Sunday, July 31, 2005

Dateline - 10 Minutes Of Empty Air

Well, I just saw the long anticipated Dateline piece, two plus years in the making, wherein the DTCC stock borrow program and its creation of electronic counterfeit shares (which are treated as legitimate shares by the system), the abuse of loopholes by unscrupulous and powerful hedge funds, the SEC’s Regulation SHO and its lack of teeth, and the SEC’s complete lack of any real enforcement of prompt delivery rules that have been on the books since the Commission was formed, were all revealed in compelling and alarming detail.

I saw a clear description of legitimate short selling (where speculators sell stock into the market that they've borrowed from lenders, in the hopes they can buy the stock back at a lower price when they return the shares) and the distinction between that lawful practice, and the illegal practice of failing to deliver/naked short selling (where stock is sold short but never borrowed, thus never delivered to the buyer, and instead the system treats electronic IOU’s/ or counterfeit shares, as legit – defrauding the buyers by representing the bogus article as genuine).

I saw an articulation of the damage failing to deliver/naked short selling can cause, by depressing a company’s stock and impairing their ability to raise capital, and listened with rapt attention as the robbery of shareholder value was exposed for all to wonder aloud at - perpetrated by the clearing system and the brokers that own the system.

Or rather, I didn’t.

Instead, what I saw was a 10-minute puff piece that covered none of the above, and could have been slapped together by a couple of college student filmmakers during a Tijuana binge-drinking weekend - it clarified nothing and educated nobody, and was long on how a guy lost everything when his company went belly up, and short on anything else. It followed the trials and tribulations of Eagletech, and made it seem as though the entire FTD thing is just a few guys at Smith Barney who might have done something "too difficult to explain" called naked short selling, that is being pursued by attorney John O'Quinn, who has filed a bunch of cases, some of which have been dismissed. After watching it, I knew exactly nothing more about any of it, besides the cautionary bromide that "investors should be careful" in the stock market.

That's it.

Some attorney is filing suits over something too complicated to even try to describe, which can hurt companies and investors, and which has to do with the stock market.

Now, I could express considerable surprise that the best NBC could do after spending years, was to generate a piece that makes the latest late night spray-on-hair infomercial look substantial. I could bemoan the fact that they missed the essence of every noteworthy aspect of the largest financial scandal of the century. But I would be a liar if I did.

I have learned a few things since getting involved in this issue. The first is that powerful interests want to keep their culpability in the systematic destruction of companies for profit quiet, at all costs. The second is that money buys power, and power buys the ability to silence opposition. The third is that our regulators are complicit, at the very least, through their inaction, and likely some are flat out dirty and aiding and abetting the criminals who are gaming the system. The fourth is that nobody has any interest in fighting for shareholders or investors – all the money is made screwing them. The fifth is that most of the media lies, or selectively filters what is reported, creating a Pollyanna-ish view of the world, where warfare is freedom fighting, genocide is ethnic cleansing, corporate fraud and lying becomes restatement, and moral relativism is the order of the day – aphorisms abound, positive thinking can achieve anything, and ignoring ugly truths is essential to peace of mind.

Given these lessons and the resultant reality they describe, could anyone have reasonably expected the Dateline piece to have any more gravitas or duration than an N’Sync ballad? Was there any basis for a hope that an issue that the mainstream media has studiously ignored for 8 months now would be exposed by a show best known for hard hitting interviews with second string pseudo-celebrities?

You could have learned more about naked short selling and DTCC, SEC, and broker/participant duplicity by watching an episode of Being Bobby Brown. And it likely would have been more compelling and coherent, to boot.

Folks, this was a non-event that was, IMO, neutered to the point where it was a non-issue. You don’t spend two years on a piece and come up with this sort of empty air accidentally. What you just saw was an example of why the mainstream media doesn’t matter any more, and why the bad guys are confident of their ability to continue to steal a generation’s retirement. They get to control the message, and sculpt public opinion, and they have the ability to kill anything that could even hint at exposing them.

If we are going to get this noticed and acted upon, it will be because activist groups like NCANS raise awareness by advertising and subsidizing behind the scenes action, not because 60-Minutes needs an Andy Rooney filler.

We are all poorer for the opportunity that was just squandered, and should be fighting mad. But also wiser. Because we need to be smarter than the bad guys are. And placing our hopes in someone else doing the heavy lifting is a fool’s errand.

Same as it ever was.

Thursday, July 28, 2005

Captive Regulator Chooses To Protect Criminals

Yup.

You read it right.

Our securities regulator is now on record, indicating that they chose sides when they created Regulation SHO, and the side they chose was protecting the naked short sellers, rather than the investing public.

You can see this admission memorialized at this site.

In the document, you will find them admitting clearly that they were concerned about creating short squeezes, thereby causing the naked short sellers financial pain associated with covering their illegally sold shares. They obviously had no concerns about the financial damage that the short sellers caused to the investors when they sold those naked shares into the market, often in very rapid and systematic fashion, to deliberately depress stock prices. That is OK in the SEC's book, even though there are laws against doing so. But should the short sellers actually have to cover their illegally sold shares in the same fashion, resulting in a run back up to fair value, that would cause them financial pain - and the SEC doesn't want to cause the short sellers pain.

Read it.

Now, what do you do with that? How do you reconcile someone like Annette Nazareth being made an SEC Chairperson, merely months after saying that there wasn't any problem, and further that investors were just a big bunch of crybabies because their stocks hadn't gone up? And now we see, in writing, that the SEC is in on it, ensuring that the short sellers are protected from the consequences of covering their fails in a timely manner? What can be said about that? How can the SEC take the stance one week that there was no problem of significance, and then confirm in writing that the problem was significant enough to cause short squeezes of the magnitude to cause them to have to allow the rules to continue to be broken for many months in order to avoid squeezes?

Who is hurt by a short squeeze, other than the short sellers who created the situation in the first place? Nobody. But the SEC wants to protect them from the natural consequence of building up a huge inventory of illegally shorted stock, while doing nothing to protect the investors who were harmed by their downward manipulation using these illegally shorted shares.

What do you do when your police force is protecting the bank robbers, and slapping the cuffs on anyone with the temerity to point out their corruption?

I am sickened, but not surprised. Folks, the system is broken, and this document confirms just how badly. When your regulator chooses to protect the violators at the expense of the folks they fleeced, we have a problem.

And Bush wants us to put our SS money into this market? Why not just mail our checks directly to the hedge funds and eliminate the formality of the market?

This stinks, and nobody in Washington wants to tackle it.

Tuesday, July 26, 2005

Your Honor, I'm Innocent, I Swear...It Was All A Big Mistake...

So, a funny article ran today. Not really ha ha funny. More "can it get any worse" funny. It was in today's CNN/Money, and the title says it all:

Ex-SEC aide involved in fund scandal?
Report: Derby profited from hedge fund accused of fleecing investors of millions of dollars.


Now, for starters, it wasn't an aide. We are talking about the Managing Executive for Operations for the SEC. Not some low-level flunky. The second name you see at the SEC.gov site when you look at the directory. Peter Derby, Managing Executive for Operations.

According to the CNN piece, Derby was an investor in a crooked New York hedge fund, that cheated investors out of many millions. And he serendipitously pulled his money out, along with almost 20% profit, before the bomb went off and it was exposed as a scam.

Now, one might ask if it is healthy that one of the top SEC guys had a relationship that was so cozy with a criminal hedge fund manager - cozy enough that he was one of the very few that made money from the fraud. One might wonder what favors might have been granted to this hedge fund manager, or friends of friends, and how many other hedge funds enjoy similarly intimate access to our watchdog regulators. One might speculate that this is the sort of thing that the SEC is ostensibly supposed to be against, and here we have a top dog making bank from one of the more egregious hedge fund frauds I've seen - this one was literally just a Ponzi scheme - forget about hiding losses and cooking the books, we are talking much more straightforward than anything that evolved. We are talking I'll take your $5 and pay my old investor $3 for investing $2, and pocket the remaining $2. A time honored pyramid scheme, from what I can gather.

So yet another bombshell for the SEC. Donaldson resigns, Cutler resigns, anti-investor market regulation Director Nazareth (wife of a Fed Governor) gets nominated for a Commission Chair, and the Operations Chief leaves under a cloud, while being sued for participating in a Ponzi scheme.

Can this really get any worse? What's next? Do we have to get a video of the SEC getting large bags of small denomination bills dropped off by a guy named Vinnie, who laughingly refers to it as the "hedge fund and naked short selling amnesia fund"? I mean, could you even make this stuff up? You have the DTCC and the SEC saying there is no naked short selling problem, and then going dark when experts like Finnerty and Shapiro say bullshit, you have a no comment when the FOIA request turns up a list of hundreds of millions of shares naked shorted per day (sort of conflicts with the "problem, what problem?" tack that the SEC and DTCC have taken to date), and now you have one of the upper echelon guys accused of participating in a Ponzi scheme.

Is it any wonder that hedge funds enjoy such a "look the other way days" treatment from the SEC? They should....apparently they are co-conspirators with some of the top dogs there! And it isn't some wild eyed conspiracy kook saying so. It's CNN.

Here's my favorite part of the article: "Derby, who is leaving the SEC this week, and the SEC, which has filed suit against Haligiannis and Sterling Watters, did not return calls from the Post. "

Yeah. I'll just bet. And Larry Thomson of the DTCC never returned any emails from dozens of investors who were asking for clarification of his flights of fancy in the @DTCC interview.

Seems like there is a lot of no commenting going on with the SEC and the DTCC these days. Sort of a standard operating procedure.

It really is getting stranger and stranger by the day.

Friday, July 22, 2005

The King Is Dead, Long Live...

Today, Annette Nazareth was nominated for one of the two available Chairperson seats at the SEC.

Annette, as you may or may not be aware of, is married to one of the New York Fed Governors - you know, one of the guys who runs the system of which the DTCC is a part - the privately owned Federal Reserve Banking System (whose Federal Reserve banks are all privately owned). For anyone that doesn't know it, the U.S. is the only modern first world (or second world, for that matter) country that has a privately owned central banking system. Kinda makes you want to ask why that is, and who owns the banks that print the money for the country, but that is a different subject. Suffice it to say that 99% of the U.S. believes that the Federal Reserve is a part of the government, when in fact the only thing governmental about them is the Federal Reserve Board, the oversight and advisory board that Greenspan chairs, which does have government oversight and is a quasi-governmental agency.

Anyhow, Annette is noteworthy because of her "let them eat cake" pronouncements when investors correctly noted that it appeared that the SEC had allowed the system to conduct sanctioned bear raids on the Regulation SHO list companies, presumably to shake loose shares from those receiving margin calls and being stop lossed out of their savings, so that the participants who had Failed to Deliver could solve their problem with sweetheart deals on cheap shares at the expense of Joe Sixpack, whose retirement was vaporized to create the "buy side liquidity".

When this ugly suspension was pointed out to her, did she immediately initiate an ivestigation of the specialists and market makers, to see whether the sell side pressure had been legitimate selling or manipulated selling in order to create a downward spiral? Of course not. The same specialists who two months later would be sanctioned for being outright crooks would never do anything that dishonorable. Instead of even giving it a cursory look, she went on record with her unique perspective that investors were basically a bunch of whiners who were angry their stocks hadn't gone up. Joe Sixpack could just buck up, and get used to the idea of working a fast food gig into his seventies, so that Wall Street could cover the shares they'd sold and never delivered, at fire sale prices. I mean, it's not like they made a fortune selling the shares naked in the first place or anything. Why would they want to actually have to cover them and lose money? When you are talking hundreds of millions of shares, every few billion dollars counts.

Honest. Couldn't make this up.

Even as the daily fails were in the 150-200 million PER DAY range, she was blaming the investors for being ingrates, and ignoring the odd propensity of most of the SHO list companies to experience 30, 40 and 50%+ declines in their prices in the first 3 months of this year, when one would have expected that buying to cover the fails would have had the opposite effect.

But Annette never met a short seller or a Fail to Deliver she couldn't love. And the investors that were being fleeced out of their life savings and their retirements were speculators who deserved what they got. It was the first time any SEC employee had ever gone on record with such an arrogant, high handed and dismissive stance.

But she wasn't fired or disciplined. Instead she was tendered the Commission's highest honor.

Even the WSJ withdrew their support for Annette, recognizing that you couldn't have selected a worse chairperson, but no matter.

Does anyone feel a little sick?

Tuesday, July 19, 2005

One Emperor, No Clothes. Check. Any Questions?

About a week ago I posted a list at the NCANS site. It is a list, by day, of the number of Fail To Delivers since last March. The list was only for the NYSE and the NASDAQ, and was a partially complete response to a Freedom Of Information Act (FOIA) request by one of our NCANS members. I say partially because it omitted the OTCBB and pink sheet stocks. But, we now understand how many shares are failed on any given day for the last year for the major exchanges.

And it is shocking.

For just the NYSE and NASDAQ, the totals run from 100 million to 259 million shares per day, with the average being in the 150-160 or so million range.

To put it into perspective, that represents between 4% and 8% of the total volume on the exchanges per day, give or take, winding up as FTDs. Not counting the ex-clearing fails, which are of unknown size, but are believed to be at least as large as the FTDs, if not dwarfing them (ex-clearing refers to fails that are held at the brokerage level and never entered into the clearing and settlement system - IOU's passed between the larger houses).

So why is this so shocking?

Well, I personally find the idea that in the neighborhood of 10-15% (counting ex-clearing) of the total volume of the exchanges' volume being FTDs/naked shorts to be alarming. Why, to listen to Mr. Thompson of the DTCC, this is a trivial problem, hardly worthy of his time. And yet the hard numbers show that at times, the FTDs alone amounted to over a quarter of a billion shares per day, at a time when supposedly the industry was thinning out the FTDs (due to the efficacy of Reg SHO, I suppose). Now, using his own numbers, around $6 billion per day are fails. Divide that by the average 150 million fails, and you can begin to see that the problem is not trivial at all, but rather represents what looks suspiciously like a cottage industry that has $30 billion of fails or so per week. Per week. But it's no problem, we are assured. What's a little $2 trillion annualized problem between friends?

And yet nobody has really commented on that FOIA data, except to ignore it.

Doesn't that seem a trifle odd?

Anyone find a 150 million per day fails problem to be more than just a hiccup? No? Yes? If the US Government knew that there were $6 billion of counterfeit T-Bills being passed per day, do you think that would warrant anyone's attention? Every single business day? No? That's a lot of Pentagon hammers, even in this day and age...

This gets stranger and stranger every week, as the apparent strategy is to just pretend that nobody will find out how big the problem is.

Sorry guys. The cat is out of the bag. It is apparent that none of the mainstream media want to tackle the financial crisis of our generation, presumably because they don't want to rock their very lucrative boat. I get it. So maybe if we all continue pretending the emperor is wearing drawers, the rest of the sheep will believe it...

I dunno. I see an ugly naked man trying to pretend that he is dressed. And the numbers support that take.

Question is how long can everyone pretend that those numbers aren't staggering, and an indictment of the entire Wall Street apparatus?

Thursday, July 07, 2005

The Politics Of Profits

Today's deplorable and cowardly attack on innocents in London is an unfortunate reality in this day and age, where violence without any semblance of reason is the tactic employed by terrorists - as it has been for 40 years, during which time it has never resulted in any terrorist objective being met or any policy being changed. And yet the carnage continues.

My observations have more to do with the way the markets reacted - they dropped, precipitously, far faster than one would have expected from retail investors selling in panic. It certainly would appear that some large interests decided to play the odds that this would cause a panic, and decided to prime the pump by shorting some key sectors.

The good news, or bad news for them, is that it didn't work very well.

But it highlights another important dynamic in the hedge fund/naked short selling controversy, namely that international hedge funds are completely unregulated, and nobody has any idea where the money is coming from.

To believe that it is all clean, that there is no middle eastern arms or terrorist money, no narco dollars, no criminally generated cash, is naive. Why wouldn't there be? Why not? It's the last frontier, the Wild West, and nobody knows what special interests are throwing money at what funds.

In point of fact, it would make good business sense to set up some hedge funds to trade in advance of these attacks if you were one of the bad guys - you could fund future attacks using the profits from the last one.

Someone traded in advance of 9/11, and effectively shorted the airlines and the insurance industry ahead of the attack. A halfhearted investigation was started, with no conclusion ever announced.

Is it just me, or does it seem strangely impossible that a nation that has passed sweeping laws impinging on the rights of every citizen in the name of national security, and that has invaded sovereign nations based on unabashedly false pretenses (to "defend ourselves", of course, against a "threat" that turns out to have had no threat capability), shows exactly zero interest in understanding how very real dollars are likely being made by unknown parties capitalizing on terrorist attacks? How is that possible? We have spent years trying to track a guy with a sat phone, whose primary tactic can be synthesized into "caves are good", and yet we don't want to understand who is benefiting from front running terrorist attacks? How can that be?

Perhaps it is all innocent. Perhaps the bad guys don't profit from their mayhem. Perhaps individuals who come from backgrounds of complicated mega-money transactions and who are terrorist-affiliated never thought of benefiting from their actions.

Perhaps.

But I find it unlikely. They always need more money to fund the next round of atrocities. The requirement for cash is insatiable. So why, again, would they not use a completely anonymous mechanism for making money from their heinous deeds? And why are we completely silent on the subject?

Food for thought. Does money really buy you the ability to prey on a nation and its allies with impunity, and profit from it? If so, is the delicate contract between state and citizen valid, given that the citizen is a resource to be harvested, a subject to be manipulated, rather than an individual to be protected?

I believe that we need to understand who is putting the money in hedge funds. We need to understand how that money is affecting our national security, and the security of our allies. And we need to do it sooner rather than later, or all the rest is just impotent posturing in order to reassure the sheep that something is being done about the wolves.

Tuesday, July 05, 2005

Never A Dull Moment

Mark Faulk, in one of his latest installments of The Faulking Truth, does a follow-up on the Global Links story - a saga that highlights the depth of the Fail To Deliver problem, and raises troubling questions about the role that the SEC and the DTCC are playing. His piece can be seen here. I note with wry amusement that the reporter he takes on as being one of the greatest disseminator of misleading information is one of our favorites: Carol Remond. She also happens to be the reporter that the hedge fund drive to discover my identity was shifted to when the issue became too embarrassing for WSJ Jesse Eisinger to pursue.

Here are a few select quotations from Mark's outstanding piece:

"... It seems that Robert Simpson, CEO of a small company in Michigan called Zann Corp., had bought every available share of Global Links Corp after the company had reduced their outstanding shares to about 1.1 million shares from more than 350 millions shares in early February. Incredibly, over the next two days, over 50 million shares traded hands, even though Simpson owned every share, and there were only 1.1 million shares even in existence.

The Global Links story is one that, like the Stockgate scandal itself, just won't go away. While some articles have called it the "poster child" of the Stockgate scandal, others have been more concerned with discussing their lack of financial success over the past few years, while ignoring the more important issue of how brokers could buy and sell almost fifty times the total issued shares in only two days, especially since those shares were presumably in the account of just one shareholder.

The Faulking Truth has received numerous emails from other GLKC stockholders who held shares totaling over 400,000 during the same time period. In fact, Global Links representative Patrick Donahoo says that "During the month of February, we were literally besieged by stockholders who were digging for information. While we cannot confirm exactly how many shares were purchased and held, we believe that this number exceeds 20 million shares." Twenty million shares out of a total available float of 1,158,064. Where did the other nineteen million shares come from?"

Now, I may not be a mathematician, but even I can understand that the likelihood of all of this being innocent is nil. And yet the system keeps insisting that there's no problem, and the DTCC is pushing the states to eliminate requirements for any paper certificates, thereby eliminating the only mechanism with which investors can verify that they aren't being screwed by the participants. Does any of this seem a trifle alarming? The entire trading/regulatory framework is simply ignoring the elephant in the room, while the DTCC works frantically to eliminate the last of the proof of malfeasance.

What's wrong with this picture?

Read all of Mark's piece - it's a stunner.