be to appealing to most I sent it to. I liked the Time article in the sense that it was fairly simple and somewhat easy to understand. If the listener does not understand they quit trying pretty quick. Bob to a certain extent you write above the common persons head. I think if someone could put together a nice chart showing how the process goes on it would do wonders on simplicity. I would speculate that over 99% of the population does not know what a market maker is. A chart showing the supposed process and the people involved would do wonders. JMHO

8:42 PM  
Blogger n-tres-ted said...

Funny that the writers of the Time article really don't get the naked shorting scam. They report the details of the Sedona deal, which involved the scammers lending money to the target, then slamming the stock with naked shorting to get the price down so they could buy shares cheaply, take over the company and cover their shorts.

After going to all that trouble in few deals, the scammers realized they could make off with a lot more money by just doing the naked shorting. Forget the loan and taking over the company. Forget covering the naked shorts. If they ever got caught doing what they were doing to Sedona, they would go to federal prison anyway. So why go through all the bother of gaining control of the target company and covering the short sales. Just take the money and run. And don't get caught.

Can anybody tell which investigators are investigating the 35 institutions? Do you think it's the U.S. Attorney Garcia of NY? Or the SEC, or maybe the NY Attorney General? First I've heard of 35 institutions being investigated. Why haven't they made public that they're under investigation, as public companies normally do?

8:52 PM  
Blogger SECFOInfo said...

It's a step in the right direction but I agree with anonymous on the "limited hangout".

It makes it out to be a few bad apples and not systemic.

It's very good for quieting the naysayers who don't believe it exists at all

9:17 PM  
Anonymous Anonymous said...

In case you missed my point you first have to get people up to speed about what they should be mad about. You need to approach it like most know absolutely nothing. Ross Perot did a great job with charts and graphs for the regular folk. People do not like, not understanding, or feeling stupid. When I send these out as my earlier post mentioned I even had some try to explain to me how this is not a big deal with the most idiotic explanations. You need to arm these people with the ability to understand it and then the ability to explain it to others. I know you have been working on this but it needs to go farther. JMHO

9:25 PM  
Blogger bob obrien said...

The problem is that what you are describing would take a book. Not a chart. If someone doesn't understand what a market maker or a derivative is, how are they supposed to get their head around the systemic larceny that is the ex-clearing system?

It is deliberately complicated, and is what drove me to write the non-fiction book - no tome exists that lays out the whole thing, blow by blow, with complete explanations an interested layman can grasp, and yet sufficient detail so as to be all-encompassing.

The notion that it's all facored into the price is not something a matrix or chart will solve. It speaks to a complete ignorance of the history of Wall Street, and the scope of the problem. I wish an easy one pager could knock it out, and I tried to do that with the Primer at NCANS.

At it's core it is simple.

The brokers have figured out that they can do transactions, get paid for them, and never deliver the shares. That results in de facto counterfeiting. Counterfeiting is illegal. Hedge funds have learned that it is wildly lucrative, and that the SEC doesn't do anything about it. It is likely large enough to pose a systemic risk. And it has stolen untold hundreds of billions from investors.

There.

No need to understand what a market maker is. No need to get mired down in detail.

The industry is counterfeiting shares by creating sales and not delivering the goods. That depresses prices. It is illegal. But the cops are busy chasing Martha Stewart.

How much simpler does it have to be?

9:26 PM  
Blogger tbs_theman said...

Employees of companies that are on the Reg SHO list would be the best place to start.

I continue to believe KKD employees should be notified what the SEC and other regulators are allowing to happen to them. KKD is headquartered in Winston-Salem NC. The local paper's web site is http://www.journalnow.com/

The local reporters may have some interest in the story. If the company does go bankrupt, what happens to hundreds of employee's 401k plan? It goes the way of the airline's pilots pension plan. How about all the local and state tax dollars that are lost???

You know Delta was on Reg SHO. The executives never said a word. They pillaged the union pension plan. They allowed / helped the company go bankrupt screwing shareholders. They then recommended that they get "retention" bonuses and extra pension money.

So get the employees to take a stand before what happens to Delta employees happens to them.

10:07 PM  
Blogger Craig is working on his first million said...

Bob,
Congrats on the hard work paying off! I will definately be writing in to the editor as well.

I'll be in touch.

3:06 AM  
Anonymous Anonymous said...

People seem to understand the term counterfeiting.

It isn't necessary for them to understand market makers or clearing to understand that the system treats IOU's as if they were shares and that extra supply pushes prices down.

::It makes it out to be a few bad apples and not systemic.

It's very good for quieting the naysayers who don't believe it exists at all::

This is my fear with a limited hangout article like this that doesn't educate the reader on the systemic problem. The reader will hear about naked shorting, but then think, "ya, but they got that Badian guy, so the problem is solved".

The most important thing is that WE not slow down.

I agree with the idea of trying to educate the employees whose jobs might be on the line.

3:22 AM  
Blogger n-tres-ted said...

The brokers have figured out that they can do transactions, get paid for them, and never deliver the shares.

Bob,

The brokers wouldn't do the counterfeiting just to be paid their commissions. They would know the activity is illegal and can put them in prison plus take all their money. Thus, they would participate in the naked shorting only if they get a significant share of the "take" of proceeds from the naked short sales. JMO

7:53 AM  
Anonymous Anonymous said...

n-tres-ted,

Have you been following the recent scandals much? Late-Trading/Market Timing - I never see where the Brokerage firms got any part of the take other than trade commissions.

Liquidity in the market is generating revenues for these firms as was recently presented by Ameritrade. Firms allowing naked shorting create liquidity and volatility which generate revenues.

8:21 AM  
Anonymous Anonymous said...

tbs..

Delta Airlines is still on Reg SHO just as a Pink Sheet as is United Airlines as a Pink Sheet. These companies get raided with extra shares pre-bankruptcy and take profit down as the company goes down.

Too many shareholders having too great a loss is the result of unsettled trades. Not to worry, Fox News said this past weekend that we can't tax the rich any more because they are the ones who re-invest. Of course they are as teh middle class is living hand to mouth since our investments have all been robbed.

8:32 AM  
Blogger bob obrien said...

Nterested: They do it for the commissions. Hedge funds represent the majority of trading on Wall Street now. Nobody is enforcing the laws, thus the fear of going to prison is less than non-existent. When was the last time a participant did anything more than disgorge a tiny fraction of the ill-gotten gains without admitting any guilt?

I'd be happy to pay a flat tax of $1 million for every half a billion I steal from investors. Hell, call it $2 million and buy yourself something pretty.

That's the system. Like it or not. The only way to change it is to expose it.

10:17 AM  
Anonymous Anonymous said...

"Nobody is enforcing the laws,"

That's part of the problem. Who's laws?

The SEC regulates US based SRO's, but much of the trading is non US.

If some offshore jurisdiction is allowed access to the system, then trading there is governed by their local laws.

Clearing will be parked wherever the laws are most lenient. American hedge funds just have to run their trading through friendly jurisdictions.

The NASD rule would have worked because it punished the American based buying brokerage that is buying on behalf of the US based investor.

It makes you wonder why the SEC canned it. Can they bring it back now?

10:57 AM  
Anonymous Anonymous said...

I hope everyone against naked shorting is posting comments on this proposed rule as you can be assured the hedge funds will be making their concerns known.

Specifically, the SEC wants to know if there is any harm in having it implemented as quickly as possible.

The rule is to require disclosure of US based short positions of OTC and Pink Sheet stocks.

You can submit your comments here:

http://www.sec.gov/rules/sro/nasd.shtml

The rule is here:

http://www.smartpdf.com/register/2005/Nov/03/66875A.pdf

11:46 AM  
Anonymous Anonymous said...

Comments to the rule change are posted here as they are received.

http://www.sec.gov/rules/sro/nasd/nasd2005112.shtml

11:48 AM  
Blogger Jer. 9:24 said...

Yes, the NASD can re-introduce the rule, tomorrow if they want. If the state regulators want to put a stop to this scam, and make the SEC --again-- show its colors by their response, they should pressure the NASD to re-introduce it and then not bend over for the SEC when the SEC asks them to pull it again. Give the public a comment period if necessary (that would be fun) but put the market on notice that from a date certain in the near future, T + 3 + 10 is it...after that you will be bought in and the trades settled. No grandfathering, no ex-clearing, no more perversion of the capitalist system by these scum and their captive "regulators."

11:48 AM  
Blogger n-tres-ted said...

Bob/anon,

The brokerage firms would not get the kick-backs or splits of proceeds. They would have to report and account for it to the auditors. The individuals involved would take these funds and launder/secret them by the best means they can design. I doubt they would risk prison/fines for more commissions. JMO

4:12 PM  
Anonymous Anonymous said...

n-trest-ed,

Exactly what in the latest round of securities fraud scandals have you missed. Wall street institutions, executives, and brokers have risked everything including their own namee for money.

Emanual Friedman, CEO of Friedman, Billings, and Ramsey was terminated amidst allegations of aiding hilary shane in selling short ahead of a PIPE. he faces SEC actions and other possible actions. All for money.

Morgan Stanley faces a legal fight from Byrne because they were willing to sell 200,000 shares without settlement in a highly publicized SHO company.

The bottom line, Wall Street will do anything for money including risk their futures. the odds are good, they rarely get caught and when they do the fines pale compared to teh profits.

4:26 PM  
Anonymous Anonymous said...

I posted this in the NFI thread, but am not sure if you are monitoring it.

Those opening two paragraphs in the NFI thread are excellent. I like the emotional content as most people make decisions from the heart.

I would only add one more paragraph with a slam on the media and links for more information. If it is too long, people won't read it.

When it is ready, let us know. I for one will forward it.

The only thing I'd add is a reminder right in the first sentence to forward the email. Viral emails only work to the extent they are replicated.

Something like:

It's important that we get the word out by the end of the year, so please forward this email to everyone you know. As you may have seen in this week's Time Magazine, Wall Street has been ripping off investors by selling them counterfeit shares of stock - and I'm mad as hell that it's been covered up until now, and that the average shareholder has never heard of the practice:
www.time.com/time/insidebiz/article/0,9171,1126706,00.html

You and I are being robbed daily by a well coordinated fraud, perpetrated by hedge funds and brokers, called naked short selling, or "failing to deliver. It's stolen hundreds of billions from investors, and is Wall Street's biggest dirty secret.

It is important that you forward this email so that we can get the word out as much of the financial press won't cover this story. You can learn more at:

http://...
http://...
http://...
http://...

8:50 AM  
Blogger SECFOInfo said...

REGULATION SHO is a sham. Plain and simple. The SEC misled investors in final-rule. They do not have a handle on the share or money slush and they have admitted such.

It's a regulatory sham, trust me. When it all comes out people will just shudder. It's that bad.

10:48 AM  
Anonymous Anonymous said...

http://www.financialexpress.com/fe_full_story.php?content_id=108213

5:06 PM  
Anonymous Anonymous said...

I'm in Canada and am having trouble getting a certificate for a penny stock that isn't on the SRO list, but which trades like it is heavily shorted.

Does anyone know who I can complain to to get my certificate?

11:44 AM  
Blogger graham01 said...

Bob,

You've done some great Due Diligence on this topic. Few people understand this problem better than you. Thank you.

I can substantiate some claims from the previous posts. It is the commissions that dealers and prime brokers seek. Maybe it doesn't seem like enough. Perhaps you're right. But these guys are paying 14% of commissions on Wall St. I recollect the hedge fund industry is at approx $1 trillion in assets. That's an extremely small base for that turnover. Dealers are pretty slutty. HFs are reputed to be good clients. Apparently they pay big commission and take the other side when they have to. They also go bankrupt. I suppose it's only the 5-year storm we have to worry about?

I'm at a Canadian investment dealer and we used to execute for hedge funds. In fact, I understand it was big business for some groups on Bay St. They would call and say "short a million XYZ" and one of my collegues would respond "Um, that's pretty aggressive for a naked short". Hedgie would say "ok, short half a million". Then we would get CNS (credit net settlement) lists from the prime brokers in the US and call their back offices. We were interested to know if they were going after anything we were short. If the answer was no, we didn't have to worry about getting bought in. If yes, we tried to cover before 3:00.

When I first tuned into the OSTK saga, I felt like Byrne was talking about Fairfax Financial. I couldn't believe the similarities between my experience with FFH, that began in Jan '03 and OSTK. I was all too familiar with the delivery problems Byrne discussed. Morgan Keegan, a broker dealer I had never heard of, based in Memphis was publishing absolutely ridiculous research. TheStreet.com ran continuous articles calling for "a zero". I discovered David Rocker owns 13% of TSC. Bashers on message boards. Shares of both companies were mysteriously listed on Berlin, Munich and Bavarian stock exchanges. I felt nauseas. Days after listing on the NYSE, almost 2MM shares were sold short. There were only 15MM shares outstanding and well over half were owned personally by Prem Watsa, Fairfax's CEO, employees and board members. Southeastern Asset Management now owns 25% of the outstanding shares of Fairfax. Cundill owns 15%. O. Mason Hawkins of Southeastern manages about 60B and runs the Longleaf group of funds. I hope Peter Cundill would consider it an honour to be compared to Mr. Hawkins. Both have long term records which place them in the top 0.1% of investors in North America.

I'm all for a more efficient market. I sell short myself in certain situations. I've also been subjected to buy-ins. Those are the risks we take. What is happening in the marketplace today is frightening!

6:57 PM  
Anonymous Anonymous said...

Here's a question?

How come there are so few OTC companies on the SRO list? Companies that are obviously heavily shorted, then listed without their permission in Berlin where there is NO volume, yet they don't show up on the SRO list.

Who prepares that list? Will its composition change when the NASD takes it over?

The BS OTC naked short list is ridiculous.

The dollar volume may be in the big stocks, but nothing makes money for the naked shorts like bankrupting a penny stock.

You never have to cover and never have to pay tax.

Ask Mark Valentine. He made hundreds of millions of dollars, collapsed a Canadian brokerage (Thomson Kernaghan) and was stung by operation Bermuda short.

He collapsed a number of OTC companies, causing bankruptices and mass layoffs.

TK worked closely with hedge funds and Mark shorted through hundreds of brokerage accounts in countries around the world.

He spent a few months in his mansion in Florida under house arrest and is now living the easy life, drinking Pina Coladas and paying for them with your investment losses.

If it p_sses you off, do what you can to let others know about NCAANS.

Post links in any stock threads you participate in:

http://www.ncans.net/news.htm

http://www.investigatethesec.com/MediaLinks.php

7:24 PM  
Anonymous Anonymous said...

http://www.rgm.com/articles/tk2.html

http://www.rgm.com/articles/theriseandfall.html

This is Mark:

http://www.mountsinai.on.ca/Publications/YHRSpring2001/Images/val.jpg

You don't get a big sentence when you can blackmail the who's who of Wallstreet.

7:29 PM  
Anonymous Anonymous said...

The SEC killed the rule the Faulking Truth was looking forward to a year ago April.

http://www.faulkingtruth.com/Articles/Investing101/1002.html


If you leave it to the SEC, they will NEVER fix this problem.

7:48 PM  
Blogger bob obrien said...

Graham:

The lads at FFH should email me. We have much to discuss and in common.

It is not only frightening how the Street is conducting itself, it is the complete sense of impunity with which some of the worst execute, day after day, with limitless hubris and confidence in their invulnerability.

Look, Wall Street has always been about making money. Period. Ethics are a hollow sham. Nobody smart cares about them. Top guys at brokerage houses laugh as they get off the phone with large clients, apologizing for front running them and blaming it on their "other" divisions. It is a society that celebrates socio-pathology and larceny, and has nothing but disdain for those foolish enough to care about anything but today's dollar. These are not people who build business or engineer better mousetraps - they are smug parasites whose contribution is to be just smart and well educated enough (usually from their parents' wealth) to be able to figure out how to game the system and steal from the rest of the country.

Like most successful criminals, they express nothing but contempt for anyone dim enough to care about those silly rules the rest abide by. They are above the law. Their ability to steal, using their own moral code of "anything goes", is the self perpetuating evidence of their superiority. You see it in Ebbers and Keating and many of the other high net worth crooks. They simply believe that because they have stolen so much, that the rules are not intended for them, as they are not mere mortals.

Now we have an entire society of these vermin unchecked by the regulator chartered with keeping them from killing the host. So instead of the usual Wall Street larceny, you have an uber-larceny unprecedented in modern financial history, other than the S&L scandal, which offered us a brief glimpse of how bad it could get in just a few years, with the scum of the earth given the keys to the bank vaults.

Mark my words, this will make that debacle look like a little fudging on one's income tax. This is the single largest financial nightmare of our lifetimes, brought to you by a group of hedge funds, and Beltway cronies, and brokers, and avaricious and cynical foreign powers, whose greed and snide cynicism are mind boggling. Because you are in the business, you comprehend the level that this runs to, and the inevitable consequences.

Few others do, and those that actually get it don't want to. They want it to be different.

It isn't. It is as bad as anyone can imagine, and then some.

No lie.

8:53 PM  
Blogger n-tres-ted said...

Graham,

Thanks for your contribution to the discussion.

11:19 AM  
Blogger Mover Mike said...

Thursday, November 10, 2005
Let's Just Grandfather It!
by movermike
I didn't know it then, but on August 25th, when I wrote about "naked shorting" and the problems of Fails to Deliver (FTDs), I would be revisiting the subject again in regards to Refco.

Regulation SHO was passed by the SEC and gave brokerage firms marching orders to eliminate FTDs after Jan 3rd and

"The SEC, wanting to avoid short-squeezes in dozens of stocks caused by the closing out of naked short positions, opted to 'grandfather in' any failed deliveries before Jan. 3.

Grandfathering Under Regulation SHO

The requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to positions that were established prior to the security becoming a threshold security. This is known as "grandfathering." For example, open fail positions in securities that existed prior to the effective date of Regulation SHO on January 3, 2005 are not required to be closed out under Regulation SHO.

The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions. The Commission will continue to monitor whether grandfathered open fail positions are being cleaned up under existing delivery and settlement guidelines or whether further action is warranted.

It is important to note that the "grandfathering" clause of the Regulation does not affect the Commission's ability to prosecute violations of law that may involve such securities or violations that may have occurred before the adoption of Regulation SHO or that occurred before the security became a threshold security.

Bottom line: 1.5% of daily trading or $6 Billion daily is involved in naked shorting. The Feds called a meeting of the top 14 firms involved in derivatives, suspected of "unconfirmed trades". Short sales after Jan 3rd, 2005 must be settled after 13 days or the firm is obligated to buy the shares in. Naked short sales prior to Jan 3rd are grandfathered, basically told to sin no more.

Now Time Magazine in an article titled Watch Out, They Bite! HOW HEDGE FUNDS TIED TO EMBATTLED BROKER REFCO USED "NAKED SHORT SELLING" TO PLUNDER SMALL COMPANIES By DANIEL KADLEC, quotes James Angel, associate professor of finance at Georgetown University.

He (Angel) says the rate of short selling has nearly doubled in the past five years, to 36% of all trades.

We already know that Refco was singled out by the SEC in the case of naked selling in Sedona.

February 2003 the SEC fined Rhino Advisors $1 Million for their participation in the manipulation of Sedona Corporation. In the Rhino case, the SEC had obtained audio recordings of Rhino Executives bribing US Brokers to manipulate Sedona Corp. stock by selling with 'unbridled levels of aggression.' The Rhino Executives were later recorded congratulating the US Brokers on 'collapsing' the security. While the SEC has the audio recordings, they have not to date taken any actions against the Brokers bribed to manipulate the stock. The period of the recorded manipulation was 2001. The SEC has recently issued a Wells notice to Refco which acts as both a Brokerage House and Clearing Agent for firms like Rhino Advisors.

We also know that Refco set aside $5 million to cover the cost of settling allegations that some of its brokers acted improperly in arranging trades for an investor in a PIPEs (private investments in public equity) transaction.

The question is how big was the naked shorting at Refco?

Remember the old saying: He who sells what isn't his'n, buys it back or goes to prison.I have a feeling when this all shakes out there will be a lot of money lost and a lot of new people in prison!

That's the other shoe!

When will the SEC enforce Reg Sho and when will they clean up the problems prior to Jan 3rd. That stuff is toxic!

11:52 AM  
Anonymous Anonymous said...

Is it true that market makers only have to put up 2% of the amount they are short?

http://www.
tradearca.com/
traders/
mm_requirements.asp

Market Makers subject to the Alternative Net Capital Requirement maintain minimum net capital that is the greater of:

$250,000
2 percent of aggregate indebtedness
the amount prescribed by SEC Rule 15c3-1

12:38 PM  
Blogger bob obrien said...

Anonymous: There's any number of ways that the MM's can game the system. Low collateralization requirements are simply the tip of the iceberg.

But remember to repeat after me: There is no impending leverage crisis due to all the FTD's. The SEC is your friend and trying to do the best they can. Grandfathering all past fails so as to not cause UPSIDE volatility for those who already pocketed the ill-gotten gains from the downside volatility their manipulative, illegal trading has caused is good.

Golly, it's 2005 and we are living in 1984. Ignorance is Strength. Freedom is Slavery. War is Peace.

Any questions?

12:55 PM  
Blogger SECFOInfo said...

Jaffe's lack of journalism will be taken to the cleaners in a chapter on the media.

Simply absurd how these people call themselves journalists. It should be lemming.

4:36 AM  
Blogger SECFOInfo said...

previous comment has nothing to do with OSTK fundies. No opinion either way there.

4:59 AM  
Anonymous Anonymous said...

Bob, despite the Orwellian media, I think your campaign has a good chance of success.

98% leverage works both ways - you make a lot of money as stocks go down, but you lose a lot when stocks go up.

My guess is the taxpayers will be bailing out the system, but rising prices for stocks like NFI or OSTK could quickly bankrupt the shorts and put a lot of pressure on the banks.

It will only take a few hedge fund bankruptcies before large investors start redeeming.

Heck, I wouldn't leave my money in a hedge fund after the Refco disaster.

You know the end of hedge funds is coming when you see ads to set up your own. Search for "hedge fund" in google and several companies pop up that will help you, Bob O' set up your own fund.

Maybe you could start a hedge fund with the stated purpose of squeezing Rocker companies.

7:28 AM  
Blogger bob obrien said...

I think that the notion that one fund could squeeze other funds is specious. The better connected ones are so intertwined with the investment bankers and prime brokers that if you go up against them, you are going up against most of Wall Street. My feeling is that is why you haven't seen a few funds come in and put the pork to fellows like our friend. You may make a buck doing so (doubtful though, as if he loses, his bankers lose even bigger, and their pockets are always going to be bigger than yours) but you will have made enemies in an area where you don't want enemies. A deal is over fairly quickly, but a career on the Street skimming 20% of any upside your fund makes is something you want to protect, and pissing off UBS or GS or ML or MS or BS is not the way to go about playing ball.I think it is over for these parasites once the states and the DOJ bring on the heat and make it less lucrative to rip off the system. Even then, I expect a fight, as the investors in funds like his are likely the powers that be, both legal, and illegal. And they will want to keep their names out of the light.

Learn from the S&L disaster, where the Federal apparatus and Wall Street allowed the ripoff to continue 4 or 5 years longer than it should have, costing the nation hundreds of billions more than it should have. Those hundreds of billions went directly into Wall Street's pockets, via the sale of junk bonds from all the big names involved in this little episode as well.

There are no new ideas. The frightening thing is how close this got to cutting into the national retirement system, via SS private accounts (which I have nothing against, BTW, if the system is even marginally honest).

Again, mark my words - this will wind up being the largest financial scandal of our lifetime. Not just the clearing and settlement system's abuses via the stock borrow program, nor the SEC's criminal abuse of their oversight capacity, but the brokerage community's systematic larceny via the non-CNS clearing system - the infamous "ex-clearing" that I have been harping on for these many moons. My belief is that it will become apparent that system has been abused to the point where it has resulted in centi-billion dollar liabilities from houses and funds that don't have the cash with which to cover. Centi-billion dollar liabilities which represent one for one redistribution of investor dollars to hedge fund and brokers, who have created billions of transactions with no shares to back them up, and no intent of ever making good on delivery - for years. Do the math on the total dollars lost on the dot com fall, and then consider the "what if" that a fair amount of the rapid fall was due to unbridled naked short selling (just as a fair amount of the 1929 crash was due to the same thing), and then further go out on the logical limb to speculate that the reason the SEC pardoned the prior fails (grandfathered) was because they were afraid of legal responsibility for their complicity in ignoring Congress' mandates, and also because the industry had gotten the ultimate leverage over them - buy us in and the financial markets melt down.

Not a pretty picture. And I am predicting that if/when the truth becomes evident, my version will be eerily accurate.

Again, I hope I'm wrong, but I don't think so.

10:01 AM  

Post a Comment

<< Home