Post by jannikki on Nov 12, 2005 10:11:41 GMT -4
The Sale of Unregistered Securities; Regulators Miss the Mark - September 22, 2004
Dave Patch
What did we learn from the Crash of 1929?
To many , the ' 29 crash resulted from “Bear Raids” in which short sellers created a sell-side imbalance by actually selling counterfeited securities in the markets and took advantage of they fear it created. In 1999 the SEC went out for comments on short selling reforms and admitted the same in their concept release. The SEC also admitted that “Short selling was one of the central issues studied by Congress before enacting the Exchange Acts (of 1933 and 1934)”. Congress empowered the SEC in these acts to regulate and limit short selling abuses as necessary. Congress also provided a few leading thoughts for the SEC to consider.
The Securities Act of 1933 deals primarily with the rules and regulations regarding the registration of a company and the issuance and transfer of shares thereafter. Of note are those Sections pertaining to the Sale of Unregistered Securities.
Section 5: Prohibits the sale or delivery after sale of unregistered securities. In this section of the rules, prohibitions are made regarding the use of any means or instruments of transportation to transfer or to offer for sale an unregistered security.
The SEC defines naked shorting as the execution of a short sale where the seller does not own, nor have access to borrow a share for delivery and settlement at the time of the trade. In an event where this occurs, the Buyer will be electronically credited with a share into their account by their Broker-Dealer. The "Void" in this transaction was the actual transfer of ownership of a registered security between any of the related parties in the trade.
The manifestation of this electronic share (Journal entry) into the account is the transfer of a share that is, at the time of the execution, unregistered. The share has no pedigree to it related to ownership rights and the share has no defined contract or contract date for delivery. Specifically defined, the share is a “counterfeit.” The Broker-Dealers representing both the Buyer and Seller will make notation of a security in their journals, yet the security itself is non-existent in a physical and registered state by either party. The Broker-Dealers effectively enter into a contract for the sale of an unregistered security.
Section 6: This Section of the Act defines all of the rules and regulations pertaining to the issuance of Registered Securities into the Marketplace. Among the guidelines provided is the clear definition as to who has the authority to issue and register a security. “At least one (form) shall be signed by each issuer, its principal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and the majority of its board of directors or persons performing similar functions”.
The intent of Congress by this passage was to control by whom and how securities would become issued into the market place. Congress did not provide access for the members of the Industry's service units to manifest shares electronically without the knowledge that the registered share was in transit. The SEC later expanded upon these laws by forcing issuers to file with the SEC upon the issuance of shares for sale into the marketplace. The SEC deemed this information pertinent to the investing public in their due diligence efforts.
The magnitude of unsettled trades pertaining to any given security is unreported. The Members of Wall Street have created unregistered shares at will and entered them into client accounts without the knowledge of the investor or the issuer. This “pertinent” and "material" information is forced upon the registered issuer to make a filing when they issue shares, but comes free to the industry members who simply manifest unregistered shares for sale.
Today we are aware that trade settlement failures exceed the entire public float of companies. We know this because our Securities Regulators have told us this. Earlier, I provided guidance on how these unsettled trades were in violation of the Securities Act of 1934 pertaining to prompt settlement of trades (Section 17a) as well as a violation of several contract rules (Rule 15c6-1 and Rule 15c3-3). Now logic shows that these unsettled trades also violate the rules pertaining to the sale of registered shares as defined in the Securities Act of 1933.
Naked Shorting and the allowance of indefinite time to make trade settlements has become a modified 1929 “Bear Raid” tactic imposed on a select pedigree of publicly traded company today. To date, the SEC has not adequately addressed the issue because it has not yet resulted in a ’29 event according to their view, even though the 2000 Crash was in fact a near perfect mirror technically of both the 1929 and 1937 Bear Raids/Crashes. The tactic still violates the very guidance that Congress put in place in 1933 and 1934 because of the fear of another such event. In the terms of the 1933 Act, naked shorting is the very definition of the sale of an unregistered security. It creates a counterfeit share that attacks the very integrity of our markets and the people and organizations that operate these markets.
The only difference between the short selling in 1929 and today is that instead of printed counterfeit shares, the violators have found a way, with regulatory support, to create "kited", or "electronically" counterfeited shares. The printed shares of the 1929 era were so ubiquitous they were given a name: Watered Stock. The modern version of counterfeited shares will not get such a name.
It is important for everyone to remember that the counterfeiting of a commercial security for the purpose of defrauding investors is a Class B felony, punishable by up to 25 years in Federal Prison. Prohibitions against counterfeiting commercial securities are specifically addressed in USC Title 18, Section 514. Authority for criminal investigation and prosecution of such felonies under this Title and Section fall to the United States Secret Service, now part of Homeland Security.
It is time our Regulatory bodies, along with Congress, engross themselves in the sins of the past and learn from the efforts made. We had issues and we addressed them. To ignore them now will only recreate the sins once again.
Dave Patch
What did we learn from the Crash of 1929?
To many , the ' 29 crash resulted from “Bear Raids” in which short sellers created a sell-side imbalance by actually selling counterfeited securities in the markets and took advantage of they fear it created. In 1999 the SEC went out for comments on short selling reforms and admitted the same in their concept release. The SEC also admitted that “Short selling was one of the central issues studied by Congress before enacting the Exchange Acts (of 1933 and 1934)”. Congress empowered the SEC in these acts to regulate and limit short selling abuses as necessary. Congress also provided a few leading thoughts for the SEC to consider.
The Securities Act of 1933 deals primarily with the rules and regulations regarding the registration of a company and the issuance and transfer of shares thereafter. Of note are those Sections pertaining to the Sale of Unregistered Securities.
Section 5: Prohibits the sale or delivery after sale of unregistered securities. In this section of the rules, prohibitions are made regarding the use of any means or instruments of transportation to transfer or to offer for sale an unregistered security.
The SEC defines naked shorting as the execution of a short sale where the seller does not own, nor have access to borrow a share for delivery and settlement at the time of the trade. In an event where this occurs, the Buyer will be electronically credited with a share into their account by their Broker-Dealer. The "Void" in this transaction was the actual transfer of ownership of a registered security between any of the related parties in the trade.
The manifestation of this electronic share (Journal entry) into the account is the transfer of a share that is, at the time of the execution, unregistered. The share has no pedigree to it related to ownership rights and the share has no defined contract or contract date for delivery. Specifically defined, the share is a “counterfeit.” The Broker-Dealers representing both the Buyer and Seller will make notation of a security in their journals, yet the security itself is non-existent in a physical and registered state by either party. The Broker-Dealers effectively enter into a contract for the sale of an unregistered security.
Section 6: This Section of the Act defines all of the rules and regulations pertaining to the issuance of Registered Securities into the Marketplace. Among the guidelines provided is the clear definition as to who has the authority to issue and register a security. “At least one (form) shall be signed by each issuer, its principal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and the majority of its board of directors or persons performing similar functions”.
The intent of Congress by this passage was to control by whom and how securities would become issued into the market place. Congress did not provide access for the members of the Industry's service units to manifest shares electronically without the knowledge that the registered share was in transit. The SEC later expanded upon these laws by forcing issuers to file with the SEC upon the issuance of shares for sale into the marketplace. The SEC deemed this information pertinent to the investing public in their due diligence efforts.
The magnitude of unsettled trades pertaining to any given security is unreported. The Members of Wall Street have created unregistered shares at will and entered them into client accounts without the knowledge of the investor or the issuer. This “pertinent” and "material" information is forced upon the registered issuer to make a filing when they issue shares, but comes free to the industry members who simply manifest unregistered shares for sale.
Today we are aware that trade settlement failures exceed the entire public float of companies. We know this because our Securities Regulators have told us this. Earlier, I provided guidance on how these unsettled trades were in violation of the Securities Act of 1934 pertaining to prompt settlement of trades (Section 17a) as well as a violation of several contract rules (Rule 15c6-1 and Rule 15c3-3). Now logic shows that these unsettled trades also violate the rules pertaining to the sale of registered shares as defined in the Securities Act of 1933.
Naked Shorting and the allowance of indefinite time to make trade settlements has become a modified 1929 “Bear Raid” tactic imposed on a select pedigree of publicly traded company today. To date, the SEC has not adequately addressed the issue because it has not yet resulted in a ’29 event according to their view, even though the 2000 Crash was in fact a near perfect mirror technically of both the 1929 and 1937 Bear Raids/Crashes. The tactic still violates the very guidance that Congress put in place in 1933 and 1934 because of the fear of another such event. In the terms of the 1933 Act, naked shorting is the very definition of the sale of an unregistered security. It creates a counterfeit share that attacks the very integrity of our markets and the people and organizations that operate these markets.
The only difference between the short selling in 1929 and today is that instead of printed counterfeit shares, the violators have found a way, with regulatory support, to create "kited", or "electronically" counterfeited shares. The printed shares of the 1929 era were so ubiquitous they were given a name: Watered Stock. The modern version of counterfeited shares will not get such a name.
It is important for everyone to remember that the counterfeiting of a commercial security for the purpose of defrauding investors is a Class B felony, punishable by up to 25 years in Federal Prison. Prohibitions against counterfeiting commercial securities are specifically addressed in USC Title 18, Section 514. Authority for criminal investigation and prosecution of such felonies under this Title and Section fall to the United States Secret Service, now part of Homeland Security.
It is time our Regulatory bodies, along with Congress, engross themselves in the sins of the past and learn from the efforts made. We had issues and we addressed them. To ignore them now will only recreate the sins once again.