Post by jannikki on Nov 12, 2005 10:35:45 GMT -4
SEC Kool-Aid - Impairs Logical Thinking - February 26, 2005
By Dave Patch
I tell ya, you would have thought quality financial reporters would have gotten away from the Securities and Exchange Commission’s Kool-Aid Punch Bowl kept in the front lobby free visitors and employees as they enter. The danger in drinking the mix is known to be harmful to your perceptions of logic. Apparently not all media have learned their lesson as reporter Floyd Norris most recently subjected himself to a queen’s goblet full of the elixir.
NY Times Reporter Floyd Norris, on temporary assignment in London, wrote a recent publication concerning the naked shorting issue. Floyd’s article “If a Stock Falls, Blame the SEC”, published February 17, 2005 in the International Herald Tribune with a follow-up in the NY Times contained the inherent flaws in logic many who drink the SEC’s Kool-Aid would make. Floyd used the SEC’s Annette Nazareth to justify Securities Fraud because Annette sweet talked Floyd through a series of mis-directions and a smooth tasting mix of denial. Annette of course being the Director of the SEC’s Market Regulation and the department who recently “grandfathered” securities fraud to protect the violators when the SEC released Regulation SHO.
Mr. Norris and Ms. Nazareth claim that those fighting the battle over naked shorting are merely frustrated at a lack of short squeezes as a result of Regulation SHO. That the stocks on the “threshold list” that continue to fall despite mandatory closeouts are entirely “the companies fault”. Actually, that is far from the truth. Frustration comes from the lack of any meaningful restitution to those companies listed daily on the “threshold security” lists published by each market center. Companies, who by definition are oversold beyond available settlement, that are still being sold down some 50% in Market Capitalization as they remain “threshold securities” with excessive fails.
When the SEC proposed regulation SEC in October 2003 Ms. Nazareth and her team had this to say about naked shorting:
Naked short selling can have a number of negative effects on the market, particularly when the fails to deliver persist for an extended period of time and result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled. At times, the amount of fails to deliver may be greater than the total public float. In effect the naked short seller unilaterally converts a securities contract (which should settle in three days after the trade date) into an undated futures-type contract, which the buyer might not have agreed to or that would have been priced differently. The seller's failure to deliver securities may also adversely affect certain rights of the buyer, such as the right to vote. More significantly, naked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable time period, and they may use this additional leverage to engage in trading activities that deliberately depress the price of a security.
Adversely affect certain rights of the buyer. Greater leverage. Deliberately depress the price of a security. These are not my words these are the SEC words and yet Ms. Nazareth and Mr. Norris are convinced we are all simply whining about nothing. Mr. Norris going so far as to state the short seller is taking on as great a risk as the long buyer. This is where logic is clearly misplaced. Try and I might, I am not sure how a short seller with the unlimited ability to sell has as much risk as a long buyer putting up hard cash to buy a stock that never gets delivered.
Mr. Norris has only been a business columnist forever so there must be something he knows that I don’t. Maybe it is that leverage thing that the SEC was talking about. No, can’t be that, that favors my logic. Oh well, he should keep drinking that sweet nectar Ms. Nazareth is feeding him. Maybe I should as well so I can see the logic.
So now here are the simple facts that Ms. Nazareth and Mr. Floyd do not want to address.
First and foremost is the threshold list itself. Had Wall Street been complying with Securities law the list would never exist. Rule 17A of the Securities Act of 1934 requires prompt settlement of Trades. Rule 15c6-1 requires that no contract for trade exceed 3-days, and the DTCC Stock Borrow program, approved by the SEC, allows for temporary loaning of stock to settle trade failures. Temporary loaning not indefinite as is the case here. Under none of these present laws is there an allowance for indefinite fails that reach the magnitudes identified in the SEC’s proposal of Regulation SHO. The NASD and SEC also have laws requiring that to sell short a stock the seller must locate the share to borrow. The implication being, when you sell short you then borrow the stock. Today they may locate to borrow but then cease borrowing because it cuts into their margins. An undisclosed Wall Street practice hidden from the investing public.
Short Squeezes. There can only be a short squeeze in forced settlement if there has been illegal trading on our securities. Legal shorting will not be called in because they would have followed the guidelines of settlement and thus those short sellers would not be generating any squeeze nor be burdened in the process. Illegal short selling, selling that was used to hold back and even depress a security, is illegal and cannot be protected from mandatory closeout. Manipulating the price of a security is illegal whether it is to hold back growth or whether it is to depress a stock. Stock trades that did not settle due to securities violations have no legal standing for “grandfathering” the fail. These fails, for indefinite periods in time have never been legal and acceptable but Ms. Nazareth “grandfathered” them anyway. Sounds like the Mark Rich pardon all over again. Call in Bill Clinton.
Finally, selling a security naked is selling a security that does not exist. Under Securities Law, selling naked is the sale of unregistered securities. The NASD recently equated the two in a December 2004 complaint against Hilary Shane (Case: CMS040208). Ms. Shane conducted 975 transactions for trade on shares she did not own nor had access to borrow. How she did this was orchestrated through a Wall Street system that has accepted settlement failures as the norm instead of the exception. Wall Street and the buying firms on the receiving end of her trading aided and abetted her fraud. Ms. Nazareth nor the NASD want to delve into that portion of this snake pit and Mr. Norris apparently never understand the pit being there in the first place.
Beyond the release of Regulation SHO we have heard public testimony from the likes of Bear Stearns General Council admitting that Wall Street and the regulators were aware of the abuses. The opening statements to their December 13 call regarding Regulation SHO claimed:
“To give you that brief introduction in Reg SHO, the history how we got to where we are today. For the past several years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients, were not following already established rules.”
This is an admission of awareness of fraud at both the regulatory and Wall Street compliance levels. Guilt without enforcement! To those abused by this fraud, Investors have every right to see whatever satisfaction comes from the settlement of all trades past and present. To those drinking the Kool-Aid, they can keep drinking it until it kills their logic completely or change goblets. People like Ms. Nazareth and Mr. Norris can continue to be a part of the problem or they can start to be part of the solution. Naked shorting is abusive and undermines the credibility of our markets. Ms. Nazareth and the SEC’s decision to “grandfather” past fraud puts into question the ethics and integrity of the agency chartered by Congress to protect all investors over all else.
Floyd, I wish you the best of luck. My suggestion would be to seek the nearest hospital and get your stomach pumped of that vile drink you were served at the SEC. When you are healthy again, seek out the answers to the tougher questions the SEC will not answer, not the easy ones they can mis-direct you on. How big are the fails in these threshold securities and how long is the SEC willing to let companies remain on these lists before they step in to protect the innocent, paying, investors.
By Dave Patch
I tell ya, you would have thought quality financial reporters would have gotten away from the Securities and Exchange Commission’s Kool-Aid Punch Bowl kept in the front lobby free visitors and employees as they enter. The danger in drinking the mix is known to be harmful to your perceptions of logic. Apparently not all media have learned their lesson as reporter Floyd Norris most recently subjected himself to a queen’s goblet full of the elixir.
NY Times Reporter Floyd Norris, on temporary assignment in London, wrote a recent publication concerning the naked shorting issue. Floyd’s article “If a Stock Falls, Blame the SEC”, published February 17, 2005 in the International Herald Tribune with a follow-up in the NY Times contained the inherent flaws in logic many who drink the SEC’s Kool-Aid would make. Floyd used the SEC’s Annette Nazareth to justify Securities Fraud because Annette sweet talked Floyd through a series of mis-directions and a smooth tasting mix of denial. Annette of course being the Director of the SEC’s Market Regulation and the department who recently “grandfathered” securities fraud to protect the violators when the SEC released Regulation SHO.
Mr. Norris and Ms. Nazareth claim that those fighting the battle over naked shorting are merely frustrated at a lack of short squeezes as a result of Regulation SHO. That the stocks on the “threshold list” that continue to fall despite mandatory closeouts are entirely “the companies fault”. Actually, that is far from the truth. Frustration comes from the lack of any meaningful restitution to those companies listed daily on the “threshold security” lists published by each market center. Companies, who by definition are oversold beyond available settlement, that are still being sold down some 50% in Market Capitalization as they remain “threshold securities” with excessive fails.
When the SEC proposed regulation SEC in October 2003 Ms. Nazareth and her team had this to say about naked shorting:
Naked short selling can have a number of negative effects on the market, particularly when the fails to deliver persist for an extended period of time and result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled. At times, the amount of fails to deliver may be greater than the total public float. In effect the naked short seller unilaterally converts a securities contract (which should settle in three days after the trade date) into an undated futures-type contract, which the buyer might not have agreed to or that would have been priced differently. The seller's failure to deliver securities may also adversely affect certain rights of the buyer, such as the right to vote. More significantly, naked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable time period, and they may use this additional leverage to engage in trading activities that deliberately depress the price of a security.
Adversely affect certain rights of the buyer. Greater leverage. Deliberately depress the price of a security. These are not my words these are the SEC words and yet Ms. Nazareth and Mr. Norris are convinced we are all simply whining about nothing. Mr. Norris going so far as to state the short seller is taking on as great a risk as the long buyer. This is where logic is clearly misplaced. Try and I might, I am not sure how a short seller with the unlimited ability to sell has as much risk as a long buyer putting up hard cash to buy a stock that never gets delivered.
Mr. Norris has only been a business columnist forever so there must be something he knows that I don’t. Maybe it is that leverage thing that the SEC was talking about. No, can’t be that, that favors my logic. Oh well, he should keep drinking that sweet nectar Ms. Nazareth is feeding him. Maybe I should as well so I can see the logic.
So now here are the simple facts that Ms. Nazareth and Mr. Floyd do not want to address.
First and foremost is the threshold list itself. Had Wall Street been complying with Securities law the list would never exist. Rule 17A of the Securities Act of 1934 requires prompt settlement of Trades. Rule 15c6-1 requires that no contract for trade exceed 3-days, and the DTCC Stock Borrow program, approved by the SEC, allows for temporary loaning of stock to settle trade failures. Temporary loaning not indefinite as is the case here. Under none of these present laws is there an allowance for indefinite fails that reach the magnitudes identified in the SEC’s proposal of Regulation SHO. The NASD and SEC also have laws requiring that to sell short a stock the seller must locate the share to borrow. The implication being, when you sell short you then borrow the stock. Today they may locate to borrow but then cease borrowing because it cuts into their margins. An undisclosed Wall Street practice hidden from the investing public.
Short Squeezes. There can only be a short squeeze in forced settlement if there has been illegal trading on our securities. Legal shorting will not be called in because they would have followed the guidelines of settlement and thus those short sellers would not be generating any squeeze nor be burdened in the process. Illegal short selling, selling that was used to hold back and even depress a security, is illegal and cannot be protected from mandatory closeout. Manipulating the price of a security is illegal whether it is to hold back growth or whether it is to depress a stock. Stock trades that did not settle due to securities violations have no legal standing for “grandfathering” the fail. These fails, for indefinite periods in time have never been legal and acceptable but Ms. Nazareth “grandfathered” them anyway. Sounds like the Mark Rich pardon all over again. Call in Bill Clinton.
Finally, selling a security naked is selling a security that does not exist. Under Securities Law, selling naked is the sale of unregistered securities. The NASD recently equated the two in a December 2004 complaint against Hilary Shane (Case: CMS040208). Ms. Shane conducted 975 transactions for trade on shares she did not own nor had access to borrow. How she did this was orchestrated through a Wall Street system that has accepted settlement failures as the norm instead of the exception. Wall Street and the buying firms on the receiving end of her trading aided and abetted her fraud. Ms. Nazareth nor the NASD want to delve into that portion of this snake pit and Mr. Norris apparently never understand the pit being there in the first place.
Beyond the release of Regulation SHO we have heard public testimony from the likes of Bear Stearns General Council admitting that Wall Street and the regulators were aware of the abuses. The opening statements to their December 13 call regarding Regulation SHO claimed:
“To give you that brief introduction in Reg SHO, the history how we got to where we are today. For the past several years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients, were not following already established rules.”
This is an admission of awareness of fraud at both the regulatory and Wall Street compliance levels. Guilt without enforcement! To those abused by this fraud, Investors have every right to see whatever satisfaction comes from the settlement of all trades past and present. To those drinking the Kool-Aid, they can keep drinking it until it kills their logic completely or change goblets. People like Ms. Nazareth and Mr. Norris can continue to be a part of the problem or they can start to be part of the solution. Naked shorting is abusive and undermines the credibility of our markets. Ms. Nazareth and the SEC’s decision to “grandfather” past fraud puts into question the ethics and integrity of the agency chartered by Congress to protect all investors over all else.
Floyd, I wish you the best of luck. My suggestion would be to seek the nearest hospital and get your stomach pumped of that vile drink you were served at the SEC. When you are healthy again, seek out the answers to the tougher questions the SEC will not answer, not the easy ones they can mis-direct you on. How big are the fails in these threshold securities and how long is the SEC willing to let companies remain on these lists before they step in to protect the innocent, paying, investors.