Post by jcline on Mar 7, 2006 20:08:32 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
DTCC Accounting Standards; By the Numbers – March 7, 2006
David Patch
For the past several years the Depository Trust Clearing Corporation (DTCC) has taken it upon themselves to venture into a full public campaign aimed at clarifying what they perceive to be misrepresentations stated about their methods of operations.
Plaintiffs claiming illegal stock settlements involving shorting abuses have named the DTCC as a defendant in several lawsuits over these past years raising the ire of the Wall Street operation. In each case, the plaintiff has contested that the DTCC creates “counterfeit” securities within their Stock Borrow Program (SBP) to settle out a trade that has effectively failed the settlement process and that short sale investors are using this process to manipulate the price of securities.
The plaintiff’s claim is that the SBP and the Fails-to-Deliver (FTD) hidden by the SBP are flooding the markets with excess supply of shares which creates a sell side imbalance on the stock price. The sellers then utilizing this sell side leverage to effectively cover the FTD when the price has fallen to profitable levels.
The DTCC has set up a special section on their home page dedicated to the illegal short sale process now known as naked shorting. In that section, the DTCC has published materials that can lead you to certain conclusions if the material is taken at face value.
The question is, how transparent has the DTCC been in their presentation of material?
I researched the DTCC site and conducted some of my own analysis of the DTCC contentions based on the data provided.
Let’s start with the understanding that the DTCC is the national clearance and settlement system for the US Capital Markets. The DTCC 2004 annual report identified that $1.1 Quadrillion in securities were settled through the DTC. Reports out of the DTCC identify that 2005 was even greater. This number represents the sub total dollar value of all trades settled through the Depository Trust Operations.
That’s a lot of dough.
But the fraud the plaintiffs speak of is with regards to those trades that fail settlement within the requirements of 3 business days after execution. What happens to them and how big a problem is it?
In a March 2005 Interview with DTCC Newsletter @dtcc, General Counsel Larry Thomson claimed that 24,000 transactions daily failed the required settlement period. Thomson further went on to identify that approx. $6 Billion in new and aged fails were on the books of the DTCC daily and that the $6 Billion represented approximately 1.5% of the $400 Billion in trades that reach settlement daily.
The problem is the DTCC accounting standards are all messed up. The DTCC is misrepresenting their numbers by continually comparing different time standards to the analysis. The $1.1 Quadrillion is an annual figure, the $400 Billion is a daily figure, and the $6 Billion is an accumulation of both daily and pre-existing fails. – Apples to Oranges to Banana’s. And these guys are the accountants for the market settlement system.
So to understand the magnitude of the settlement failure problem, in annual dollar value, I went to the press releases presented by the DTCC regarding the NASAA Public Forum held in November of 2005 to address naked shorting abuses.
According to Securities and Exchange Commission Asst. Director of Market Regulation James Brigagliano, “While there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without incident.”
So what does 99% settlement accuracy represent?
If the DTCC settles $1.1 Quadrillion in trades annually, 99% on-time settlement represents a staggering $10 Trillion in settlement failures. Of this $10 Trillion in failures, the DTCC also claims that 10% of all fails are settled outside the window of 20 business days. Again doing the math, $1 Trillion in annual trades executed exceed 20 business days in which the seller of that security makes good to the buyer of that security. One Trillion in investor capital is not seeing delivery of what was purchased for greater than one calendar month.
And the DTCC is happy about this!
How damaging can these delays be?
In 2001 a seller of shares in Eagletech Communications sold shares into the market at $11.00/share. Tens of thousands of illegal shares were sold into the market to unsuspecting buyers. The sellers failed making good on delivery of the shares sold for over 250 consecutive trade days and only then delivered the security at a time when the stock was trading at the significantly reduced value of $0.50/share. The profit to the sellers for the illegal sale of securities was 21 times their ultimate investment since this investment involved selling first, taking the money, and only buying back at a later date.
This data, remarkable as it is, comes directly from the records maintained at the DTCC and was released by the SEC under court order. The DTCC has refuted that this is a cause for concern.
As an engineer by degree, we are trained to measure the quality of our operations by a standard called sigma. Designs, manufacturing processes, accounting are all developed to meet quality levels and standards equal to six-sigma. Six-Sigma represents a level of quality equal to 3.4 defects per 1 Million events.
To apply a six-sigma standard to the financial settlement process, the dollar value of annual settlement failures, with a $1.1 Quadrillion in trades settled annually, would be approx $3.5 Billion annually. By the DTCC’s own comments, they carry a liability of $6 Billion in aged and new settlement failures on their books daily.
How important is this?
This is your financial future, your investments, and the manner in which Wall Street respects your financial safety. This is not how your widget in the dishwasher is machined and there is no rework process if a failure took place. In the financial environment, a lost investment has no recovery plan and a manipulated investment rarely has a satisfactory reconciliation.
On March 1, 2006 the DTCC announced that they are refunding the member firms of Wall Street a record $528 Million in rebates after already providing these firms with a $161 Million reduction in clearance and settlement fees. Funny, my Commissions on trades never changed and Wall Street did hand out $22 Billion in bonuses this year. I wonder if I was serviced properly with my share of the rebate.
For those investors who were on the failing end of some $10 Trillion in trade executions annually, we could all come to the logical conclusion that the DTCC would be better served taking the excess cash from operations and invest it on making the settlement process more efficient and more secure to the investing public.
The SEC and NASD have shown through recent enforcement activity that settlement failures are a venue for manipulation and while this rebate money looks good in the bonus checks of the Wall Street employees, it would look better if it were used to clean up the loophole used to defraud the unsuspecting public.
The DTCC has the authority to suggest policy changes to correct the loophole. Unfortunately the DTCC Management has elected to spend their resources documenting a paper trail of misleading commentary aimed at spinning a known bad situation into a non-event and diverting the rest back to the firms represented by the DTCC Board Members.
The DTCC is free to correct my assumptions if they so choose. Evidence will be required however. FOIA requests submitted to the SEC for information on the dollar value of settlement failures have repeatedly been turned down leaving us to fend for ourselves.
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
DTCC Accounting Standards; By the Numbers – March 7, 2006
David Patch
For the past several years the Depository Trust Clearing Corporation (DTCC) has taken it upon themselves to venture into a full public campaign aimed at clarifying what they perceive to be misrepresentations stated about their methods of operations.
Plaintiffs claiming illegal stock settlements involving shorting abuses have named the DTCC as a defendant in several lawsuits over these past years raising the ire of the Wall Street operation. In each case, the plaintiff has contested that the DTCC creates “counterfeit” securities within their Stock Borrow Program (SBP) to settle out a trade that has effectively failed the settlement process and that short sale investors are using this process to manipulate the price of securities.
The plaintiff’s claim is that the SBP and the Fails-to-Deliver (FTD) hidden by the SBP are flooding the markets with excess supply of shares which creates a sell side imbalance on the stock price. The sellers then utilizing this sell side leverage to effectively cover the FTD when the price has fallen to profitable levels.
The DTCC has set up a special section on their home page dedicated to the illegal short sale process now known as naked shorting. In that section, the DTCC has published materials that can lead you to certain conclusions if the material is taken at face value.
The question is, how transparent has the DTCC been in their presentation of material?
I researched the DTCC site and conducted some of my own analysis of the DTCC contentions based on the data provided.
Let’s start with the understanding that the DTCC is the national clearance and settlement system for the US Capital Markets. The DTCC 2004 annual report identified that $1.1 Quadrillion in securities were settled through the DTC. Reports out of the DTCC identify that 2005 was even greater. This number represents the sub total dollar value of all trades settled through the Depository Trust Operations.
That’s a lot of dough.
But the fraud the plaintiffs speak of is with regards to those trades that fail settlement within the requirements of 3 business days after execution. What happens to them and how big a problem is it?
In a March 2005 Interview with DTCC Newsletter @dtcc, General Counsel Larry Thomson claimed that 24,000 transactions daily failed the required settlement period. Thomson further went on to identify that approx. $6 Billion in new and aged fails were on the books of the DTCC daily and that the $6 Billion represented approximately 1.5% of the $400 Billion in trades that reach settlement daily.
The problem is the DTCC accounting standards are all messed up. The DTCC is misrepresenting their numbers by continually comparing different time standards to the analysis. The $1.1 Quadrillion is an annual figure, the $400 Billion is a daily figure, and the $6 Billion is an accumulation of both daily and pre-existing fails. – Apples to Oranges to Banana’s. And these guys are the accountants for the market settlement system.
So to understand the magnitude of the settlement failure problem, in annual dollar value, I went to the press releases presented by the DTCC regarding the NASAA Public Forum held in November of 2005 to address naked shorting abuses.
According to Securities and Exchange Commission Asst. Director of Market Regulation James Brigagliano, “While there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without incident.”
So what does 99% settlement accuracy represent?
If the DTCC settles $1.1 Quadrillion in trades annually, 99% on-time settlement represents a staggering $10 Trillion in settlement failures. Of this $10 Trillion in failures, the DTCC also claims that 10% of all fails are settled outside the window of 20 business days. Again doing the math, $1 Trillion in annual trades executed exceed 20 business days in which the seller of that security makes good to the buyer of that security. One Trillion in investor capital is not seeing delivery of what was purchased for greater than one calendar month.
And the DTCC is happy about this!
How damaging can these delays be?
In 2001 a seller of shares in Eagletech Communications sold shares into the market at $11.00/share. Tens of thousands of illegal shares were sold into the market to unsuspecting buyers. The sellers failed making good on delivery of the shares sold for over 250 consecutive trade days and only then delivered the security at a time when the stock was trading at the significantly reduced value of $0.50/share. The profit to the sellers for the illegal sale of securities was 21 times their ultimate investment since this investment involved selling first, taking the money, and only buying back at a later date.
This data, remarkable as it is, comes directly from the records maintained at the DTCC and was released by the SEC under court order. The DTCC has refuted that this is a cause for concern.
As an engineer by degree, we are trained to measure the quality of our operations by a standard called sigma. Designs, manufacturing processes, accounting are all developed to meet quality levels and standards equal to six-sigma. Six-Sigma represents a level of quality equal to 3.4 defects per 1 Million events.
To apply a six-sigma standard to the financial settlement process, the dollar value of annual settlement failures, with a $1.1 Quadrillion in trades settled annually, would be approx $3.5 Billion annually. By the DTCC’s own comments, they carry a liability of $6 Billion in aged and new settlement failures on their books daily.
How important is this?
This is your financial future, your investments, and the manner in which Wall Street respects your financial safety. This is not how your widget in the dishwasher is machined and there is no rework process if a failure took place. In the financial environment, a lost investment has no recovery plan and a manipulated investment rarely has a satisfactory reconciliation.
On March 1, 2006 the DTCC announced that they are refunding the member firms of Wall Street a record $528 Million in rebates after already providing these firms with a $161 Million reduction in clearance and settlement fees. Funny, my Commissions on trades never changed and Wall Street did hand out $22 Billion in bonuses this year. I wonder if I was serviced properly with my share of the rebate.
For those investors who were on the failing end of some $10 Trillion in trade executions annually, we could all come to the logical conclusion that the DTCC would be better served taking the excess cash from operations and invest it on making the settlement process more efficient and more secure to the investing public.
The SEC and NASD have shown through recent enforcement activity that settlement failures are a venue for manipulation and while this rebate money looks good in the bonus checks of the Wall Street employees, it would look better if it were used to clean up the loophole used to defraud the unsuspecting public.
The DTCC has the authority to suggest policy changes to correct the loophole. Unfortunately the DTCC Management has elected to spend their resources documenting a paper trail of misleading commentary aimed at spinning a known bad situation into a non-event and diverting the rest back to the firms represented by the DTCC Board Members.
The DTCC is free to correct my assumptions if they so choose. Evidence will be required however. FOIA requests submitted to the SEC for information on the dollar value of settlement failures have repeatedly been turned down leaving us to fend for ourselves.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006