Post by jannikki on Nov 12, 2005 10:48:23 GMT -4
SEC Admits SHO “Grandfather Clause” Intended to prevent Short Squeeze – July 28, 2005
David Patch
Do you know of any Securities Law that prohibits a stock from trading down 40, 50, or 60% of its value in a matter of days, weeks, or months? Have you ever owned a stock that exhibited such change and wondered what happened?
Reality is there is no regulation in place to protect against a volatile decline. When a stock is about to be raided by Wall Streets short sellers and Hedge Funds you have no protection. We saw much of those raids in the late 1990’s and early 2000 markets and watched $100.00 stocks plummet to $5.00 or less in mere days. Some of those actions were justified, some was simple raids. The Securities Acts of 1933 and 1934 were drafted because of these type illegal raids during the crash of 1929.
Today the SEC Division of Market Regulation directed a memo to me in which they admitted that the “grandfather clause” of Regulation SHO was intended to deter short squeezes on securities with excessive fails. There is no law against a short squeeze taking place but the SEC wanted to protect against it anyway. The SEC wanted to protect the seller of a security that did not exist to sell.
The unsigned memo, sent in an e-mail, stated “Regulation SHO does not require the close-out of fails to deliver that existed before a stock became a threshold security (known as "grandfathered" securities) because the Commission was concerned about creating volatility through short squeezes if existing positions had to be closed out quickly.”
Huh? Remember, fails are supposed to be an anomaly as trades are to be settled promptly by law.
Under Section 17A of the Securities Act of 1934, the SEC was mandated by Congress to create a national system in which trades, all trades, settle promptly to insure, among other things, that squeezes due to fails did not take place. Congress did not differentiate between a member of the Industry, a Hedge Fund, or a retail investor; ALL trades were to be closed out promptly. This mandate was to insure the protection of the Investor purchasing securities and to reduce the liabilities of the Industry due to unsettled trades.
The SEC blinked. The SEC ignored the actual settlement of trades and has done so for decades. As the fails grew, so did the manipulation against investors.
When the SEC drafted the proposal for SHO they admitted in their proposal that some issuers had fails in the system that exceeded their entire public float. That means, for example, that a security with 25 Million shares in public float actually has an additional 25 million shares sold into the market without settlement. Wall Street generated counterfeit shares.
Do you think those additional 25 million shares sold but never settled [transfer of share between seller and buyer] created negative pressure on the stock price? In the theory of economics, value is based on supply and demand and if there is suddenly twice the supply and the same limited demand, what does that do for the price of the product? It moves down.
To look at it differently, let’s say a stock with a float of 25 million shares trades at $10.00/share and has no fails in the system. Suddenly an additional 25 million shares become sold into the market over the course of a month to 6 months that was never registered by the company. Which direction do you expect the stock to go?
The SEC watched it happen and watched that $10.00 stock move from $10.00 to $1.00. No protection to the Investors holding shares at $10.00. Wall Street and the Hedge Funds were making money so it was okay. The sellers of the fails are suddenly ahead on profits and the investors are at a loss.
Investors lost 90% of their investment and it will now take a 1000% squeeze in the stock to bring value back to equilibrium. The squeeze the SEC is protecting against. The ill gotten gains of Wall Street the SEC is protecting.
Logically, a squeeze can only take place if the abuse of unsettled trades exists. A squeeze only happens if excessive fails need to be covered. If the fails are minimal, there will be no squeeze and fails can be closed out rather quickly on the liquidity of the security. Thus, creating law to mitigate a squeeze is creating a law to protect the violator since those not abused will not see any upward volatility. A Law that violates the Securities Act of 1934 specifically created to stop this type of abuse.
The grandfather clause is about knowing who the bank robbers are and letting them keep the money. The SEC now working for the robbers as “captive regulators.” The grandfather clause has allowed those that violated the laws of settlement to cover their abuses at the now present manipulated prices, slowly and over an indeterminate period of time. The SEC protected Wall Street and the Hedge Funds and sacrificed investors, businesses, and our economy in the process.
To further emphasize the cover-up, consider the timelines provided.
In October of 2003 the SEC notified the Industry that they planned on cleaning up the fails in the system. Some 8 months later, after meeting with the Industry, the SEC Released Regulation SHO on June 23, 2004. The SEC granted a span of yet another 6 months for the Industry to come in compliance with the rules citing a January 3, 2005 date of affectivity.
In total, the SEC provided the industry 14 months to address the “large pre-existing fails” that generated the need for Regulation SHO in the first place. That was not long enough due to the pervasiveness of the Industry problem and the need for the grandfather clause was created. Fourteen months to slowly close-out trades that is required by law to settle in 3-business days and the Industry could not do it. With a problem that big, do you think the investor or companies abused were on the safe side of the equation? Not a chance. Our Investments were channeled directly into Wall Street and Hedge Fund profits.
The data provided by the SEC under the FOIA regarding fails registered at the DTCC for the months of April 2004 to April 2005 for NASDAQ and NYSE listed securities indicate that the industry initiated no steps to close out the fails in the markets during this window of opportunity. Instead the number of fails actually increased fails some 35% between June 2004 and December 2004. (Document can be viewed at www.investigatethesec.com/Settlement120705.htm )
More compelling in all this is that the present SHO list, incomplete at this time, has a minimum of 14 companies listed that were present on January 7, 2005 when the first lists were posted [138 trading days]. While the SEC was worried about the short squeezes, some of these stocks and many others who were listed for extended periods of time, continued to lose market capitalization while listed. To the tune of 50 – 75% of the values held on January 7, 2005. Raids are acceptable as long as short squeezes do not occur.
Securities Laws are about fair markets and a protection of our nation’s economy. Naked shorting has cost investors a reported $1 Trillion or more over the past decade. But naked shorting has also cost our economy through job losses and lost entrepreneurial opportunities. As the SEC watched the fraud become enforcement opportunities lost, they generated laws to protect their negligence as much as protect those that manipulated the markets. They cheated the American people.
A full investigation into the SEC’s activities is required. If the SEC willfully put investors at risk to protect the illegal actions of the Industry, these Directors, and Commissioners who authorized the grandfather clause deserve jail time like any other that aid and abets fraud.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005
David Patch
Do you know of any Securities Law that prohibits a stock from trading down 40, 50, or 60% of its value in a matter of days, weeks, or months? Have you ever owned a stock that exhibited such change and wondered what happened?
Reality is there is no regulation in place to protect against a volatile decline. When a stock is about to be raided by Wall Streets short sellers and Hedge Funds you have no protection. We saw much of those raids in the late 1990’s and early 2000 markets and watched $100.00 stocks plummet to $5.00 or less in mere days. Some of those actions were justified, some was simple raids. The Securities Acts of 1933 and 1934 were drafted because of these type illegal raids during the crash of 1929.
Today the SEC Division of Market Regulation directed a memo to me in which they admitted that the “grandfather clause” of Regulation SHO was intended to deter short squeezes on securities with excessive fails. There is no law against a short squeeze taking place but the SEC wanted to protect against it anyway. The SEC wanted to protect the seller of a security that did not exist to sell.
The unsigned memo, sent in an e-mail, stated “Regulation SHO does not require the close-out of fails to deliver that existed before a stock became a threshold security (known as "grandfathered" securities) because the Commission was concerned about creating volatility through short squeezes if existing positions had to be closed out quickly.”
Huh? Remember, fails are supposed to be an anomaly as trades are to be settled promptly by law.
Under Section 17A of the Securities Act of 1934, the SEC was mandated by Congress to create a national system in which trades, all trades, settle promptly to insure, among other things, that squeezes due to fails did not take place. Congress did not differentiate between a member of the Industry, a Hedge Fund, or a retail investor; ALL trades were to be closed out promptly. This mandate was to insure the protection of the Investor purchasing securities and to reduce the liabilities of the Industry due to unsettled trades.
The SEC blinked. The SEC ignored the actual settlement of trades and has done so for decades. As the fails grew, so did the manipulation against investors.
When the SEC drafted the proposal for SHO they admitted in their proposal that some issuers had fails in the system that exceeded their entire public float. That means, for example, that a security with 25 Million shares in public float actually has an additional 25 million shares sold into the market without settlement. Wall Street generated counterfeit shares.
Do you think those additional 25 million shares sold but never settled [transfer of share between seller and buyer] created negative pressure on the stock price? In the theory of economics, value is based on supply and demand and if there is suddenly twice the supply and the same limited demand, what does that do for the price of the product? It moves down.
To look at it differently, let’s say a stock with a float of 25 million shares trades at $10.00/share and has no fails in the system. Suddenly an additional 25 million shares become sold into the market over the course of a month to 6 months that was never registered by the company. Which direction do you expect the stock to go?
The SEC watched it happen and watched that $10.00 stock move from $10.00 to $1.00. No protection to the Investors holding shares at $10.00. Wall Street and the Hedge Funds were making money so it was okay. The sellers of the fails are suddenly ahead on profits and the investors are at a loss.
Investors lost 90% of their investment and it will now take a 1000% squeeze in the stock to bring value back to equilibrium. The squeeze the SEC is protecting against. The ill gotten gains of Wall Street the SEC is protecting.
Logically, a squeeze can only take place if the abuse of unsettled trades exists. A squeeze only happens if excessive fails need to be covered. If the fails are minimal, there will be no squeeze and fails can be closed out rather quickly on the liquidity of the security. Thus, creating law to mitigate a squeeze is creating a law to protect the violator since those not abused will not see any upward volatility. A Law that violates the Securities Act of 1934 specifically created to stop this type of abuse.
The grandfather clause is about knowing who the bank robbers are and letting them keep the money. The SEC now working for the robbers as “captive regulators.” The grandfather clause has allowed those that violated the laws of settlement to cover their abuses at the now present manipulated prices, slowly and over an indeterminate period of time. The SEC protected Wall Street and the Hedge Funds and sacrificed investors, businesses, and our economy in the process.
To further emphasize the cover-up, consider the timelines provided.
In October of 2003 the SEC notified the Industry that they planned on cleaning up the fails in the system. Some 8 months later, after meeting with the Industry, the SEC Released Regulation SHO on June 23, 2004. The SEC granted a span of yet another 6 months for the Industry to come in compliance with the rules citing a January 3, 2005 date of affectivity.
In total, the SEC provided the industry 14 months to address the “large pre-existing fails” that generated the need for Regulation SHO in the first place. That was not long enough due to the pervasiveness of the Industry problem and the need for the grandfather clause was created. Fourteen months to slowly close-out trades that is required by law to settle in 3-business days and the Industry could not do it. With a problem that big, do you think the investor or companies abused were on the safe side of the equation? Not a chance. Our Investments were channeled directly into Wall Street and Hedge Fund profits.
The data provided by the SEC under the FOIA regarding fails registered at the DTCC for the months of April 2004 to April 2005 for NASDAQ and NYSE listed securities indicate that the industry initiated no steps to close out the fails in the markets during this window of opportunity. Instead the number of fails actually increased fails some 35% between June 2004 and December 2004. (Document can be viewed at www.investigatethesec.com/Settlement120705.htm )
More compelling in all this is that the present SHO list, incomplete at this time, has a minimum of 14 companies listed that were present on January 7, 2005 when the first lists were posted [138 trading days]. While the SEC was worried about the short squeezes, some of these stocks and many others who were listed for extended periods of time, continued to lose market capitalization while listed. To the tune of 50 – 75% of the values held on January 7, 2005. Raids are acceptable as long as short squeezes do not occur.
Securities Laws are about fair markets and a protection of our nation’s economy. Naked shorting has cost investors a reported $1 Trillion or more over the past decade. But naked shorting has also cost our economy through job losses and lost entrepreneurial opportunities. As the SEC watched the fraud become enforcement opportunities lost, they generated laws to protect their negligence as much as protect those that manipulated the markets. They cheated the American people.
A full investigation into the SEC’s activities is required. If the SEC willfully put investors at risk to protect the illegal actions of the Industry, these Directors, and Commissioners who authorized the grandfather clause deserve jail time like any other that aid and abets fraud.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005