Post by jcline on Mar 17, 2006 17:56:02 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Unethical Behavior on Wall Street – March 17, 2006
David Patch
The Securities Exchange Act of 1934.
This was the document that was drafted by Congress that represented the incorporation of and charter for the Securities and Exchange Commission. This act was specifically created in response to the “Bear Raid” fraud committed during the market crash of 1929.
Section 17A of the Exchange Act of 1934 mandated that the Securities and Exchange Commission provide the markets with a national clearance and settlement system that would insure the prompt and accurate clearance and settlement of trades. The clearance representing the transfer of funds between buyer and seller and the settlement representing the transfer of custody of ownership of the securities traded.
In response to this Congressional mandate, modified over the years, the formation of the unified Depository Trust Clearing Corporation (DTCC) took place in 1999. Prior to 1999 the clearance and settlement operations were split between the Depository Trust Corporation (DTC) and the National Securities Clearing Corporation (NSCC) with the final merger between these two operations making up this now national system.
Since 1999, a significant level of fraud continues to transpire that has been associated with the “Bear Raids” of abusive short selling that ultimately became the preface to the Exchange Act of 1934 being drafted. Those trade settlement concerns that forced the formation of this national system clearance and settlement system.
The vehicle for the fraud transpiring is a failure in trade settlement as it was the failure in trade settlement that allowed for the Bear Raids Market Crash of 1929.
Over the past several years, the investing public has come to learn of the abusive trading practices through a series of regulatory enforcement actions and rule changes.
In 2003 the SEC brought civil charges against Rhino Advisors for aiding in the stock manipulation of Sedona. DOJ warrants include audio recordings of individuals involved conspiring to manipulate the stock using such catch phrases as “sell with unbridled levels of aggression” and “collapse the stock” when discussing the method to the short selling.
By 2004 the SEC had a civil compliant filed against a former SG Cowen Fund Manager accused of illegal shorting in a minimum of 10 separate Private Placement Equity deals (PIPE’s). That same year the NASD brought charges up against Hedge Fund manager Hilary Shane for illegal shorting during a PIPE deal. 2005 brought Refco Securities and Friedman, Billings & Ramsey into the fray as they filed with the SEC that they were in negotiations with the regulators over illegal shorting practices.
Also in 2005 short seller Anthony Elgindy was convicted in US Federal Court of stock fraud and racketeering associated with illegal shorting where the US prosecutor admitted that they held evidence of Elgindy and his network conspiring to manipulate a minimum of 40 publicly traded companies. By the end of 2005 the NASD had also settled charges against Market Maker Scott Ryan for aiding 3 Hedge Funds in illegally shorting securities.
In a short 2006, more SEC and NASD activities as the NASD settled charges with Hedge Fund Manager John Mangan for illegally shorting securities while the SEC brought charges against 3 Hedge Funds managed by Jeff Thorp for illegally shorting 23 publicly traded companies involving PIPE deals. Day Trading firm TradeStation also reported that they received a Wells Notice from the SEC regarding illegal shorting practices. The report stating that the SEC found fault in a minimum of 170+ short sale executions recently.
In all of these cases brought forth, the vehicle of fraud centered on the short seller not making good on the required date for delivery of shares for settlement. The most recent case by the SEC exposed the length to which the fraud reached as Jeff Thorp took his business up to Canada to purposely short without settlement into the US markets.
So what does the DTCC have to say about loopholes and flaws in their settlement operation being used to commit acts of securities fraud?
Stuart Goldstein, DTCC Managing Director of Corporate Communications denies the DTCC has any issues or that this is at all a problem.
In a memo Mr. Goldstein drafted to a concerned investor Goldstein claimed, “If the allegations [shorting abuse] had legs, you’d see regulators and law enforcement going after it.”
But that is exactly what they are doing.
The SEC drafted Regulation SHO identifying concerns over settlement failures and abusive short selling. In the proposal for change the SEC admitting that settlement failures create additional leverage to the seller and that leverage can be used to manipulate stocks. The NASD also proposed rule changes to tighten up the issues within settlement process. Further support to this problem existing comes through the have stepped up regulatory enforcement we have seen over recent years.
In addition to these facts as presented through regulatory enforcement is yet another indication that the DTCC settlement system is flawed.
On March 3, 2006 SEC Commissioner Paul Atkins stated in a “SEC Speaks” conference that bear raids due to abusive short selling exists in our markets and that the SEC has the authority and opportunity to correct it. With the Commission making a public comment such as this, there must be some evidence on hand at the SEC that indicates this to be a problem. Commissioner Atkins would not publicly expose a concern of this nature if an issue did not exist that required exposure.
Instead of recognizing these as changing times, Goldstein further states in his memo that “the only fraud here are the gross misrepresentations of the truth by folks who are being paid to issue these reports [about naked shorting].” Is Goldstein actually rationalizing that those who get paid would lie and misrepresent facts, tarnishing their reputations, just to make Goldstein and the DTCC look bad?
Comments like these are baseless and irresponsible and should not be condoned by the Executive Team at the DTCC. Goldstein is himself paid by the DTCC to defend their position and has been frequently caught making statements containing factual inaccuracies. Something Mr. Goldstein apparently has no concern over. Calls to discuss these comments with Stuart Goldstein were not returned.
Today the system is broken regardless of what the Wall Street controlled DTCC has to say. Trade settlement failures account for as much as $6 Billion in daily aged and new failures according to the DTCC’s own General Counsel. The DTCC also claims that as much as 1% of the trades fail annually which could represent as much as $10 trillion in the $1.1 Quadrillion annual settlement system operated by the DTCC. The DTCC reports that this is merely business as usual.
In 1934 Congress recognized the need to tighten up trade settlements and later mandated the SEC to tighten it more through the creation of a national clearance and settlement system. Rules such as 15c3-3 and 15c6-1 were enacted to provide for the authority to impose regulatory enforcement when abuses occurred.
Instead of following through with the spirit of the laws, the regulators and the system ignored their duties to protect the investing public. I personally could not find a single enforcement case where a violation of 5c3-3 or 15c6-1 was charged. Yet, the level of cases brought forth and the shear magnitude in the dollar value of settlement failures that exist at the DTCC is evidence that violations have become commonplace in the industry.
Bear Raids that took down our markets in 1929 exist today because of regulatory neglect in the enforcement of Rules15c3-3 and 15c6-1. In addition, the DTCC has failed to take on the role responsibly in the prompt settlement of trades, as written specifically into the contents of Section 17A of the 1934 Act. Together, our markets continue to endanger the financial security of the middle class retail investor and the small development level companies that make up our local communities.
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
Unethical Behavior on Wall Street – March 17, 2006
David Patch
The Securities Exchange Act of 1934.
This was the document that was drafted by Congress that represented the incorporation of and charter for the Securities and Exchange Commission. This act was specifically created in response to the “Bear Raid” fraud committed during the market crash of 1929.
Section 17A of the Exchange Act of 1934 mandated that the Securities and Exchange Commission provide the markets with a national clearance and settlement system that would insure the prompt and accurate clearance and settlement of trades. The clearance representing the transfer of funds between buyer and seller and the settlement representing the transfer of custody of ownership of the securities traded.
In response to this Congressional mandate, modified over the years, the formation of the unified Depository Trust Clearing Corporation (DTCC) took place in 1999. Prior to 1999 the clearance and settlement operations were split between the Depository Trust Corporation (DTC) and the National Securities Clearing Corporation (NSCC) with the final merger between these two operations making up this now national system.
Since 1999, a significant level of fraud continues to transpire that has been associated with the “Bear Raids” of abusive short selling that ultimately became the preface to the Exchange Act of 1934 being drafted. Those trade settlement concerns that forced the formation of this national system clearance and settlement system.
The vehicle for the fraud transpiring is a failure in trade settlement as it was the failure in trade settlement that allowed for the Bear Raids Market Crash of 1929.
Over the past several years, the investing public has come to learn of the abusive trading practices through a series of regulatory enforcement actions and rule changes.
In 2003 the SEC brought civil charges against Rhino Advisors for aiding in the stock manipulation of Sedona. DOJ warrants include audio recordings of individuals involved conspiring to manipulate the stock using such catch phrases as “sell with unbridled levels of aggression” and “collapse the stock” when discussing the method to the short selling.
By 2004 the SEC had a civil compliant filed against a former SG Cowen Fund Manager accused of illegal shorting in a minimum of 10 separate Private Placement Equity deals (PIPE’s). That same year the NASD brought charges up against Hedge Fund manager Hilary Shane for illegal shorting during a PIPE deal. 2005 brought Refco Securities and Friedman, Billings & Ramsey into the fray as they filed with the SEC that they were in negotiations with the regulators over illegal shorting practices.
Also in 2005 short seller Anthony Elgindy was convicted in US Federal Court of stock fraud and racketeering associated with illegal shorting where the US prosecutor admitted that they held evidence of Elgindy and his network conspiring to manipulate a minimum of 40 publicly traded companies. By the end of 2005 the NASD had also settled charges against Market Maker Scott Ryan for aiding 3 Hedge Funds in illegally shorting securities.
In a short 2006, more SEC and NASD activities as the NASD settled charges with Hedge Fund Manager John Mangan for illegally shorting securities while the SEC brought charges against 3 Hedge Funds managed by Jeff Thorp for illegally shorting 23 publicly traded companies involving PIPE deals. Day Trading firm TradeStation also reported that they received a Wells Notice from the SEC regarding illegal shorting practices. The report stating that the SEC found fault in a minimum of 170+ short sale executions recently.
In all of these cases brought forth, the vehicle of fraud centered on the short seller not making good on the required date for delivery of shares for settlement. The most recent case by the SEC exposed the length to which the fraud reached as Jeff Thorp took his business up to Canada to purposely short without settlement into the US markets.
So what does the DTCC have to say about loopholes and flaws in their settlement operation being used to commit acts of securities fraud?
Stuart Goldstein, DTCC Managing Director of Corporate Communications denies the DTCC has any issues or that this is at all a problem.
In a memo Mr. Goldstein drafted to a concerned investor Goldstein claimed, “If the allegations [shorting abuse] had legs, you’d see regulators and law enforcement going after it.”
But that is exactly what they are doing.
The SEC drafted Regulation SHO identifying concerns over settlement failures and abusive short selling. In the proposal for change the SEC admitting that settlement failures create additional leverage to the seller and that leverage can be used to manipulate stocks. The NASD also proposed rule changes to tighten up the issues within settlement process. Further support to this problem existing comes through the have stepped up regulatory enforcement we have seen over recent years.
In addition to these facts as presented through regulatory enforcement is yet another indication that the DTCC settlement system is flawed.
On March 3, 2006 SEC Commissioner Paul Atkins stated in a “SEC Speaks” conference that bear raids due to abusive short selling exists in our markets and that the SEC has the authority and opportunity to correct it. With the Commission making a public comment such as this, there must be some evidence on hand at the SEC that indicates this to be a problem. Commissioner Atkins would not publicly expose a concern of this nature if an issue did not exist that required exposure.
Instead of recognizing these as changing times, Goldstein further states in his memo that “the only fraud here are the gross misrepresentations of the truth by folks who are being paid to issue these reports [about naked shorting].” Is Goldstein actually rationalizing that those who get paid would lie and misrepresent facts, tarnishing their reputations, just to make Goldstein and the DTCC look bad?
Comments like these are baseless and irresponsible and should not be condoned by the Executive Team at the DTCC. Goldstein is himself paid by the DTCC to defend their position and has been frequently caught making statements containing factual inaccuracies. Something Mr. Goldstein apparently has no concern over. Calls to discuss these comments with Stuart Goldstein were not returned.
Today the system is broken regardless of what the Wall Street controlled DTCC has to say. Trade settlement failures account for as much as $6 Billion in daily aged and new failures according to the DTCC’s own General Counsel. The DTCC also claims that as much as 1% of the trades fail annually which could represent as much as $10 trillion in the $1.1 Quadrillion annual settlement system operated by the DTCC. The DTCC reports that this is merely business as usual.
In 1934 Congress recognized the need to tighten up trade settlements and later mandated the SEC to tighten it more through the creation of a national clearance and settlement system. Rules such as 15c3-3 and 15c6-1 were enacted to provide for the authority to impose regulatory enforcement when abuses occurred.
Instead of following through with the spirit of the laws, the regulators and the system ignored their duties to protect the investing public. I personally could not find a single enforcement case where a violation of 5c3-3 or 15c6-1 was charged. Yet, the level of cases brought forth and the shear magnitude in the dollar value of settlement failures that exist at the DTCC is evidence that violations have become commonplace in the industry.
Bear Raids that took down our markets in 1929 exist today because of regulatory neglect in the enforcement of Rules15c3-3 and 15c6-1. In addition, the DTCC has failed to take on the role responsibly in the prompt settlement of trades, as written specifically into the contents of Section 17A of the 1934 Act. Together, our markets continue to endanger the financial security of the middle class retail investor and the small development level companies that make up our local communities.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006