Post by ginger on May 17, 2006 17:53:12 GMT -4
Location: Blogs Bud Burrell - Front and Center
www.thesanitycheck.com
Posted by: bburrell 5/17/2006 11:40 AM
In the very early 1990's, Prime brokers, particularly the major ones with major firm trading accounts, found they were continually running into shortages of stocks to borrow that they wanted to short. According to Reg T, shares held in cash, excess margin, retirement, pension, and institutional safe-keeping accounts were not eligible to be loaned to short sellers.
These very same brokers knew where these shares were located, by whom and under whose control they were owned, irrespective of whether they were held at DTCC or not. They are reported to have gotten major players (brokers, mutual funds and retirement systems) across the country to agree to lend shares owned by them directly to them for a kind of rebate, particularly on those shares that were closely held, or hard to borrow, or both.
These agreements became the foundation for these self same brokers to begin to both legally and illegally short stocks across the board, since they knew they could go to other providers for "guarantees" or "insurance" that the shares they needed to deliver, if such a thing should ever occur. They knew such agreements violated both the letter and intent of the Reg T rule, in that these shares would come from mutual funds, cash accounts, retirement funds, etc., without passing through DTCC, or specially tagged when passing through DTCC, which they were the major owners of in any event.
Finding hard third party confirmation has been very difficult, as it appears there was never any attempt to provide "informed consent" to the owners of such funds, and by implication, their underlying shares. Today, a general counsel for a major company for whom I have done work had its very major outside General Counsel disclose the existence of such agreements.
How has this never come up before? This should be a boon to major plaintiffs' and class action lawyers. Will the SEC issue another bogus "Immunity" to these parties? Watch and see. After today's major pronouncements today on its planned actions in the Biovail and other cases, this must come out.
www.thesanitycheck.com
Posted by: bburrell 5/17/2006 11:40 AM
In the very early 1990's, Prime brokers, particularly the major ones with major firm trading accounts, found they were continually running into shortages of stocks to borrow that they wanted to short. According to Reg T, shares held in cash, excess margin, retirement, pension, and institutional safe-keeping accounts were not eligible to be loaned to short sellers.
These very same brokers knew where these shares were located, by whom and under whose control they were owned, irrespective of whether they were held at DTCC or not. They are reported to have gotten major players (brokers, mutual funds and retirement systems) across the country to agree to lend shares owned by them directly to them for a kind of rebate, particularly on those shares that were closely held, or hard to borrow, or both.
These agreements became the foundation for these self same brokers to begin to both legally and illegally short stocks across the board, since they knew they could go to other providers for "guarantees" or "insurance" that the shares they needed to deliver, if such a thing should ever occur. They knew such agreements violated both the letter and intent of the Reg T rule, in that these shares would come from mutual funds, cash accounts, retirement funds, etc., without passing through DTCC, or specially tagged when passing through DTCC, which they were the major owners of in any event.
Finding hard third party confirmation has been very difficult, as it appears there was never any attempt to provide "informed consent" to the owners of such funds, and by implication, their underlying shares. Today, a general counsel for a major company for whom I have done work had its very major outside General Counsel disclose the existence of such agreements.
How has this never come up before? This should be a boon to major plaintiffs' and class action lawyers. Will the SEC issue another bogus "Immunity" to these parties? Watch and see. After today's major pronouncements today on its planned actions in the Biovail and other cases, this must come out.