Post by jcline on Mar 16, 2006 19:03:15 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
SEC Nails Hedge Funds for Naked Shorting - Misses on Penalty – March 16, 2006
David Patch
Reports out of the Securities and Exchange Commission is that three Madison Ave. based Hedge Funds managed by portfolio manager Jeffery Thorp engaged in insider trading and naked short selling involving 23 Private Placement Equity deals (PIPE’s) between 2000 and 2002.
According to the SEC Complaint filed, Thorp created an elaborate scheme to illegally profit from short sales executed while in negotiations for a convertible private placement arrangement. In the scheme, Thorp would illegally short shares through a Canadian firm utilizing a known loophole between Canadian and US market laws.
The Madison Ave. based Hedge Funds would naked short through Canada using Canadian shorting rules resulting in settlement failures to exist on the short sales until that time where the deal was concluded and shares were received as part of the private placement. Once the shares were received as part of the private placement, Thorp would cover the fails using those shares.
This all sounds great right? The SEC is now taking enforcement action in connection with fraud they have publicly stated does not exist to any extent. Fraud the DTCC claims they have no accountability in even though the fraud is orchestrated using the leverage of settlement failures.
Unfortunately, if you dig deeper into the story, there is actually more to it than what the SEC is willing to state publicly.
Let’s start with the Canadian loophole.
Naked shorting or shorting without making proper Affirmative Determination (AD) that a share can be borrowed for delivery on settlement was legal in Canada in 2000 - 2002. These trades from non-Member firms were unregulated by the US Securities regulators even though the trades were being executed from Canada into the US. The result was settlement failures on the books of US member Firms and at the Depository Trust Clearing Corporation (DTCC).
Under US law, trades executed must abide by rules 15c3-3 and 15c6-1 which require both buy-side and sell-side Broker-Dealers (BD) to be responsible for the prompt settlement of a trade. The industry standard was 3-days after trade execution.
The Canadian loophole created a fail to receive on the books of US Member firms and created conflict with the best interests of the US Investor purchasing shares long. In 2001 the NASD recognized this loophole between countries and trade laws and proposed to the SEC a modification to NASD Rule 3370 making it the responsibility of the member firm to insure AD was made and settlement could be achieved on time (SR-NASD-2001-85).
But while the NASD recognized this as a loophole, and as we have learned since that this loophole was widely used to commit fraud, the SEC Division of Market Regulation under the direction of now SEC Commissioner Annette Nazareth sat on the proposal. The SEC delaying the submission of notice for public comment on this proposal for several years; only allowing this rule to come into affect on April 1, 2004.
This fraud we now hear of 4 – 6 years later was committed at a time where the NASD recognized it as a problem and attempted to address it but the SEC ignored their warnings. Commissioner Annette Nazareth’s willingness to ignore issues of illegal shorting resulted in her failing in her duties to protect the issuers and the investors from Wall Street abuses.
And thus we get to the vehicle used to defraud; trade settlements.
The Securities and Exchange Commission is a Federal Agency created by Congress to protect our US markets and the investing public. In 1934 Congress created the Securities and Exchange Commission and over the years since recognized the need for a national clearance and settlement system. The SEC created this system we now recognize as the DTCC through the merging of several private entities and developing a quasi self-regulatory agency.
Under Section 17A of the Securities Act of 1934 came the demand that this system be created and that prompt and accurate settlement of trades be a priority. This is US Law pertaining to US Markets. Promulgated from 17A came Rules 15c3-3 and 15c6-1.
The fraud we now are learning about used the vehicle of settlement failure to work it’s magic. Three US Hedge Funds under the regulation of the SEC went up to Canada to circumvent US Laws by naked shorting US Securities into the US marketplace. The settlement failures, failures to receive at the US end, were accounted for on US member firm books and accounted for on the DTCC ledger. The US system created to protect the US markets failed.
In the simple case of the 23 separate dealings, and $7 Million in illegal gains, the DTCC and the member firms ignored their sole responsibilities to compliance of US Securities laws and allowed excessive fails to persist without question for periods exceeding 30 – 60 days according to the SEC complaint. The US member firms failed in complying with their side of rules 15c3-3 and 15c6-1 and in doing so become willing participants in the fraud.
The SEC even today refuses to recognize this breach of fiduciary responsibility to the US client involved in this trade by the member firms. It was systemic and therefore it must be forgiven.
To this very day the DTCC refuses to accept blame or responsibility for the settlement failures. The DTCC has created a public campaign to excuse the agency from blame yet the basic principle behind the fraud is the very nature of the DTCC existence – Trade Settlement.
Finally, the SEC complaint against Thorp and the three Madison Ave. Hedge Funds accuses Thorp of conspiring with US Broker-Dealers to hide the fraud through “wash trades” and “boxing.” The complaint does not identify who those Broker-Dealers are and/or whether any regulatory action was taken against them. According to a report out of the NY Times, Floyd Norris asked the SEC attorney Jeffrey Friestad who was in charge of this case whether the brokers involved would see an enforcement action. Friestad’s response was troubling as he reportedly claimed he would "look to see whether brokers had any responsibility for this and bring charges if appropriate."
The damn complaint all but identifies broker collusion and Friestad is deciding whether that is a violation?
What we do know is that this scheme to defraud lasted for over 2 years and affected 23 separate companies. We also know that one fund manger out of SG Cowen was accused in no fewer than 10 of these similar type conspiracies and TradeStation is accused in yet another 19 cases of illegal short selling through Bear Stearns. In addition we have cases settled with Rhino Advisors, Hedge Fund Manager Hilary Shane, Hedge Fund Manager John Mangan, and a pending settlement with Emanual Friedman for illegal short selling.
These enforcement activities all lead to something more than isolated cases involving a relatively non-issue as being portrayed by the SEC and SRO’s. In fact, a betting man would say that this has been a standard practice known to all.
Today, jobs are being lost, the financial stability of US Families is being stolen, and our future technologies are being cast aside to finance the greed of wealthy individuals of Wall Street. Hedge Funds that locate themselves on the prestige of Madison Ave. have to cheat to deliver profits to their ultra-wealthy clients. Schemes include setting up accounts in Canada just to circumvent the US laws illustrate the integrity of these individuals.
The fact that many of these companies were part of the medical field and may have a product that could save lives is irrelevant to those committing this fraud as it is all about who has the bigger yacht when you play in these circles. Safety of our nation and of our generations to come have no place in the bank accounts of these wealthy criminals.
It is time the SEC and other regulatory agencies are held accountable for their actions in allowing this abuse to prosper even as these small cases are brought forth. This type of fraud is not based on rogue individuals but is well known to those in the industry as merely standard practice. Like conflicts in stock research, special trading privileges (late trading/market timing) for Hedge Funds, and front running orders the regulators have waited until meaningful time has passed and the damage is beyond repair before any type of action is taken.
The insult in this particular case the SEC did not ban thorp from the Industry. The SEC instead settled on a monetary fine and made thorp promise to never violate THIS act again. The fact that Thorp did it a minimum of 23 times previously seems to slip past the geniuses who sit on the Commission of the SEC. This crime resulted in tens if not hundreds of millions in public investor losses and the SEC fines Thorp and his Funds a total of $13 Million in fines and disgorgement of gains. Far from a deterrent to a man of who operates three Hedge Funds on the prestigious Madison Ave. in New York.
The evidence is out there – all you have to do is look for it.
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
SEC Nails Hedge Funds for Naked Shorting - Misses on Penalty – March 16, 2006
David Patch
Reports out of the Securities and Exchange Commission is that three Madison Ave. based Hedge Funds managed by portfolio manager Jeffery Thorp engaged in insider trading and naked short selling involving 23 Private Placement Equity deals (PIPE’s) between 2000 and 2002.
According to the SEC Complaint filed, Thorp created an elaborate scheme to illegally profit from short sales executed while in negotiations for a convertible private placement arrangement. In the scheme, Thorp would illegally short shares through a Canadian firm utilizing a known loophole between Canadian and US market laws.
The Madison Ave. based Hedge Funds would naked short through Canada using Canadian shorting rules resulting in settlement failures to exist on the short sales until that time where the deal was concluded and shares were received as part of the private placement. Once the shares were received as part of the private placement, Thorp would cover the fails using those shares.
This all sounds great right? The SEC is now taking enforcement action in connection with fraud they have publicly stated does not exist to any extent. Fraud the DTCC claims they have no accountability in even though the fraud is orchestrated using the leverage of settlement failures.
Unfortunately, if you dig deeper into the story, there is actually more to it than what the SEC is willing to state publicly.
Let’s start with the Canadian loophole.
Naked shorting or shorting without making proper Affirmative Determination (AD) that a share can be borrowed for delivery on settlement was legal in Canada in 2000 - 2002. These trades from non-Member firms were unregulated by the US Securities regulators even though the trades were being executed from Canada into the US. The result was settlement failures on the books of US member Firms and at the Depository Trust Clearing Corporation (DTCC).
Under US law, trades executed must abide by rules 15c3-3 and 15c6-1 which require both buy-side and sell-side Broker-Dealers (BD) to be responsible for the prompt settlement of a trade. The industry standard was 3-days after trade execution.
The Canadian loophole created a fail to receive on the books of US Member firms and created conflict with the best interests of the US Investor purchasing shares long. In 2001 the NASD recognized this loophole between countries and trade laws and proposed to the SEC a modification to NASD Rule 3370 making it the responsibility of the member firm to insure AD was made and settlement could be achieved on time (SR-NASD-2001-85).
But while the NASD recognized this as a loophole, and as we have learned since that this loophole was widely used to commit fraud, the SEC Division of Market Regulation under the direction of now SEC Commissioner Annette Nazareth sat on the proposal. The SEC delaying the submission of notice for public comment on this proposal for several years; only allowing this rule to come into affect on April 1, 2004.
This fraud we now hear of 4 – 6 years later was committed at a time where the NASD recognized it as a problem and attempted to address it but the SEC ignored their warnings. Commissioner Annette Nazareth’s willingness to ignore issues of illegal shorting resulted in her failing in her duties to protect the issuers and the investors from Wall Street abuses.
And thus we get to the vehicle used to defraud; trade settlements.
The Securities and Exchange Commission is a Federal Agency created by Congress to protect our US markets and the investing public. In 1934 Congress created the Securities and Exchange Commission and over the years since recognized the need for a national clearance and settlement system. The SEC created this system we now recognize as the DTCC through the merging of several private entities and developing a quasi self-regulatory agency.
Under Section 17A of the Securities Act of 1934 came the demand that this system be created and that prompt and accurate settlement of trades be a priority. This is US Law pertaining to US Markets. Promulgated from 17A came Rules 15c3-3 and 15c6-1.
The fraud we now are learning about used the vehicle of settlement failure to work it’s magic. Three US Hedge Funds under the regulation of the SEC went up to Canada to circumvent US Laws by naked shorting US Securities into the US marketplace. The settlement failures, failures to receive at the US end, were accounted for on US member firm books and accounted for on the DTCC ledger. The US system created to protect the US markets failed.
In the simple case of the 23 separate dealings, and $7 Million in illegal gains, the DTCC and the member firms ignored their sole responsibilities to compliance of US Securities laws and allowed excessive fails to persist without question for periods exceeding 30 – 60 days according to the SEC complaint. The US member firms failed in complying with their side of rules 15c3-3 and 15c6-1 and in doing so become willing participants in the fraud.
The SEC even today refuses to recognize this breach of fiduciary responsibility to the US client involved in this trade by the member firms. It was systemic and therefore it must be forgiven.
To this very day the DTCC refuses to accept blame or responsibility for the settlement failures. The DTCC has created a public campaign to excuse the agency from blame yet the basic principle behind the fraud is the very nature of the DTCC existence – Trade Settlement.
Finally, the SEC complaint against Thorp and the three Madison Ave. Hedge Funds accuses Thorp of conspiring with US Broker-Dealers to hide the fraud through “wash trades” and “boxing.” The complaint does not identify who those Broker-Dealers are and/or whether any regulatory action was taken against them. According to a report out of the NY Times, Floyd Norris asked the SEC attorney Jeffrey Friestad who was in charge of this case whether the brokers involved would see an enforcement action. Friestad’s response was troubling as he reportedly claimed he would "look to see whether brokers had any responsibility for this and bring charges if appropriate."
The damn complaint all but identifies broker collusion and Friestad is deciding whether that is a violation?
What we do know is that this scheme to defraud lasted for over 2 years and affected 23 separate companies. We also know that one fund manger out of SG Cowen was accused in no fewer than 10 of these similar type conspiracies and TradeStation is accused in yet another 19 cases of illegal short selling through Bear Stearns. In addition we have cases settled with Rhino Advisors, Hedge Fund Manager Hilary Shane, Hedge Fund Manager John Mangan, and a pending settlement with Emanual Friedman for illegal short selling.
These enforcement activities all lead to something more than isolated cases involving a relatively non-issue as being portrayed by the SEC and SRO’s. In fact, a betting man would say that this has been a standard practice known to all.
Today, jobs are being lost, the financial stability of US Families is being stolen, and our future technologies are being cast aside to finance the greed of wealthy individuals of Wall Street. Hedge Funds that locate themselves on the prestige of Madison Ave. have to cheat to deliver profits to their ultra-wealthy clients. Schemes include setting up accounts in Canada just to circumvent the US laws illustrate the integrity of these individuals.
The fact that many of these companies were part of the medical field and may have a product that could save lives is irrelevant to those committing this fraud as it is all about who has the bigger yacht when you play in these circles. Safety of our nation and of our generations to come have no place in the bank accounts of these wealthy criminals.
It is time the SEC and other regulatory agencies are held accountable for their actions in allowing this abuse to prosper even as these small cases are brought forth. This type of fraud is not based on rogue individuals but is well known to those in the industry as merely standard practice. Like conflicts in stock research, special trading privileges (late trading/market timing) for Hedge Funds, and front running orders the regulators have waited until meaningful time has passed and the damage is beyond repair before any type of action is taken.
The insult in this particular case the SEC did not ban thorp from the Industry. The SEC instead settled on a monetary fine and made thorp promise to never violate THIS act again. The fact that Thorp did it a minimum of 23 times previously seems to slip past the geniuses who sit on the Commission of the SEC. This crime resulted in tens if not hundreds of millions in public investor losses and the SEC fines Thorp and his Funds a total of $13 Million in fines and disgorgement of gains. Far from a deterrent to a man of who operates three Hedge Funds on the prestigious Madison Ave. in New York.
The evidence is out there – all you have to do is look for it.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006