Post by jcline on Aug 9, 2006 19:34:29 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
The Abuses of Short Selling Continue to be Exposed – Aug 9, 2006
David Patch
For years the investing public has been spoon-fed the philosophy that any and all short selling is good for the markets and good for the investing public. Short selling creates liquidity and short selling places controls in an otherwise out of control marketplace.
As securities regulators, hedge funds managers, several Fed. Reserve spokesmen, and members of Congress routinely delivered this insight with enough sugar coating to make you sick, something was happening behind the scenes that was going undetected. Fraud was taking place.
Wednesday on CNBC’s Squawk Box commentator Charles Gasparino discussed the NYSE’s growing concerns over short selling abuses. This time, while the NYSE investigation into the suspect short selling of the Vonage (NYSE: VG) IPO remains open, the NYSE has initiated a separate investigation into the apparent run up in short selling interests in Bristol-Meyer Squibb (NYSE: BMY) prior to the companies public announcement of a federal probe into the company.
According to Gasparino, the short interest in BMY increased from 27 Million shares reported for June 15 to over 47 Million shares reported for July 15 with this meteoric increase taking place just prior to the public announcement of the federal investigation. Since the news became public in late July the stock has experienced a 20% drop off. At the more than $4.00/share drop in stock price, the additional 20 million shorts will have netted a hefty $80 Million in profits.
The question I would ask is, how did a short seller(s) gain access to information regarding a federal probe into the company and who are these short sellers who became so fortunate? I will bet you anything it was not your average investor as these short sales totaled over $500 Million in trades executed if you consider that the 20 Million short sales were executed at $25/share.
Gasparino further stated in his blog, “In recent months, regulators have increased oversight of the once lightly regulated market for short selling.”
It is that “light regulation” that continues to be a thorn in the side of the investing public as the investing public is typically the victim of securities fraud while those that can afford $500 million in short sales are generally overlooked by the regulators.
Yet, on a day where Gasparino was openly discussing what appears to be insider trading [short selling] ahead of the news of a federal investigation, the NY Post was running a story regarding a possible $100 Million loss to Dutch Bank ABN Amro over the implosion of a hedge fund, Motherrock, that was over extended with short interests the fund can no longer afford to cover.
The Post claims that the positions, 1 million futures and options contracts on natural gas, which were mostly bets on the falling price of natural gas, now have to be covered to close them out. The Post identified that most likely the cost of such a close out will be substantial because of the rise in gas prices.
Beyond the $100 Million loss the bank will most likely suffer is the possibility that a deal that was near conclusion will now be scrapped completely or re-written for a lesser value. The Post article stating, “The massive bloodletting could threaten ABN's $386 million deal to sell its global futures business to Swiss investment bank UBS. That deal, struck in May, is not expected to close until October, but ABN's losses are likely to trigger provisions that could kill the deal or lower the price, sources said.”
Now does the fact that the media is bringing to light capital markets related issues that to date has seen little if any regulatory attentions ring any bells for you? If not, it should.
If you put yourself back into that time machine and press year 2000 or 2001 you could find yourself sitting in the audience of the Senate Banking Hearing on research conflicts of interest. You would lay witness to Banking Chairman Richard Shelby preaching on why the Banking Committee and the regulators could ill afford to miss the red flags again. The signs were out there we just missed them Sen. Shelby would be saying as he and the team promised to never miss these red flags again.
So back to 2006 we go and now we have abusive and illegal short selling and those out of control hedge funds that have simply been ignored for the sake of liquidity.
The red flags have not only been raised but have become tattered over the years as thousands of investors and issuers filed complaints that fell on the deaf ears of the regulators and the members of Congress. Congress and the Federal Reserve even ignored the comments of former SEC Chairman William Donaldson in 2004 when he asked the Fed Chairman “How much fraud are you willing to accept for liquidity?” Fraud…Liquidity…Fraud…Liquidity; Tough call.
The Fed. Ultimately responded to Donaldson by defending the significant role hedge funds play in our capital markets and what little risk they pose to the general public. A position the Fed remains grounded on. Congress and the White House simply ran Donaldson out of town.
The regulatory belief that a “pump and dump” is real but not a “short and distort” is simply wrong. The belief that insider trading only takes place when it is on the long side of a trade and not the short side of a trade is acting uneducated. And finally, the belief that hedge funds and the activities of these hedge funds only impact the investors who play in these investment pools is irresponsible.
While the demise of a single bank deal or the implosion of yet another small hedge fund should not be a matter of concern, the fact that these events are starting to escalate in numbers should be.
In the past few years we have seen hedge fund fraud on the rise through one scandalous event after another. Market timing, illegal shorting ahead of PIPE placements, Ponzi schemes, and the increase in lawsuits accusing hedge funds of manipulation are simply the latest in developments against the hedge fund industry.
Now consider the impact the failure of Motherrock Fund has had on ABN Amro, and consider the complete destruction of Refco Securities and Austrian based BAWAG due to failed short positions and the inability to close out the debt and you really have to wonder why this practice has remained so unregulated for as long as it has. As these funds impacted the operations of these banks and businesses the impacts went beyond simply brick and mortal but into the households of the innocent people and investors. This impact is rarely addressed by the cheerleaders for the hedge funds and the liquidity these funds bring to our capital markets.
Today the SEC has a proposed rule change to short selling rules merely 18 months after creating the rule in the first place.
Regulation SHO as it is called was supposed to address these short selling abuses but instead of addressing them, and limiting capital market liabilities, the SEC allowed Wall Street to continue with the abuse. It is what the wealthy hedge fund managers requested and what the Securities Industry Association, the lobbyist group representing Wall Street, worked diligently to achieve.
The proposal published by the SEC is riddled with conflicts of interest where Wall Street continues to be provided leverage and privilege over the investor. The SEC does this to insure they can stay healthy even if you can’t. The SEC has failed to understand the ramifications of what was disclosed today by Gasparino and the NY Post – Short Selling abuses, if not put under control, will destroy our markets and our economy.
I agree that our markets need a certain level of liquidity but that was what the market making exemptions were intended to create. To fail to regulate the liquidity and liability the hedge fund industry adds to the marketplace takes a good opportunity and turns it sour.
The red flags are out there and in full view for all to see. As the tattered ones finally blow away with the destruction of yet another public company new flags of concern quickly appear on news like we heard today.
If the members of Congressional oversight committees and the SEC conducted their duties responsibly we may be able to take down a few of these flags before they too become the tattered signs of a victim destroyed by the regulatory negligence.
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
The Abuses of Short Selling Continue to be Exposed – Aug 9, 2006
David Patch
For years the investing public has been spoon-fed the philosophy that any and all short selling is good for the markets and good for the investing public. Short selling creates liquidity and short selling places controls in an otherwise out of control marketplace.
As securities regulators, hedge funds managers, several Fed. Reserve spokesmen, and members of Congress routinely delivered this insight with enough sugar coating to make you sick, something was happening behind the scenes that was going undetected. Fraud was taking place.
Wednesday on CNBC’s Squawk Box commentator Charles Gasparino discussed the NYSE’s growing concerns over short selling abuses. This time, while the NYSE investigation into the suspect short selling of the Vonage (NYSE: VG) IPO remains open, the NYSE has initiated a separate investigation into the apparent run up in short selling interests in Bristol-Meyer Squibb (NYSE: BMY) prior to the companies public announcement of a federal probe into the company.
According to Gasparino, the short interest in BMY increased from 27 Million shares reported for June 15 to over 47 Million shares reported for July 15 with this meteoric increase taking place just prior to the public announcement of the federal investigation. Since the news became public in late July the stock has experienced a 20% drop off. At the more than $4.00/share drop in stock price, the additional 20 million shorts will have netted a hefty $80 Million in profits.
The question I would ask is, how did a short seller(s) gain access to information regarding a federal probe into the company and who are these short sellers who became so fortunate? I will bet you anything it was not your average investor as these short sales totaled over $500 Million in trades executed if you consider that the 20 Million short sales were executed at $25/share.
Gasparino further stated in his blog, “In recent months, regulators have increased oversight of the once lightly regulated market for short selling.”
It is that “light regulation” that continues to be a thorn in the side of the investing public as the investing public is typically the victim of securities fraud while those that can afford $500 million in short sales are generally overlooked by the regulators.
Yet, on a day where Gasparino was openly discussing what appears to be insider trading [short selling] ahead of the news of a federal investigation, the NY Post was running a story regarding a possible $100 Million loss to Dutch Bank ABN Amro over the implosion of a hedge fund, Motherrock, that was over extended with short interests the fund can no longer afford to cover.
The Post claims that the positions, 1 million futures and options contracts on natural gas, which were mostly bets on the falling price of natural gas, now have to be covered to close them out. The Post identified that most likely the cost of such a close out will be substantial because of the rise in gas prices.
Beyond the $100 Million loss the bank will most likely suffer is the possibility that a deal that was near conclusion will now be scrapped completely or re-written for a lesser value. The Post article stating, “The massive bloodletting could threaten ABN's $386 million deal to sell its global futures business to Swiss investment bank UBS. That deal, struck in May, is not expected to close until October, but ABN's losses are likely to trigger provisions that could kill the deal or lower the price, sources said.”
Now does the fact that the media is bringing to light capital markets related issues that to date has seen little if any regulatory attentions ring any bells for you? If not, it should.
If you put yourself back into that time machine and press year 2000 or 2001 you could find yourself sitting in the audience of the Senate Banking Hearing on research conflicts of interest. You would lay witness to Banking Chairman Richard Shelby preaching on why the Banking Committee and the regulators could ill afford to miss the red flags again. The signs were out there we just missed them Sen. Shelby would be saying as he and the team promised to never miss these red flags again.
So back to 2006 we go and now we have abusive and illegal short selling and those out of control hedge funds that have simply been ignored for the sake of liquidity.
The red flags have not only been raised but have become tattered over the years as thousands of investors and issuers filed complaints that fell on the deaf ears of the regulators and the members of Congress. Congress and the Federal Reserve even ignored the comments of former SEC Chairman William Donaldson in 2004 when he asked the Fed Chairman “How much fraud are you willing to accept for liquidity?” Fraud…Liquidity…Fraud…Liquidity; Tough call.
The Fed. Ultimately responded to Donaldson by defending the significant role hedge funds play in our capital markets and what little risk they pose to the general public. A position the Fed remains grounded on. Congress and the White House simply ran Donaldson out of town.
The regulatory belief that a “pump and dump” is real but not a “short and distort” is simply wrong. The belief that insider trading only takes place when it is on the long side of a trade and not the short side of a trade is acting uneducated. And finally, the belief that hedge funds and the activities of these hedge funds only impact the investors who play in these investment pools is irresponsible.
While the demise of a single bank deal or the implosion of yet another small hedge fund should not be a matter of concern, the fact that these events are starting to escalate in numbers should be.
In the past few years we have seen hedge fund fraud on the rise through one scandalous event after another. Market timing, illegal shorting ahead of PIPE placements, Ponzi schemes, and the increase in lawsuits accusing hedge funds of manipulation are simply the latest in developments against the hedge fund industry.
Now consider the impact the failure of Motherrock Fund has had on ABN Amro, and consider the complete destruction of Refco Securities and Austrian based BAWAG due to failed short positions and the inability to close out the debt and you really have to wonder why this practice has remained so unregulated for as long as it has. As these funds impacted the operations of these banks and businesses the impacts went beyond simply brick and mortal but into the households of the innocent people and investors. This impact is rarely addressed by the cheerleaders for the hedge funds and the liquidity these funds bring to our capital markets.
Today the SEC has a proposed rule change to short selling rules merely 18 months after creating the rule in the first place.
Regulation SHO as it is called was supposed to address these short selling abuses but instead of addressing them, and limiting capital market liabilities, the SEC allowed Wall Street to continue with the abuse. It is what the wealthy hedge fund managers requested and what the Securities Industry Association, the lobbyist group representing Wall Street, worked diligently to achieve.
The proposal published by the SEC is riddled with conflicts of interest where Wall Street continues to be provided leverage and privilege over the investor. The SEC does this to insure they can stay healthy even if you can’t. The SEC has failed to understand the ramifications of what was disclosed today by Gasparino and the NY Post – Short Selling abuses, if not put under control, will destroy our markets and our economy.
I agree that our markets need a certain level of liquidity but that was what the market making exemptions were intended to create. To fail to regulate the liquidity and liability the hedge fund industry adds to the marketplace takes a good opportunity and turns it sour.
The red flags are out there and in full view for all to see. As the tattered ones finally blow away with the destruction of yet another public company new flags of concern quickly appear on news like we heard today.
If the members of Congressional oversight committees and the SEC conducted their duties responsibly we may be able to take down a few of these flags before they too become the tattered signs of a victim destroyed by the regulatory negligence.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006