Post by jcline on Jun 3, 2006 10:37:17 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Refco Trade Data Verifies Market Raid on Stock – June 3, 2006
David Patch
How many of you readers successfully lived through the tech crash of the late 90’s and early 2000? Were you successful in selling out of your portfolio before the stocks you owned crashed like a meteor on nearly no news? Well maybe there was a reason most failed to survive.
This weeks Wall Street Journals Trading Shots column put the subject of hedge fund regulation on the table. The two parties sparring over this controversy are Bill Cara, a former trader with who built two successful trading operations from scratch and Brett Duval Fromson, a former staff reporter for the Washington Post and Fortune magazine.
While Cara seeks higher regulations on the secretive funds, Fromson sees the markets and hedge funds differently. Fromson stands by the position that if hedge funds were so dubious, why haven’t there been any Enron like scandals attached to the hedge fund industry.
According to Fromson, hedge funds do not pose any grave threats to the market because “during the stock market collapse of 2000-2001, hedge funds provided excellent returns to the lucky few when most investors were getting clobbered. Such moments of relative virtue far outweigh the few, small scandals.”
But what if the excellent returns to the wealthy investors were in fact manufactured through acts against the investing public? Would that not make the argument that an Enron type scandal exists it just hasn’t been brought to the public’s awareness as of yet?
To explain the collapse of 2000, let’s consider several more recent events that could be used to look back in time to the markets of 2000/2001.
In October 2005 Refco Inc. imploded on news of an accounting scandal associated with over $400 Million in hidden debt. The news broke on a Sunday evening and by market Monday the impacts were clear and decisive. Refco closed Monday October 10, 2005 down 47%. By Thursday pre-market the NYSE halted trading as the bad news continued, as did the sell off. The stock at the time of the trade halt was now down an amazing 74%.
Recent Continuous Net Settlement (CNS) information gathered under the Freedom of Information Act (FOIA) provided insight into these few days of trading and how the markets and the hedge funds respond to areas of potential “excellent returns.” The insight is disturbing and if used to reconsider how the markets may have operated in 2000/2001 it is downright frightful.
Refco Inc. went public in August 2005 and was heralded as a success by much of Wall Street. The day of the IPO Refco Executives rang the opening bell and the stock responded with nothing but positive buy-side interest. The stock exploded to near 25% returns on the opening day.
For the next few months, the reported short position in Refco stayed relatively low, as did the levels of trade settlement failures as evidence suggests in the FOIA response from the SEC. In fact, the level of settlement failures leading into October 10, 2005 had been consistently below 10,000 shares as they were represented for the that last trade day leading up to the implosion.
Yet, on Monday October 10, 2005 the market responded and responded hard to the news of a scandal announced only a day earlier. By the end of the day short sellers, specialists, and day traders traded a reported volume of 24 Million shares, nearly the entire shares outstanding. Of those shares traded, 314,000 shares failed to make proper settlement three days later. Some $5.0 - $6.5 million in excessive sales was executed into the markets, Millions of dollars worth of sales that were purchased by unsuspecting investors. By the time these trades were eventually settled, the seller was fortunate to buy back the failed trade below $1.00 netting nearly the entire $6 Million in profits.
What we know of the trading in Refco is that hedge funds were soaking up all the available shares to short and in doing so creating massive sell side pressure. By the level of fails that concluded the trade day, it would appear some may have been given the opportunity to continue to sell even after the number of available shares vanished. Those holding the stock long got crushed and got crushed at the hands of a sell side raid on the security.
Some have asked whether these fails in settlement can be attributed to bona-fide market making, which allows specialists to sell short on shares not in inventory to flatten out a market. The answer is no as this market was in a free fall and thus no justifications could be made in keeping an orderly market by becoming a seller in a sell off. Thus, we are left to conclude that the fails to settle was nothing short of more special privilege allotted to preferred clients – Hedge Funds.
If it can happen in 2006 for one company during a “stable market,” imagine what could take place when the whole market was in a free fall? How would the efficiency of trade settlement work in a bear market where sellers outweigh buyers by heavy margins?
Over the past few years the SEC and NASD have undertaken enforcement actions against firms and hedge funds for their participation in the illegal sale of securities during private placement (PIPE) financing deals. The root to the fraud is the sale of securities that do not yet exist resulting in a settlement failure in the market. The failure created is later closed out with shares registered by the company only after the deal in consummated. Records show that the enforcement actions recently taken date back to the 2000/2001 trading period.
For Wall Street trade settlement failures became standard practice and accepted as normal regardless of what that meant to the buy-side market. The issue became so pervasive that the SEC drafted and released new law; Regulation SHO that had the specific intent of shutting down the high levels of fails the market was beginning to accept in trades executed. The SEC released the new law in June 2004.
For those that remember back to the last market crash and to those days where you worried over what that meant to your future retirement plans just think, those moments of stress and anxiety in your modest household may have induced pleasure into the estate of some wealthy hedge fund investor who illegally raided your portfolio.
Yes hedge funds create liquidity and can be good for the markets but to say hedge funds do not impact the investing public is flat out wrong. Wall Street has grown accustom to catering to these funds and the revenue these funds bring into the firms. With the opportunity to make higher profits, Wall Street has never shied away from breaking a few rules. The collusion to defraud orchestrated between Wall Street and Hedge Funds can result in damages a thousand times greater than the damage Enron wreaked on their investors. This type of fraud can impact any investor at any time and does.
The irony here in the Refco trading is that Refco was under investigation by the SEC for exactly this type of abusive trading practice. Refco was a firm the SEC had accused of manipulating stocks by selling short aggressively on shares that did not in fact exist to short. In October 2005 Wall Street ate one of their own as Wall Street put a market raid on a raider. And that $6 Million in illegal profits, rest assured there was far greater ill-gotten gains than that. Wall Street has ways of hiding reported fails using a system called ex-clearing and wash trading. Refco the raider showed us that as well.
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
Refco Trade Data Verifies Market Raid on Stock – June 3, 2006
David Patch
How many of you readers successfully lived through the tech crash of the late 90’s and early 2000? Were you successful in selling out of your portfolio before the stocks you owned crashed like a meteor on nearly no news? Well maybe there was a reason most failed to survive.
This weeks Wall Street Journals Trading Shots column put the subject of hedge fund regulation on the table. The two parties sparring over this controversy are Bill Cara, a former trader with who built two successful trading operations from scratch and Brett Duval Fromson, a former staff reporter for the Washington Post and Fortune magazine.
While Cara seeks higher regulations on the secretive funds, Fromson sees the markets and hedge funds differently. Fromson stands by the position that if hedge funds were so dubious, why haven’t there been any Enron like scandals attached to the hedge fund industry.
According to Fromson, hedge funds do not pose any grave threats to the market because “during the stock market collapse of 2000-2001, hedge funds provided excellent returns to the lucky few when most investors were getting clobbered. Such moments of relative virtue far outweigh the few, small scandals.”
But what if the excellent returns to the wealthy investors were in fact manufactured through acts against the investing public? Would that not make the argument that an Enron type scandal exists it just hasn’t been brought to the public’s awareness as of yet?
To explain the collapse of 2000, let’s consider several more recent events that could be used to look back in time to the markets of 2000/2001.
In October 2005 Refco Inc. imploded on news of an accounting scandal associated with over $400 Million in hidden debt. The news broke on a Sunday evening and by market Monday the impacts were clear and decisive. Refco closed Monday October 10, 2005 down 47%. By Thursday pre-market the NYSE halted trading as the bad news continued, as did the sell off. The stock at the time of the trade halt was now down an amazing 74%.
Recent Continuous Net Settlement (CNS) information gathered under the Freedom of Information Act (FOIA) provided insight into these few days of trading and how the markets and the hedge funds respond to areas of potential “excellent returns.” The insight is disturbing and if used to reconsider how the markets may have operated in 2000/2001 it is downright frightful.
Refco Inc. went public in August 2005 and was heralded as a success by much of Wall Street. The day of the IPO Refco Executives rang the opening bell and the stock responded with nothing but positive buy-side interest. The stock exploded to near 25% returns on the opening day.
For the next few months, the reported short position in Refco stayed relatively low, as did the levels of trade settlement failures as evidence suggests in the FOIA response from the SEC. In fact, the level of settlement failures leading into October 10, 2005 had been consistently below 10,000 shares as they were represented for the that last trade day leading up to the implosion.
Yet, on Monday October 10, 2005 the market responded and responded hard to the news of a scandal announced only a day earlier. By the end of the day short sellers, specialists, and day traders traded a reported volume of 24 Million shares, nearly the entire shares outstanding. Of those shares traded, 314,000 shares failed to make proper settlement three days later. Some $5.0 - $6.5 million in excessive sales was executed into the markets, Millions of dollars worth of sales that were purchased by unsuspecting investors. By the time these trades were eventually settled, the seller was fortunate to buy back the failed trade below $1.00 netting nearly the entire $6 Million in profits.
What we know of the trading in Refco is that hedge funds were soaking up all the available shares to short and in doing so creating massive sell side pressure. By the level of fails that concluded the trade day, it would appear some may have been given the opportunity to continue to sell even after the number of available shares vanished. Those holding the stock long got crushed and got crushed at the hands of a sell side raid on the security.
Some have asked whether these fails in settlement can be attributed to bona-fide market making, which allows specialists to sell short on shares not in inventory to flatten out a market. The answer is no as this market was in a free fall and thus no justifications could be made in keeping an orderly market by becoming a seller in a sell off. Thus, we are left to conclude that the fails to settle was nothing short of more special privilege allotted to preferred clients – Hedge Funds.
If it can happen in 2006 for one company during a “stable market,” imagine what could take place when the whole market was in a free fall? How would the efficiency of trade settlement work in a bear market where sellers outweigh buyers by heavy margins?
Over the past few years the SEC and NASD have undertaken enforcement actions against firms and hedge funds for their participation in the illegal sale of securities during private placement (PIPE) financing deals. The root to the fraud is the sale of securities that do not yet exist resulting in a settlement failure in the market. The failure created is later closed out with shares registered by the company only after the deal in consummated. Records show that the enforcement actions recently taken date back to the 2000/2001 trading period.
For Wall Street trade settlement failures became standard practice and accepted as normal regardless of what that meant to the buy-side market. The issue became so pervasive that the SEC drafted and released new law; Regulation SHO that had the specific intent of shutting down the high levels of fails the market was beginning to accept in trades executed. The SEC released the new law in June 2004.
For those that remember back to the last market crash and to those days where you worried over what that meant to your future retirement plans just think, those moments of stress and anxiety in your modest household may have induced pleasure into the estate of some wealthy hedge fund investor who illegally raided your portfolio.
Yes hedge funds create liquidity and can be good for the markets but to say hedge funds do not impact the investing public is flat out wrong. Wall Street has grown accustom to catering to these funds and the revenue these funds bring into the firms. With the opportunity to make higher profits, Wall Street has never shied away from breaking a few rules. The collusion to defraud orchestrated between Wall Street and Hedge Funds can result in damages a thousand times greater than the damage Enron wreaked on their investors. This type of fraud can impact any investor at any time and does.
The irony here in the Refco trading is that Refco was under investigation by the SEC for exactly this type of abusive trading practice. Refco was a firm the SEC had accused of manipulating stocks by selling short aggressively on shares that did not in fact exist to short. In October 2005 Wall Street ate one of their own as Wall Street put a market raid on a raider. And that $6 Million in illegal profits, rest assured there was far greater ill-gotten gains than that. Wall Street has ways of hiding reported fails using a system called ex-clearing and wash trading. Refco the raider showed us that as well.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006