Post by jannikki on Jan 5, 2006 17:24:25 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
If Short Sellers are so smart, why do they need to cheat to succeed? – January 1, 2006
David Patch
Do you ever read the articles the financial press puts out on short sellers? The Wall Street Journal, NY Post, theStreet.com (NASDAQ; TSCM) and Dow Jones (NYSE; DJ) affiliate Marketwatch.com all compare short sellers to geniuses. To paraphrase the bunch, ‘short sellers are much more thorough in their due diligence which generally leads to them being correct more of the time’.
In an e-mail exchange last week with CNBC’s Mad Money Host Jim Cramer it finally came to me, an epiphany. If short sellers are so smart, why do they have to cheat to succeed? I asked Jim that very same question. Jim never responded
First, let’s lay out some of the scandalous acts orchestrated by Hedge Funds and short sellers to achieve success and then you can decide for yourself whether these investors are “savvy” or are some just plain criminal.
First the Highlights:
Late Trading/Market Timing. A scheme orchestrated between Institutions and Hedge Funds allowing Hedge Funds to trade in or out of their positions after the prices had been set. Wall Street Institutions and hedge funds have paid several billion dollars in fines associated with this act of fraud.
Insider Trading in Private Investment Financing [PIPE]. Hedge Funds involved in the placement sell short ahead of the public announcements in order to lock in profits. Several regulatory enforcement actions in 2005 revealed a systemic industry involvement in this practice.
Short and Distort. Hedge Funds and short sellers short heavily into stocks and then pressure regulators to go on a witch hunt against those companies in order to publicly discredit the companies. Investigations that ultimately yield little if anything from the regulatory front but have a significant impact on the trading value of companies under investigation.
Naked shorting. A scheme of concentrated short selling in a security where trades cannot settle and sell side pressure from the excessive selling drives value out of the stocks. Institutions overlook the requirements of settlement in order to maintain the Hedge Fund business. SEC released Regulation SHO to correct the abuse but revealed a ‘grandfather clause’ in the reform to protect large pre-existing blocks of failures in the system.
With a list of sins such as this, it is no wonder the Hedge Fund Industry has prospered these past few years. To be able to rig the markets to your favor and to sell at will, even to multiple levels of manipulation, to achieve profitability rarely has anything to do with a genius mindset. Any idiot can pass a test if given all the answers.
In the exchange between myself and Jim, we argued the merits of Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne’s plight against the abusive short sellers. Cramer, in a mocking retort to Byrne’s activities, contends he ‘praised Mr. Byrne [in a December RealMoney Article] and blasted the shorts for destroying the business model and the cheesy ad campaign and the lack of board oversight. I criticized the shorts for the business model and the fact that the company has no way of making money.’
Jim made sure he had his teammates on board in case he falters so he added RealMoney.com research associate Mike Comeau, and commentators David Peltier and Will Gabreilski to the exchange. Another typical short seller tactic – gang up to achieve success.
Mike Comeau was quick to assist struggling Jim as his response to the dialogue only confirmed expectations. Comeau chimed in ‘The funniest part about this whole thing is everyone is ignoring the fact that OSTK is a crappy company. It’s not like everyone's ganging up on a good company here.’
Did Comeau just admit to ganging up on Overstock? Doesn’t Comeau work for theStreet.com, the same theStreet.com that went IPO in May 1999 at $70.00/share and hasn’t seen an up side since? In fact, theStreet.com hasn’t seen the up side of $8.00 since April 2000 and for the most part has flirted with penny stock values since. Overstock’s recent market decline pales in comparison to the 90% market cap loss theStreet.com has suffered since going public. For the record Peltier never responded to any of the exchanges and Gabreilski responded by asking to be removed from the communication thread.
Late Trading/Market timing; this is like getting the answers to a final exam from the professor prior to actually taking the exam. In this case, Hedge funds were afforded the luxury of deciding how to trade after the prices were already locked in. They took pennies here and there that added up to hundreds of billions of dollars. They did it illegally and thought they would never get caught. It if were up to the Securities and Exchange Commission they would have been correct. It took State Regulators to break up this scheme. Eventually Congress had to chime in as even they could not protect their wealthy contributors once the state’s made this a public issue.
In December 2005 Bear Stearns closed out settlement discussions with the Regulators and agreed to a $250 million fine for aiding Hedge Funds with late trading. Only one month earlier Billionaire Israel Englander settled with regulators on a $180 Million fine for late trading abuses in the Hedge Fund he runs; Millennium Partners. These being the most recent fines imposed on what has accumulated into several billion dollars in fines against Wall Street Institutions and Hedge Funds. No small act of fraud.
Izzy is a billionaire and his clients are wealthy. Why would he create a well orchestrated scheme, involving the creation of hundreds of bogus accounts, to commit the fraud? Why does a “savvy” billionaire have to cheat to succeed? If this Hedge Fund Manager is so intelligent, can’t he succeed on his own merits? Isn’t a billion dollars in net worth enough incentive to play by the rules?
Jim and the boys couldn’t respond. I had them there. I think I heard a Booya coming from the crowd.
How about those crazy PIPE deals? In 2005 we started to see regulators act on what everybody has been talking about for years. Hedge Funds repeatedly shorted ahead of public announcements of PIPE deals in order to achieve profitability. Again it was one of those exams where the professor handed you the answers before the exam.
In a PIPE deal shares are being provided to a Fund at a discounted rate in exchange for cash. The issuance of a large block of shares will create dilution in the market and typically has an adverse effect on stock prices. The Hedge Funds involved in the deal would short the stock during the contractual negotiations knowing that the number of shares they receive will be based on a stock value at the time of the deal. The fund then uses the discounted shares provided in the deal to cover the short sales executed previously. As for the shorts executed, Wall Street ignored the legal responsibility to settle the bogus trades because they benefited financially as well.
Ironically, it has been theStreet.com commentator Matt Goldstein that broke many of these stories that came out in 2005. I guess Mad Money Jim has not been reading up on theStreet.com articles. Again no retorts from Mr. Cramer as the allegations are a matter of public record. Booya!
Finally there is the scandalous naked shorting problem these savvy investors claim doesn’t really exist. Short sellers, and especially big Hedge Funds, will get special considerations from Wall Street to short otherwise non-shortable securities. It is done illegally but done to appease these wealthy clients and the revenues they bring to big institutions.
Beyond the now published Regulation SHO threshold security list of oversold securities, we have a simple comment made by the General Counsel for Wall Street giant Bear Stearns during a December 2004 conference call.
‘To give you that brief introduction in Reg SHO, the history (of) how we got to where we are today. For the past few 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.’
Settlement failures associated with short sales that are executed in violation of established laws? Settlement failures the SEC identified, in the background release to Regulation SHO, as being additional leverage used to manipulate stock prices. Settlement failures afforded to “savvy” short sellers.
The release of regulation SHO presented the investing public with a snapshot of the level of abuse out there. Hundreds of companies were first listed on that day in early January and many on that first list remain on the published listings today.
The SEC claimed they needed to grandfather these fails that were identified as abusive because they feared market volatility. In reality it was to protect the Hedge funds profitability. The SEC did not want to harm this powerful group of short sellers and the wealthy clients represented by these funds. Wealth can buy you a boatload of overlooked abuses and the SEC has loaded the boat on this one.
To aid in the Hedge Fund performance, the SEC initiated several public investigations in 2005 involving companies listed on the threshold list. Several of the companies have been captive to the list for the much of the entire year. Heavily shorted and settlement abused Taser (NASDAQ; TASR), Novastar (NYSE; NFI), and Travelzoo (NASDAQ (TZOO) had announcements of SEC investigations by the end of January 2005. Each saw market values plummet on the news of the investigation. While the SEC Investigations ultimately led nowhere profits to those holding a short position in the stock, legal or otherwise, prospered. How fortunate.
Also in 2005 Federal prosecutors convicted short seller Anthony Elgindy for stock manipulation associated with illegal short selling. US Attorney Kenneth Breen identifying that evidence of over 40 companies being manipulated by abusive naked shorting was uncovered during their investigation. If you believe the former US Attorney, Elgindy’s fortune did not come from savvy decisions, the wealth came from manipulation and fraud.
The NASD further exposed the fraud of illegal short selling in 2005 when they barred Scott Ryan and Ryan & Co. from the industry for illegally shorting on behalf of a minimum of three Hedge Funds. Ryan would use his market making exemption [legal naked shorting] to short stocks that otherwise were not available to short. The NASD claimed the scheme was lucrative to both Ryan and the Hedge Funds.
The activities stated above are mere samplings of the tremendous evidence that confronts us.
With each rock we seemingly turn over on Wall Street we are confronted with another scandal that supports the allegations of the fleecing of middle class America. Under many of these rocks lie the Hedge Funds, favored for their lack of regulatory controls and short selling schemes. Short selling schemes that routinely lead to special privileges, rigged markets, and fraud.
The General Counsel to Bear Stearns said ‘for several years’ when he addressed regulatory concerns over illegal and damaging short sales. Going back just a few years we are confronted with the late ‘90’s early 2000 bear market. A short seller’s haven made more lucrative if you could sell shares that never existed but a trade execution that instilled fear into the long shareholder.
Drive to lower lows by selling excessively and feverishly shares that don’t presently exist to sell. Raid the investors and cover your raid on their fear. A rigged market!
So I ask again, if a short seller is so savvy why do they have to cheat to succeed? Why do they need the protection of a grandfather clause drafted into Regulation SHO, special privileges from Wall Street Institutions, bogus Regulatory Investigations, and the ganging up of media types like Jim Cramer and his boys to be successful?
Let’s start to force these Hedge Funds to come clean. Register with the SEC and publicly document the Funds short holdings as mutual funds and Institutions have to do with their long holdings. Eliminate the grandfather clause and force all trades to settle within a strict window of time as required under the Exchange Act of 1934. If short sellers are so savvy, don’t rig the markets to protect their profits make they prove their worth in a fair market.
I personally have no issues with short selling in our markets. The problem is the illegal acts of short selling.
Here’s one for ya Jimmy – Booya!!!
Happy New Year to all.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006
An online newspaper reporting the issues of Securities Fraud
If Short Sellers are so smart, why do they need to cheat to succeed? – January 1, 2006
David Patch
Do you ever read the articles the financial press puts out on short sellers? The Wall Street Journal, NY Post, theStreet.com (NASDAQ; TSCM) and Dow Jones (NYSE; DJ) affiliate Marketwatch.com all compare short sellers to geniuses. To paraphrase the bunch, ‘short sellers are much more thorough in their due diligence which generally leads to them being correct more of the time’.
In an e-mail exchange last week with CNBC’s Mad Money Host Jim Cramer it finally came to me, an epiphany. If short sellers are so smart, why do they have to cheat to succeed? I asked Jim that very same question. Jim never responded
First, let’s lay out some of the scandalous acts orchestrated by Hedge Funds and short sellers to achieve success and then you can decide for yourself whether these investors are “savvy” or are some just plain criminal.
First the Highlights:
Late Trading/Market Timing. A scheme orchestrated between Institutions and Hedge Funds allowing Hedge Funds to trade in or out of their positions after the prices had been set. Wall Street Institutions and hedge funds have paid several billion dollars in fines associated with this act of fraud.
Insider Trading in Private Investment Financing [PIPE]. Hedge Funds involved in the placement sell short ahead of the public announcements in order to lock in profits. Several regulatory enforcement actions in 2005 revealed a systemic industry involvement in this practice.
Short and Distort. Hedge Funds and short sellers short heavily into stocks and then pressure regulators to go on a witch hunt against those companies in order to publicly discredit the companies. Investigations that ultimately yield little if anything from the regulatory front but have a significant impact on the trading value of companies under investigation.
Naked shorting. A scheme of concentrated short selling in a security where trades cannot settle and sell side pressure from the excessive selling drives value out of the stocks. Institutions overlook the requirements of settlement in order to maintain the Hedge Fund business. SEC released Regulation SHO to correct the abuse but revealed a ‘grandfather clause’ in the reform to protect large pre-existing blocks of failures in the system.
With a list of sins such as this, it is no wonder the Hedge Fund Industry has prospered these past few years. To be able to rig the markets to your favor and to sell at will, even to multiple levels of manipulation, to achieve profitability rarely has anything to do with a genius mindset. Any idiot can pass a test if given all the answers.
In the exchange between myself and Jim, we argued the merits of Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne’s plight against the abusive short sellers. Cramer, in a mocking retort to Byrne’s activities, contends he ‘praised Mr. Byrne [in a December RealMoney Article] and blasted the shorts for destroying the business model and the cheesy ad campaign and the lack of board oversight. I criticized the shorts for the business model and the fact that the company has no way of making money.’
Jim made sure he had his teammates on board in case he falters so he added RealMoney.com research associate Mike Comeau, and commentators David Peltier and Will Gabreilski to the exchange. Another typical short seller tactic – gang up to achieve success.
Mike Comeau was quick to assist struggling Jim as his response to the dialogue only confirmed expectations. Comeau chimed in ‘The funniest part about this whole thing is everyone is ignoring the fact that OSTK is a crappy company. It’s not like everyone's ganging up on a good company here.’
Did Comeau just admit to ganging up on Overstock? Doesn’t Comeau work for theStreet.com, the same theStreet.com that went IPO in May 1999 at $70.00/share and hasn’t seen an up side since? In fact, theStreet.com hasn’t seen the up side of $8.00 since April 2000 and for the most part has flirted with penny stock values since. Overstock’s recent market decline pales in comparison to the 90% market cap loss theStreet.com has suffered since going public. For the record Peltier never responded to any of the exchanges and Gabreilski responded by asking to be removed from the communication thread.
Late Trading/Market timing; this is like getting the answers to a final exam from the professor prior to actually taking the exam. In this case, Hedge funds were afforded the luxury of deciding how to trade after the prices were already locked in. They took pennies here and there that added up to hundreds of billions of dollars. They did it illegally and thought they would never get caught. It if were up to the Securities and Exchange Commission they would have been correct. It took State Regulators to break up this scheme. Eventually Congress had to chime in as even they could not protect their wealthy contributors once the state’s made this a public issue.
In December 2005 Bear Stearns closed out settlement discussions with the Regulators and agreed to a $250 million fine for aiding Hedge Funds with late trading. Only one month earlier Billionaire Israel Englander settled with regulators on a $180 Million fine for late trading abuses in the Hedge Fund he runs; Millennium Partners. These being the most recent fines imposed on what has accumulated into several billion dollars in fines against Wall Street Institutions and Hedge Funds. No small act of fraud.
Izzy is a billionaire and his clients are wealthy. Why would he create a well orchestrated scheme, involving the creation of hundreds of bogus accounts, to commit the fraud? Why does a “savvy” billionaire have to cheat to succeed? If this Hedge Fund Manager is so intelligent, can’t he succeed on his own merits? Isn’t a billion dollars in net worth enough incentive to play by the rules?
Jim and the boys couldn’t respond. I had them there. I think I heard a Booya coming from the crowd.
How about those crazy PIPE deals? In 2005 we started to see regulators act on what everybody has been talking about for years. Hedge Funds repeatedly shorted ahead of public announcements of PIPE deals in order to achieve profitability. Again it was one of those exams where the professor handed you the answers before the exam.
In a PIPE deal shares are being provided to a Fund at a discounted rate in exchange for cash. The issuance of a large block of shares will create dilution in the market and typically has an adverse effect on stock prices. The Hedge Funds involved in the deal would short the stock during the contractual negotiations knowing that the number of shares they receive will be based on a stock value at the time of the deal. The fund then uses the discounted shares provided in the deal to cover the short sales executed previously. As for the shorts executed, Wall Street ignored the legal responsibility to settle the bogus trades because they benefited financially as well.
Ironically, it has been theStreet.com commentator Matt Goldstein that broke many of these stories that came out in 2005. I guess Mad Money Jim has not been reading up on theStreet.com articles. Again no retorts from Mr. Cramer as the allegations are a matter of public record. Booya!
Finally there is the scandalous naked shorting problem these savvy investors claim doesn’t really exist. Short sellers, and especially big Hedge Funds, will get special considerations from Wall Street to short otherwise non-shortable securities. It is done illegally but done to appease these wealthy clients and the revenues they bring to big institutions.
Beyond the now published Regulation SHO threshold security list of oversold securities, we have a simple comment made by the General Counsel for Wall Street giant Bear Stearns during a December 2004 conference call.
‘To give you that brief introduction in Reg SHO, the history (of) how we got to where we are today. For the past few 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.’
Settlement failures associated with short sales that are executed in violation of established laws? Settlement failures the SEC identified, in the background release to Regulation SHO, as being additional leverage used to manipulate stock prices. Settlement failures afforded to “savvy” short sellers.
The release of regulation SHO presented the investing public with a snapshot of the level of abuse out there. Hundreds of companies were first listed on that day in early January and many on that first list remain on the published listings today.
The SEC claimed they needed to grandfather these fails that were identified as abusive because they feared market volatility. In reality it was to protect the Hedge funds profitability. The SEC did not want to harm this powerful group of short sellers and the wealthy clients represented by these funds. Wealth can buy you a boatload of overlooked abuses and the SEC has loaded the boat on this one.
To aid in the Hedge Fund performance, the SEC initiated several public investigations in 2005 involving companies listed on the threshold list. Several of the companies have been captive to the list for the much of the entire year. Heavily shorted and settlement abused Taser (NASDAQ; TASR), Novastar (NYSE; NFI), and Travelzoo (NASDAQ (TZOO) had announcements of SEC investigations by the end of January 2005. Each saw market values plummet on the news of the investigation. While the SEC Investigations ultimately led nowhere profits to those holding a short position in the stock, legal or otherwise, prospered. How fortunate.
Also in 2005 Federal prosecutors convicted short seller Anthony Elgindy for stock manipulation associated with illegal short selling. US Attorney Kenneth Breen identifying that evidence of over 40 companies being manipulated by abusive naked shorting was uncovered during their investigation. If you believe the former US Attorney, Elgindy’s fortune did not come from savvy decisions, the wealth came from manipulation and fraud.
The NASD further exposed the fraud of illegal short selling in 2005 when they barred Scott Ryan and Ryan & Co. from the industry for illegally shorting on behalf of a minimum of three Hedge Funds. Ryan would use his market making exemption [legal naked shorting] to short stocks that otherwise were not available to short. The NASD claimed the scheme was lucrative to both Ryan and the Hedge Funds.
The activities stated above are mere samplings of the tremendous evidence that confronts us.
With each rock we seemingly turn over on Wall Street we are confronted with another scandal that supports the allegations of the fleecing of middle class America. Under many of these rocks lie the Hedge Funds, favored for their lack of regulatory controls and short selling schemes. Short selling schemes that routinely lead to special privileges, rigged markets, and fraud.
The General Counsel to Bear Stearns said ‘for several years’ when he addressed regulatory concerns over illegal and damaging short sales. Going back just a few years we are confronted with the late ‘90’s early 2000 bear market. A short seller’s haven made more lucrative if you could sell shares that never existed but a trade execution that instilled fear into the long shareholder.
Drive to lower lows by selling excessively and feverishly shares that don’t presently exist to sell. Raid the investors and cover your raid on their fear. A rigged market!
So I ask again, if a short seller is so savvy why do they have to cheat to succeed? Why do they need the protection of a grandfather clause drafted into Regulation SHO, special privileges from Wall Street Institutions, bogus Regulatory Investigations, and the ganging up of media types like Jim Cramer and his boys to be successful?
Let’s start to force these Hedge Funds to come clean. Register with the SEC and publicly document the Funds short holdings as mutual funds and Institutions have to do with their long holdings. Eliminate the grandfather clause and force all trades to settle within a strict window of time as required under the Exchange Act of 1934. If short sellers are so savvy, don’t rig the markets to protect their profits make they prove their worth in a fair market.
I personally have no issues with short selling in our markets. The problem is the illegal acts of short selling.
Here’s one for ya Jimmy – Booya!!!
Happy New Year to all.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006