Post by ginger on Feb 22, 2006 11:21:55 GMT -4
Corzine's treasurer pick faces grilling on 'naked short selling'
Wednesday, February 22, 2006
By JEFF PILLETS
TRENTON BUREAU
A group of bankrupt businessmen who claim to be the victims of Wall Street insiders and hedge-fund crooks will descend on Trenton Thursday to protest Governor Corzine's nomination of Bradley Abelow as New Jersey's next treasurer.
"This is a big moment for us; we've been looking for answers a long time," said Gary Valinoti, a Red Bank resident who is still trying to find out how his online stock-news service, JAGnotes, mysteriously collapsed in 2001.
Valinoti says the answers to how JAGnotes' stock fell from $20 to 3 cents a share in a matter of months lie in the files of a secretive Wall Street firm where Abelow spent three years as a board trustee.
The company, the Depository Trust & Clearing Corp., is a non-profit cooperative that serves as Wall Street's official recording secretary. Every trading day, more than $2 trillion in transactions are recorded and cleared in the mainframe computers at the DTCC's Manhattan offices.
But there is a growing suspicion on the part of some business leaders, academics and even the Securities and Exchange Commission that Wall Street's back office operation is susceptible to sinister forces seeking to manipulate the market.
The critics point out that billions of dollars in transactions fall through a loophole that the DTCC could easily close. The loophole allows unscrupulous traders to borrow and sell stock they don't even own in an elaborate ruse known as "naked short selling" that drives stock prices down.
The practice of short selling is legal: An investor borrows stock from a brokerage, sells it and then hopes to profit by buying it back at a lower price. In naked short selling, which is illegal in almost all cases, unscrupulous investors, such as hedge funds, sell shares of stock they never borrowed in the first place.
"The bottom line? It's a pyramid scheme," said James Wes Christian, a Texas lawyer who represents plaintiffs in two major lawsuits brought against the DTCC. "There's fraud going on, investors are losing millions, the market's entire settlement system has been compromised -- and the DTCC won't take the steps that will stop it."
Michael Jennings, a spokesman for the Senate Republicans in Trenton, said some GOP senators on the Senate Judiciary Committee plan to question Abelow about his role as a DTCC board member during his confirmation hearing Thursday. He said securities experts who have studied stock manipulation may also offer testimony about the DTCC and weaknesses in the stock settlement system.
Jennings said the public deserves to know if the 47-year-old former Goldman Sachs partner will run a transparent shop in administering New Jersey's $28 billion budget.
"I don't think anyone is saying that Brad Abelow is personally responsible for stock manipulation or anything like that," said Jennings. "But he sat on the board at DTCC for three years. He should be asked about the serious questions being raised."
Corzine administration officials did not answer written questions submitted by The Record, and Abelow did not respond to a request to be interviewed for this article. But in a statement released through a treasury spokesman, Abelow said the lawsuits against DTCC "have been largely dismissed or withdrawn and have nothing to do with me personally or my service on the corporation board."
Susanne Trimbath, a former official at the DTCC who is scheduled to testify at Abelow's confirmation hearing, said the depository board has been "lax" in not preventing stock manipulation.
"The board members see the data, they know what is going on, but they have done nothing," said Trimbath, a Santa Monica, Calif., economist who left the depository after six years in 1993 to help Russia set up its own stock clearing system. "Abelow and other board members had serious oversight responsibilities. It's simply disingenuous for him to claim he has no knowledge or responsibility."
'We are not police'
Officials at the DTCC aggressively dispute any suggestion that they have a role in preventing naked short selling and other forms of stock manipulation. They acknowledge that the practice does happen and that, on any given day, there is about $6 billion in bad trades on their books. But policing bad guys, they say, is not their job.
"We are not police, we are not regulators, our job is to settle trades," said Steven Letzler, a spokesman for the firm. "We have no clue about naked shorting. Buys and sells -- that's all we see."
Letzler said that opening up the company's files to the public in the hope of rooting out naked short sellers would not only be a massive violation of investors' privacy, but would promote other forms of stock manipulation.
"If we exposed everybody's investments it would move markets, there would be chaos," Letzler said.
Stuart Z. Goldstein, a managing director of the firm, pointed out that the DTCC is already one of the most heavily regulated companies on Wall Street, answering to the SEC and New York State regulators. The SEC has access to all the company's data and is constantly reviewing transaction files, he said.
"There's probably auditors here going through the books at this very moment," he said.
In the past three years, the DTCC has been the subject of 14 lawsuits brought by businesses that claim the clearing house has looked the other way as stock manipulators, mostly through offshore hedge funds, conspire to drive down stock prices. Some of those suits have named Abelow.
While nine of the suits have been thrown out, the plaintiffs say they were ejected on minor questions of procedure and jurisdiction; several are planning to refile in new venues. Leading the charge for the plaintiffs in some suits is Christian's associate, Houston attorney John O'Quinn, the class-action specialist who won huge settlements against the makers of cigarettes and breast implants.
O'Quinn, whose firm is expecting more "noteworthy plaintiffs" to join the fray, has proclaimed the issue "bigger than tobacco."
Creative financing
All the naked shorting has developed along strikingly similar story lines.
A small cash-hungry company, usually trading on the Nasdaq bulletin board, reaches out to brokers who arrange some creative financing scheme. In many of these deals, investors are offered shares of stock they can convert to cash if the stock bottoms out.
Most investors and, of course, the company, hope the stock value will go up. But in a bizarre twist on the pump and dump, a few bad-apple investors start issuing naked shorts to drive down the price and cash in their convertible chits.
Alarmed company officials sit in amazement as they watch their stock plummet for no apparent business reason.
Marco Eshrick, president of Sedona, a customer service consulting firm, says naked shorters almost ruined his customer service consulting company in 2001.
"The company was doing great and all of a sudden people somewhere start shorting our stock,'' he said. "We couldn't tell who was doing it because all our major investors were holding.''
Eshrick, at the time, did not know that offshore investors were borrowing and selling shares of Sedona stock that didn't exist.
"The scary secret is that these counterfeit shares are out there everywhere,'' said Ralph Lambiase, director of the Connecticut state Office of Securities Regulation.
Regulators in Connecticut and Utah are now taking steps to curb the naked shorters.
Last year, the SEC issued an extensive set of regulations designed to flesh out the naked shorters. But many critics who say the regulations aren't working point out that the SEC's own data show that millions of transactions every day are never settled properly.
Robert Shapiro, a Harvard-trained economist and former undersecretary of commerce in the Clinton administration, says naked shorting has cost investors $100 billion and forced 1,000 companies into failure. Shapiro is a paid consultant for some of the plaintiffs.
He says the DTTC would be more aggressive in stanching naked shorting if it were not owned by the big brokerage houses that do big business with the offshore hedge funds.
"If the DTCC forced everyone to make good on the outstanding shares right now the brokerage houses would lose billions,'' he said "The conflict of interest here is enormous.''
Naked short selling
Large traders borrow shares electronically, on their word, and pay for them later.
Unscrupulous traders short sell blocks of "borrowed" shares that don't exist.
When the price falls, the trader buys back real shares at a profit.
Analysts say the scam has driven more than 1,000 companies into bankruptcy at a cost to investors of more than $100 billion.
Wednesday, February 22, 2006
By JEFF PILLETS
TRENTON BUREAU
A group of bankrupt businessmen who claim to be the victims of Wall Street insiders and hedge-fund crooks will descend on Trenton Thursday to protest Governor Corzine's nomination of Bradley Abelow as New Jersey's next treasurer.
"This is a big moment for us; we've been looking for answers a long time," said Gary Valinoti, a Red Bank resident who is still trying to find out how his online stock-news service, JAGnotes, mysteriously collapsed in 2001.
Valinoti says the answers to how JAGnotes' stock fell from $20 to 3 cents a share in a matter of months lie in the files of a secretive Wall Street firm where Abelow spent three years as a board trustee.
The company, the Depository Trust & Clearing Corp., is a non-profit cooperative that serves as Wall Street's official recording secretary. Every trading day, more than $2 trillion in transactions are recorded and cleared in the mainframe computers at the DTCC's Manhattan offices.
But there is a growing suspicion on the part of some business leaders, academics and even the Securities and Exchange Commission that Wall Street's back office operation is susceptible to sinister forces seeking to manipulate the market.
The critics point out that billions of dollars in transactions fall through a loophole that the DTCC could easily close. The loophole allows unscrupulous traders to borrow and sell stock they don't even own in an elaborate ruse known as "naked short selling" that drives stock prices down.
The practice of short selling is legal: An investor borrows stock from a brokerage, sells it and then hopes to profit by buying it back at a lower price. In naked short selling, which is illegal in almost all cases, unscrupulous investors, such as hedge funds, sell shares of stock they never borrowed in the first place.
"The bottom line? It's a pyramid scheme," said James Wes Christian, a Texas lawyer who represents plaintiffs in two major lawsuits brought against the DTCC. "There's fraud going on, investors are losing millions, the market's entire settlement system has been compromised -- and the DTCC won't take the steps that will stop it."
Michael Jennings, a spokesman for the Senate Republicans in Trenton, said some GOP senators on the Senate Judiciary Committee plan to question Abelow about his role as a DTCC board member during his confirmation hearing Thursday. He said securities experts who have studied stock manipulation may also offer testimony about the DTCC and weaknesses in the stock settlement system.
Jennings said the public deserves to know if the 47-year-old former Goldman Sachs partner will run a transparent shop in administering New Jersey's $28 billion budget.
"I don't think anyone is saying that Brad Abelow is personally responsible for stock manipulation or anything like that," said Jennings. "But he sat on the board at DTCC for three years. He should be asked about the serious questions being raised."
Corzine administration officials did not answer written questions submitted by The Record, and Abelow did not respond to a request to be interviewed for this article. But in a statement released through a treasury spokesman, Abelow said the lawsuits against DTCC "have been largely dismissed or withdrawn and have nothing to do with me personally or my service on the corporation board."
Susanne Trimbath, a former official at the DTCC who is scheduled to testify at Abelow's confirmation hearing, said the depository board has been "lax" in not preventing stock manipulation.
"The board members see the data, they know what is going on, but they have done nothing," said Trimbath, a Santa Monica, Calif., economist who left the depository after six years in 1993 to help Russia set up its own stock clearing system. "Abelow and other board members had serious oversight responsibilities. It's simply disingenuous for him to claim he has no knowledge or responsibility."
'We are not police'
Officials at the DTCC aggressively dispute any suggestion that they have a role in preventing naked short selling and other forms of stock manipulation. They acknowledge that the practice does happen and that, on any given day, there is about $6 billion in bad trades on their books. But policing bad guys, they say, is not their job.
"We are not police, we are not regulators, our job is to settle trades," said Steven Letzler, a spokesman for the firm. "We have no clue about naked shorting. Buys and sells -- that's all we see."
Letzler said that opening up the company's files to the public in the hope of rooting out naked short sellers would not only be a massive violation of investors' privacy, but would promote other forms of stock manipulation.
"If we exposed everybody's investments it would move markets, there would be chaos," Letzler said.
Stuart Z. Goldstein, a managing director of the firm, pointed out that the DTCC is already one of the most heavily regulated companies on Wall Street, answering to the SEC and New York State regulators. The SEC has access to all the company's data and is constantly reviewing transaction files, he said.
"There's probably auditors here going through the books at this very moment," he said.
In the past three years, the DTCC has been the subject of 14 lawsuits brought by businesses that claim the clearing house has looked the other way as stock manipulators, mostly through offshore hedge funds, conspire to drive down stock prices. Some of those suits have named Abelow.
While nine of the suits have been thrown out, the plaintiffs say they were ejected on minor questions of procedure and jurisdiction; several are planning to refile in new venues. Leading the charge for the plaintiffs in some suits is Christian's associate, Houston attorney John O'Quinn, the class-action specialist who won huge settlements against the makers of cigarettes and breast implants.
O'Quinn, whose firm is expecting more "noteworthy plaintiffs" to join the fray, has proclaimed the issue "bigger than tobacco."
Creative financing
All the naked shorting has developed along strikingly similar story lines.
A small cash-hungry company, usually trading on the Nasdaq bulletin board, reaches out to brokers who arrange some creative financing scheme. In many of these deals, investors are offered shares of stock they can convert to cash if the stock bottoms out.
Most investors and, of course, the company, hope the stock value will go up. But in a bizarre twist on the pump and dump, a few bad-apple investors start issuing naked shorts to drive down the price and cash in their convertible chits.
Alarmed company officials sit in amazement as they watch their stock plummet for no apparent business reason.
Marco Eshrick, president of Sedona, a customer service consulting firm, says naked shorters almost ruined his customer service consulting company in 2001.
"The company was doing great and all of a sudden people somewhere start shorting our stock,'' he said. "We couldn't tell who was doing it because all our major investors were holding.''
Eshrick, at the time, did not know that offshore investors were borrowing and selling shares of Sedona stock that didn't exist.
"The scary secret is that these counterfeit shares are out there everywhere,'' said Ralph Lambiase, director of the Connecticut state Office of Securities Regulation.
Regulators in Connecticut and Utah are now taking steps to curb the naked shorters.
Last year, the SEC issued an extensive set of regulations designed to flesh out the naked shorters. But many critics who say the regulations aren't working point out that the SEC's own data show that millions of transactions every day are never settled properly.
Robert Shapiro, a Harvard-trained economist and former undersecretary of commerce in the Clinton administration, says naked shorting has cost investors $100 billion and forced 1,000 companies into failure. Shapiro is a paid consultant for some of the plaintiffs.
He says the DTTC would be more aggressive in stanching naked shorting if it were not owned by the big brokerage houses that do big business with the offshore hedge funds.
"If the DTCC forced everyone to make good on the outstanding shares right now the brokerage houses would lose billions,'' he said "The conflict of interest here is enormous.''
Naked short selling
Large traders borrow shares electronically, on their word, and pay for them later.
Unscrupulous traders short sell blocks of "borrowed" shares that don't exist.
When the price falls, the trader buys back real shares at a profit.
Analysts say the scam has driven more than 1,000 companies into bankruptcy at a cost to investors of more than $100 billion.