Post by jcline on Dec 15, 2005 11:12:34 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Regulator Silence Dominates NASAA Public Forum - December 1, 2005
David Patch
“The essence of the settlement issue can be summed up as -- nothing good can happen between trade date and settlement, only bad things can happen. And the longer the settlement cycle, the greater the risk.”
Yesterdays Open Public Forum hosted in Washington DC by the North American Securities Administrators Association (NASAA) was regarding a subject matter of ‘naked shorting’ abuses and market manipulation. The public forum presented a panel of experts representing the SEC, NASD, NYSE, as well as an assortment of Economic Scholars to discuss the concerns over short selling abuses and the SEC’s newly released Regulation SHO. Connecticut Director of Securities Ralph Lambiase moderated the forum.
To begin, it is my opinion that the State Regulators have once again committed to take the lead in yet another Securities related scandal that the Securities and Exchange Commission wishes to go away. Mr. Lambiase and his team need to be commended for recognizing the potentials for abuse and seeking to expeditiously come to an acceptable resolution for the investing public while the SEC continues on their decade long efforts to merely study the matter. The SEC is playing the hand of sitting back and monitoring as they did with the mutual fund and research analyst’s scandals that finally broke due to state regulatory initiatives. Scandals that eventually resulted in billions of dollars in fines against Wall Street Institutions over these past few years for defrauding the investing public
With that being said, the forum held moments of highlights and frustrations.
A significant highlight came from a consistent former SEC Attorney Fellow Peter Chepucavage, part of the SEC’s team working on Regulation SHO, who came forward to talk about SHO’s inherent problems. Mr. Chepucavage challenged the rules on stock settlement and the locate rules where short sales only require a locate and not an actual borrow to execute a short trade. Mr. Chepucavage referring to audits of system fails where the members will show the trail of the locate but no follow through on the borrow. A practice supported by a paper written by a visiting scholar to the SEC and used in the drafting of Reg. SHO.
This proposed requirement for more than a locate to execute a short sale is not new and was presented during the Regulation SHO comment period yet the SEC ignored the comments and paper presented as not being ‘Industry Friendly’. Irony in such dismissal is that the ‘Industry’ is not the one the SEC is championed to protect; it is the investing public, and the settlement failure created by this lack of closure remains as an impact to the investor.
Reduced requirements for stock borrowing continue to be a convenience to the members and a detriment to the investor.
It was my opinion that from the perspective of the SEC, NASD, and NYSE that sat on that panel, it was former SEC Attorney Fellow Peter Chepucavage that most willingly identified the problems that still existed and that something had to be done.
Additional significance in the presentation was the unanimous agreement from all analysts in appearance that the lack of transparency to short selling is the primary deterrent in the movement to prove this issue or disprove it. While the analysts did not always agree on the magnitude and impact to the problem, they did agree that many laws were ambiguous in nature and that a lack of transparency in disclosing settlement failures to the issuer impaired the issuer’s rights to insure safe execution of their company securities.
A simple question of how much in dollar value was put into settlement amnesty under the grandfather clause of Reg. SHO was asked by the panel? Unfortunately the SEC representative was unprepared to answer the question.
There were other significant highlights that will be addressed at a later time. It was the lowlights of the responses by panel members that need to be presented with appropriate rebuttal as these come from the Investor and issuer side of the spectrum. Most are directed at the SEC but not all.
As was anticipated Asst. Director of Market Regulation James Brigagliano, representing the SEC, approached this forum as yet another nuisance in his occupation obligations. Kind of like having to take the trash out on Thursdays when it is raining. The attitude started before moderator Ralph Lambiase even concluded the opening comments.
According to Mr. Brigagliano, speaking of his own opinion and not that of the Commission, the SEC is willing to review any material presented regarding naked shorting abuses and will “rigorously take enforcement action” to protect the investing public.
Had I been a panel member, Mr. Brigagliano would have quickly been asked to back up that statement with fact and not fiction based on historical and recorded evidence of the contrary. The pompous promotion of the SEC’s eagerness to aid investors is easily refuted by facts.
In March of 2001 Rhino Advisors became the Placement Agent for their 115th Private Placement [PIPE] deal since 1997. This deal involved a $2.5 Million placement with Pennsylvania based Sedona Corporation through a Swiss Hedge Fund named AMRO International SA. We would later find out through the SEC that the deal went south to the detriment of the issuer and investors.
In February of 2003 the SEC proceeded to take enforcement action against Rhino Advisors for securities fraud and stock manipulation associated with illegal shorting. Yes the SEC took their single regulatory enforcement action for illegal shorting [naked shorting].
Between March 2001 and February 2003 Rhino Advisors entered into an additional 31 PIPE placements for a total of 146 separate deals totaling $307 Million with $49 Million being directed through AMRO International.
In the SEC enforcement records against Rhino Advisors are indicators of illegal shorting and stock manipulation including washed trades to conceal the short sales. Further exposed in December 2003 Department of Justice arrest warrants issued against the former executives of Rhino Advisors were audio recordings of a Rhino executive engaged in bribing two brokers to collapse the stock. Those brokers were not employed by Rhino Advisors but reportedly employed by outside firm Refco Securities. The same Refco Securities now embroiled in a major scandal associated with securities fraud and referenced in the panel discussions.
The link to the conspiracy to manipulate required a concerted effort of several outside member participants including brokers operating out of Refco securities and market makers of unidentified firms who effectively traded these illegal sales into the open market of the NASDAQ. Affirmative Determination for the short sales could not be made and yet another member entity, clearing and settlement operations, failed to meet obligations to aide in the fraud.
While this would represent the minimum level of additional participants in this single confirmed illegal act there has yet to be a single regulatory enforcement action taken by the SEC on any of the associated parties. They have the trade data to convict Rhino Advisors but ceased any and all action against those that aided in their orchestrated fraud. The violators remain free to continue operations. Worse, communications with both past and present regulatory officials confirm the obvious. Rhino Advisors was clearly engaged in more than this single act of manipulation and that in all likelihood many of these deals had similar networks of associated members willing to defraud. Nobody takes on 115 clean PIPE deals, turns rogue for one deal, and then goes clean again for another 31 after being successful. It makes no logical sense.
Where is the rigorous enforcement Mr. Brigagliano’s stated would be conducted since the SEC already has the evidence and doesn’t need our outside help? He must have meant AFTER this meeting they would start.
In addition to this case, a 2005 NASD enforcement action taken by panel member Cameron Funkhouser, Executive VP of Market Regulation for the NASD resulted in the banning of Scott Ryan and the dissolution of Market Maker Ryan and Co. for illegal naked shorting. In this case Ryan, acting in a market maker role, used his market making exemptions to short for Hedge funds who were otherwise blocked from shorting particular companies.
Due to a lack of jurisdiction over the hedge funds, the NASD could only charge Scott Ryan according to Mr. Funkhouser. Only the SEC has the enforcement authority over the Hedge Funds themselves. Apparently Mr. Brigagliano’s ‘rigorous enforcement’ was sleeping on this effort as well. Maybe that too will be started up.
But shocking news of the day regarding regulatory neglect was the reported news the NYSE Panelist member Anand Ramtahal, VP in the Division of Member firm Regulation broke.
According to Mr. Ramtahal the NYSE has been conducted member audits and had identified that 100% of the members audited have been violating the proxy voting rules. Instead of complying with a one share one vote policy members have been stuffing the ballot box with votes they had no rights to. Audits that were verified in a similar SIA study conducted.
Effectively the NYSE has identified that members illegally submit proxy voting requests to investors who are sitting on unsettled trades and then ‘average’ the results of the total received votes and submit that average vote based on the allowable shares available to vote. The NYSE identified that instead of taking enforcement against the member firms, a special team was formulated to identify how to achieve compliance to one share one vote policies. The team’s goal would be to simplify the process for the members so they can comply.
I hate to tell the SEC and NYSE that this is not only a minor violation of one share one vote, it a rule 10b-5 violation of employing a device to deceive and to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. The proxy request being the device used to deceive shareholders into the belief settlement was conducted and that they were in fact beneficial holders in a company when they in fact are not.
I believe the US Postal Service may want to look into this as well as this would be the distribution of counterfeit proxy cards using the postal service as the currier. A Federal Violation.
Fortunately Mr. Lambiase engaged in educating those that forgot that the American people have gone to war and lost lives for our right to vote. To dismiss this right in order to deceive for personal profiteering is reprehensible. To refuse enforcement action is inexcusable.
As an investor advocate, I was disappointed in the silence from the chairs of the representatives of the regulatory environment through much of the 2-hour session with only tidbits of communications leading to excuses in a lack of cases brought and promised future considerations. Most regulatory responses discussed monitoring studies and testing methods of change associated with maintaining member approvals.
Instead the forum was dominated by analysts covering analysis of the miniscule data accessible to the public while the agencies hide the real evidence under lock and key. Again James Brigagliano suggesting that the DTCC be sued for the evidence as if to mock all present and past cases. The analysts painted a sad picture the regulators failed to defend. The representative’s excused lack of enforcement on difficulties in taking action then dismissed investors as a mere pittance of the market.
Ultimately I realized that the silence by the regulators spoke louder than the full out debate I sought. Those in the crowd could see and witness the indifference and smugness of Mr. Brigagliano looking down on the investing public while associating the need to keep the members content in efficient operations regardless of how investors are impacted. Mr. Brigagliano could not effectively defend the grandfather clause of Regulation SHO so he dismissed the issue altogether. Cam Funkhouser came to the table with the most cases brought forth out of any of the agencies yet he too fell short of identifying this as a problem that required higher attention. Instead we were asked to comment on newly published proposals to regulate further what nobody wants to admit is an issue. Cam forgets that if history repeats itself, our comments ultimately mean nothing as the SEC just proved.
As for the NYSE, I am not sure Mr. Ramtahal realized how foolish it sounded to tell the people that proxy fraud was occurring and that no enforcement was being taken by the NYSE nor was compliance being required at this time. An NYSE team was studying the situation regarding a pre-existing law that members simply did not want to follow as drafted.
Oh yes, and this quote I started the editorial with:
“The essence of the settlement issue can be summed up as -- nothing good can happen between trade date and settlement, only bad things can happen. And the longer the settlement cycle, the greater the risk.”
Those are not my words being spoken. That quote comes directly out of a 2004 Concept Release out of the SEC’s Division of Market Regulation on shortening the trade settlement cycle. The same time the SEC was drafting the grandfather clause into Reg SHO they were also stating that comment in a public concept release. Is it the left lobe or the right lobe that I think with this week? Investors or Institutions?
Maybe Jimmy Brigagliano can explain this statement in correlation to the grandfather clause he and the SEC defends so rigorously.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005
An online newspaper reporting the issues of Securities Fraud
Regulator Silence Dominates NASAA Public Forum - December 1, 2005
David Patch
“The essence of the settlement issue can be summed up as -- nothing good can happen between trade date and settlement, only bad things can happen. And the longer the settlement cycle, the greater the risk.”
Yesterdays Open Public Forum hosted in Washington DC by the North American Securities Administrators Association (NASAA) was regarding a subject matter of ‘naked shorting’ abuses and market manipulation. The public forum presented a panel of experts representing the SEC, NASD, NYSE, as well as an assortment of Economic Scholars to discuss the concerns over short selling abuses and the SEC’s newly released Regulation SHO. Connecticut Director of Securities Ralph Lambiase moderated the forum.
To begin, it is my opinion that the State Regulators have once again committed to take the lead in yet another Securities related scandal that the Securities and Exchange Commission wishes to go away. Mr. Lambiase and his team need to be commended for recognizing the potentials for abuse and seeking to expeditiously come to an acceptable resolution for the investing public while the SEC continues on their decade long efforts to merely study the matter. The SEC is playing the hand of sitting back and monitoring as they did with the mutual fund and research analyst’s scandals that finally broke due to state regulatory initiatives. Scandals that eventually resulted in billions of dollars in fines against Wall Street Institutions over these past few years for defrauding the investing public
With that being said, the forum held moments of highlights and frustrations.
A significant highlight came from a consistent former SEC Attorney Fellow Peter Chepucavage, part of the SEC’s team working on Regulation SHO, who came forward to talk about SHO’s inherent problems. Mr. Chepucavage challenged the rules on stock settlement and the locate rules where short sales only require a locate and not an actual borrow to execute a short trade. Mr. Chepucavage referring to audits of system fails where the members will show the trail of the locate but no follow through on the borrow. A practice supported by a paper written by a visiting scholar to the SEC and used in the drafting of Reg. SHO.
This proposed requirement for more than a locate to execute a short sale is not new and was presented during the Regulation SHO comment period yet the SEC ignored the comments and paper presented as not being ‘Industry Friendly’. Irony in such dismissal is that the ‘Industry’ is not the one the SEC is championed to protect; it is the investing public, and the settlement failure created by this lack of closure remains as an impact to the investor.
Reduced requirements for stock borrowing continue to be a convenience to the members and a detriment to the investor.
It was my opinion that from the perspective of the SEC, NASD, and NYSE that sat on that panel, it was former SEC Attorney Fellow Peter Chepucavage that most willingly identified the problems that still existed and that something had to be done.
Additional significance in the presentation was the unanimous agreement from all analysts in appearance that the lack of transparency to short selling is the primary deterrent in the movement to prove this issue or disprove it. While the analysts did not always agree on the magnitude and impact to the problem, they did agree that many laws were ambiguous in nature and that a lack of transparency in disclosing settlement failures to the issuer impaired the issuer’s rights to insure safe execution of their company securities.
A simple question of how much in dollar value was put into settlement amnesty under the grandfather clause of Reg. SHO was asked by the panel? Unfortunately the SEC representative was unprepared to answer the question.
There were other significant highlights that will be addressed at a later time. It was the lowlights of the responses by panel members that need to be presented with appropriate rebuttal as these come from the Investor and issuer side of the spectrum. Most are directed at the SEC but not all.
As was anticipated Asst. Director of Market Regulation James Brigagliano, representing the SEC, approached this forum as yet another nuisance in his occupation obligations. Kind of like having to take the trash out on Thursdays when it is raining. The attitude started before moderator Ralph Lambiase even concluded the opening comments.
According to Mr. Brigagliano, speaking of his own opinion and not that of the Commission, the SEC is willing to review any material presented regarding naked shorting abuses and will “rigorously take enforcement action” to protect the investing public.
Had I been a panel member, Mr. Brigagliano would have quickly been asked to back up that statement with fact and not fiction based on historical and recorded evidence of the contrary. The pompous promotion of the SEC’s eagerness to aid investors is easily refuted by facts.
In March of 2001 Rhino Advisors became the Placement Agent for their 115th Private Placement [PIPE] deal since 1997. This deal involved a $2.5 Million placement with Pennsylvania based Sedona Corporation through a Swiss Hedge Fund named AMRO International SA. We would later find out through the SEC that the deal went south to the detriment of the issuer and investors.
In February of 2003 the SEC proceeded to take enforcement action against Rhino Advisors for securities fraud and stock manipulation associated with illegal shorting. Yes the SEC took their single regulatory enforcement action for illegal shorting [naked shorting].
Between March 2001 and February 2003 Rhino Advisors entered into an additional 31 PIPE placements for a total of 146 separate deals totaling $307 Million with $49 Million being directed through AMRO International.
In the SEC enforcement records against Rhino Advisors are indicators of illegal shorting and stock manipulation including washed trades to conceal the short sales. Further exposed in December 2003 Department of Justice arrest warrants issued against the former executives of Rhino Advisors were audio recordings of a Rhino executive engaged in bribing two brokers to collapse the stock. Those brokers were not employed by Rhino Advisors but reportedly employed by outside firm Refco Securities. The same Refco Securities now embroiled in a major scandal associated with securities fraud and referenced in the panel discussions.
The link to the conspiracy to manipulate required a concerted effort of several outside member participants including brokers operating out of Refco securities and market makers of unidentified firms who effectively traded these illegal sales into the open market of the NASDAQ. Affirmative Determination for the short sales could not be made and yet another member entity, clearing and settlement operations, failed to meet obligations to aide in the fraud.
While this would represent the minimum level of additional participants in this single confirmed illegal act there has yet to be a single regulatory enforcement action taken by the SEC on any of the associated parties. They have the trade data to convict Rhino Advisors but ceased any and all action against those that aided in their orchestrated fraud. The violators remain free to continue operations. Worse, communications with both past and present regulatory officials confirm the obvious. Rhino Advisors was clearly engaged in more than this single act of manipulation and that in all likelihood many of these deals had similar networks of associated members willing to defraud. Nobody takes on 115 clean PIPE deals, turns rogue for one deal, and then goes clean again for another 31 after being successful. It makes no logical sense.
Where is the rigorous enforcement Mr. Brigagliano’s stated would be conducted since the SEC already has the evidence and doesn’t need our outside help? He must have meant AFTER this meeting they would start.
In addition to this case, a 2005 NASD enforcement action taken by panel member Cameron Funkhouser, Executive VP of Market Regulation for the NASD resulted in the banning of Scott Ryan and the dissolution of Market Maker Ryan and Co. for illegal naked shorting. In this case Ryan, acting in a market maker role, used his market making exemptions to short for Hedge funds who were otherwise blocked from shorting particular companies.
Due to a lack of jurisdiction over the hedge funds, the NASD could only charge Scott Ryan according to Mr. Funkhouser. Only the SEC has the enforcement authority over the Hedge Funds themselves. Apparently Mr. Brigagliano’s ‘rigorous enforcement’ was sleeping on this effort as well. Maybe that too will be started up.
But shocking news of the day regarding regulatory neglect was the reported news the NYSE Panelist member Anand Ramtahal, VP in the Division of Member firm Regulation broke.
According to Mr. Ramtahal the NYSE has been conducted member audits and had identified that 100% of the members audited have been violating the proxy voting rules. Instead of complying with a one share one vote policy members have been stuffing the ballot box with votes they had no rights to. Audits that were verified in a similar SIA study conducted.
Effectively the NYSE has identified that members illegally submit proxy voting requests to investors who are sitting on unsettled trades and then ‘average’ the results of the total received votes and submit that average vote based on the allowable shares available to vote. The NYSE identified that instead of taking enforcement against the member firms, a special team was formulated to identify how to achieve compliance to one share one vote policies. The team’s goal would be to simplify the process for the members so they can comply.
I hate to tell the SEC and NYSE that this is not only a minor violation of one share one vote, it a rule 10b-5 violation of employing a device to deceive and to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. The proxy request being the device used to deceive shareholders into the belief settlement was conducted and that they were in fact beneficial holders in a company when they in fact are not.
I believe the US Postal Service may want to look into this as well as this would be the distribution of counterfeit proxy cards using the postal service as the currier. A Federal Violation.
Fortunately Mr. Lambiase engaged in educating those that forgot that the American people have gone to war and lost lives for our right to vote. To dismiss this right in order to deceive for personal profiteering is reprehensible. To refuse enforcement action is inexcusable.
As an investor advocate, I was disappointed in the silence from the chairs of the representatives of the regulatory environment through much of the 2-hour session with only tidbits of communications leading to excuses in a lack of cases brought and promised future considerations. Most regulatory responses discussed monitoring studies and testing methods of change associated with maintaining member approvals.
Instead the forum was dominated by analysts covering analysis of the miniscule data accessible to the public while the agencies hide the real evidence under lock and key. Again James Brigagliano suggesting that the DTCC be sued for the evidence as if to mock all present and past cases. The analysts painted a sad picture the regulators failed to defend. The representative’s excused lack of enforcement on difficulties in taking action then dismissed investors as a mere pittance of the market.
Ultimately I realized that the silence by the regulators spoke louder than the full out debate I sought. Those in the crowd could see and witness the indifference and smugness of Mr. Brigagliano looking down on the investing public while associating the need to keep the members content in efficient operations regardless of how investors are impacted. Mr. Brigagliano could not effectively defend the grandfather clause of Regulation SHO so he dismissed the issue altogether. Cam Funkhouser came to the table with the most cases brought forth out of any of the agencies yet he too fell short of identifying this as a problem that required higher attention. Instead we were asked to comment on newly published proposals to regulate further what nobody wants to admit is an issue. Cam forgets that if history repeats itself, our comments ultimately mean nothing as the SEC just proved.
As for the NYSE, I am not sure Mr. Ramtahal realized how foolish it sounded to tell the people that proxy fraud was occurring and that no enforcement was being taken by the NYSE nor was compliance being required at this time. An NYSE team was studying the situation regarding a pre-existing law that members simply did not want to follow as drafted.
Oh yes, and this quote I started the editorial with:
“The essence of the settlement issue can be summed up as -- nothing good can happen between trade date and settlement, only bad things can happen. And the longer the settlement cycle, the greater the risk.”
Those are not my words being spoken. That quote comes directly out of a 2004 Concept Release out of the SEC’s Division of Market Regulation on shortening the trade settlement cycle. The same time the SEC was drafting the grandfather clause into Reg SHO they were also stating that comment in a public concept release. Is it the left lobe or the right lobe that I think with this week? Investors or Institutions?
Maybe Jimmy Brigagliano can explain this statement in correlation to the grandfather clause he and the SEC defends so rigorously.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005