Friday, December 09, 2005

Idle Hands - My Comment Letter To The SEC

Dave Patch of was talking about the new proposed rule for de-materializing proxies and having them distributed via the Internet, which I think is an excellent idea, and he made the observation that this represented an interesting opportunity to bring the voting fraud issue to the forefront of the discussion - namely, the fraud that occurs when FTDs, or shares loaned from margin accounts via the NSCC's stock borrow program, get their proxies to vote, just like real shares.

The NASAA meeting had a good exchange on the subject, and it was illuminating how uniform the understanding was on the mechanisms Wall Street has devised to accommodate "over-voting" - you gotta love how everything has a euphemism on the Street. Lying to shareholders about whether they have legitimate shares, or are merely the proud owners of chits, stops being lying and fraud, and instead becomes a niggling inconvenience, really a clerical nuisance, a paperwork issue like reconciling your checkbook - "over-voting."

I for one don't like to play the euphemism game when it comes to topics related to the theft of America's savings by Wall Street. I don't call mass murder "ethnic cleansing", I don't refer to theft as "re-distribution of wealth", and I don't call fraud and lying "over-voting."

Lying to customers as to what's in their accounts, and then sending out proxies as though they had real shares rather than chits, and tacitly representing to customers via the issuance of those proxies that their votes will count is fraud. It is an artifice to deceive. The truth would be to not send any of them proxies, and simply explain that they don't own shares, thus aren't entitled to any of the rights of a shareholder.

But that isn't what happens.

Instead, as we heard in the NASAA meeting, the industry has a myriad number of ways to deceive everyone, and violate the simple "one share, one vote" presumption that is a cornerstone of capitalism.

And that is outrageous.

The fact that the media ignores this breach of the public trust is both shocking, as well as entirely consistent with its behavior to date - "maybe if we don't talk about it, nobody will notice."

I'm not surprised, just disgusted.

Anyway, I decided to invest a little time into writing a comment letter to the SEC, highlighting my sentiment that it is absurd to worry about the mechanism used to distribute voting materials if the integrity of the voting process is a laughable farce.

That's just me.

I'm sure there's a million good reasons for shareholders to get the impression from their brokers that they have voting rights, when their votes will actually be stuck into the shredder, never to count for anything. I would love for Congress to tackle that logic in open session:

"Mr. Speaker, we, um, decided that we would let everyone into the voting booths because we want everyone to feel involved in the process. If some folks were denied their right to vote, they would become disenfranchised, and believe that they were being duped. That could result in a crisis in confidence in the system."

"Yes, but apparently you disconnect the levers from the voting mechanism whenever a black or brown-skinned person enters the booth, so they don't really get a vote, thus your generosity of spirit is really a hollow cheat, is it not? Aren't you really just lying to them to keep them from lynching you?"

"Well, actually, sometimes we leave the levers engaged, and merely deduct some of the "faux" votes from the "legitimate" votes - some areas do that when they are low on the manpower necessary to disconnect the levers every time. And some areas let everyone vote, and shred all the votes equally, and just vote the way that they know is the right way. So your view is inaccurate."

"Huh. How resourceful."

"Well, your honor, we are all about improving transactional efficiencies."

And so on.


Anonymous Anonymous said...

Possibly a few well placed proxie issues on some vary large corporations - say GE, Merrill Lynch, etc., to the point that only actual shares will be accepted and no over voiting allowed. It would initially fail, however serve to bring it to the investing public's attention.


Have a stockholder object to the voting process with a proposal to have the transfer agent verify and validate that only share holding proxies voted and no over voting has been counted.

6:27 AM  
Blogger bob obrien said...

I was thinking that in cases like NFI, where there is a class actions suit against them, that their counsel should demand hard evidence that the plaintiffs have the right to legal redress. It would make history if it turned out that they didn't own real shares and the case had to be thrown out.

4:15 PM  
Anonymous Anonymous said...

Bob, That sounds like an excellent idea! Especially in the courtroom, in front of the Judge. Demonstrate that there are actual shares behind the monthly brokerage statement (actually have to produce at least 4 months worth) that will be presented - followed up with a full discovery in to the plantiff's brokerage account holdings - especially if it is a margined account (it woud be funny to have the on the same monthly statement a PIL entry for the dividend). I would pay to attend the court session.....

9:00 AM  
Anonymous Anonymous said...

... actually would it be possible to enter a "friend of the court brief" (amicus curiae) by an actual shareholder, on behalf and in support of NFI?

NFI's lawyers would not have to agree, anybody could submit one, shareholder or not. NCANS could draft a standard one and submitt it routinely on all the cases that came up across all companies.

Also for distribution of any proceeds they should only go to actual shareholders not everyone with "shares" within their brokerage accounts.

Possibly the Judge could order the DTCC to disclose actual ownership data - FTD's - fake shares, etc.

9:17 AM  
Anonymous Anonymous said...

Bob, I am going to have to stop posting this way. I was doing some additional searching on the -friend of the court brief. There is a website that logs a lot of them (search short selling)

, and I came up with this one brief that I think you would find interesting..... especially on pages 5 and 6 (really nice)

10:36 AM  
Blogger bob obrien said...

The web address got truncated. Email me the article URL at

1:17 PM  
Anonymous Anonymous said...

There have been a ton of acquisitions of public companies.

I wonder where there is an example where the acquisition was with fake shares.

They file a statement that they own 20% of the company and they want an offer tendered to the shareholders, but what if the 20% is fake.

Specifically, think of Karl Icahn, who buys distressed companies?

Wouldn't it be crazy if someone shorted those companies first, then bought them out, using fake shares?

10:42 PM  
Anonymous Anonymous said...

it would not work. The buyer would have to notify the public at the 5% ownership level of their intentions - fake or not. This would cause a short squeeze. Plus the buyer would only need to purchase (via a tender) 100% of the float and the rest are the problems of the brokers who created the fake shares.

7:22 AM  
Blogger settlements said...

Actually, the 5%, 10% etc... ownership issue is strictly based on your account statement. For example, Institution XYZ can file that they own 20% of Company 123 and then put up those shares for stock lending. When most of the shares are out on loan the filings are not changed to represent a lower ownership value.

In theory, Institutional Ownership can be reported at greater than 100% of teh public float if a Company has a Large Institutional following. I believe Global Crossing, which held a 135% reported short position at one point, had a reported 80% Institutional Holdings and more than 20% Insider Positions.

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