Post by jcline on Aug 30, 2006 8:59:23 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
How a Series of Clerical Errors leads to Stock Manipulation – August 30, 2006
David Patch
Imagine going into your local bank with a payroll check and making a deposit of that check into your account. The check was for $1000.00 but the clerk at the bank put in an extra zero and suddenly your deposit became $10,000. Your account balance was suddenly $9000.00 richer.
In the world of banking, these events may rarely happen but when they do the bank will quickly identify the error and make the necessary corrections. If the client had somehow spent some of the ill-due money the client would still be required to make proper restitution. Certainly there would be no expectation to keep the money. This chain of events transpires because banks are required to balance out the books.
But what happens when these "clerical errors" happen to take place in the dynamic world of the stock market?
Recently a small Nevada based company called Global Links found out and what they found may surprise you.
On February 1, 2005 Global Links executed a normal corporate action on Wall Street called a stock reverse split. While the reverse split ratio was less than normal, 1 share for every 350 shares held in your account, the process of a stock split is not. For Global Links, the reverse split was intended to bring the pricing of the security to levels where access to financing would be more prominent.
Effective February 1 the total number of shares issued and outstanding in the company was to be 1,158,064 shares, down from a pre-split level of slightly more than 405 Million shares.
But on February 1 something happened that was not to be expected by the company or by shareholders. Instead of taking the shareholder accounts and dividing the pre-split shares by 350, Wall Street firms left the total number of shares in many accounts as what was represented on previous trading days. A shareholder who had for example 350,000 shares pre-split still had 350,000 shares post-split leaving an excess of 349,000 shares in error.
The trading in Global Links post-split likewise saw the effects of excessive shares relative to shares issued and outstanding with settlement failures culminating above 27 Million shares from the trading activity of February 1. More than 30 million shares traded hands that day while realistically only slightly more than 1 million were eligible for trading. What comes from such tremendous volumes attached to trades that could not settle was a severely depressed market cap in the stock.
In fact, the market cap hit was so severe that a single investor purchased 111% of the companies issued and outstanding for a paltry $5000.00 by February 3.
So how does the simple clerical error by our Wall Street Institutions become stock manipulation?
According to some, those shareholders that sold out of their accounts the excess shares they had no right to could be at fault. Investors should have known the shares represented were in error and avoided the trading despite the rapid decline in the stock. The belief is that it is the shareholders responsibility to monitor the record keeping of the brokerage house and not the other way around. Or at least that is one interpretation of the blame game.
Others, including myself, look at this very differently.
In the scenario posed of the bank clerk making a clerical error, the issue was resolved by taking the money back from the party who was the recipient of the excess cash. No harm no foul.
But on Wall Street, stocks trade every day and in the case of Global Links, this stock has traded for 18 months with the illegal and excessive shares still floating in the market place. Instead of halting the stock upon the surfacing of a major problem Wall Street compliance offices and Wall Street regulators sat back and did nothing. There was no balancing of the books as what would happen at a bank.
The result was an injured investing class of people but worse, a company impaired by a severely manipulated market cap.
The equivalent scenario here would be if in that bank example above the bank allowed their client to keep the extra $9,000 that was the result of the clerical error and to debit the account of the corporation that issued that $1,000 payroll check an additional $9,000 to cover the error. Except here, there were thousands of these clerical errors that happened all at once.
According to the Securities Act of 1934, the SEC is empowered to seek civil penalties where such violation of the securities laws directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.
In the case of the clerical errors regarding the trading of Global Links, Wall Street failed repeatedly and consistently in violating the rules of trade settlement and denied all requesting shareholders of these failed trades access to physical delivery of shares purchased. The actions of these firms directly impacted the market capitalization of Global Links as the imbalance between supply and demand continued. Shareholders selling out there positions did so in a panicked market where market makers were failing to perform an orderly market in the security. See for yourself.
Prior to February 1 Global Links had traded near $0.01 with 400 Million shares in circulation. This equates to a near $4.0 million market cap. But on February 1, 2005 the stock opened trading at 9:42:52 at $0.10 with 1.1 million shares legally issued and outstanding reducing the market cap to $100,000 and from there the stock became quickly decimated on extreme volume. By 9:49:58 the stock posted a price of $0.01 and by 10:05:24 it had been reduced to $0.001. By now, over 3 million shares had been recorded trading, 3 times the legal shares issued, and the stock dropped 99% below pre-split levels. It took all of 20 minutes.
With only 1.1 Million shares issued and outstanding, the market cap was reduced to devastating lows of $990.00 in intra-day trading. February 1 closed at $0.001 representing a market cap of barely $1100.00.
The devastating trading on February 1 culminated with 27 million fails to deliver in the settlement system with the Depository Trust holding slightly less than 1 million shares to settle trades with. The fails have been reported by the SEC through a Freedom of Information request.
Global Links bank account [market cap] was besieged with debits [settlement failures] resulting from bank clerk errors [failure to execute a stock split] and 18 months later the investors and the business continue to pay the price. The bank [Brokerage Houses], however, has walked away free and clear of any accountability to a problem they themselves created.
Ironically, the SEC and NASD who have regulatory oversight over the member trading in this security picked up nothing of this event. The meteoric rise in the reported fails in Global Links at the Depository Trust, where fails to deliver are recorded, did not send off any red flags despite a newly active regulation focused directly at settlement failures.
Of concern is that the trading in Global Links should have been picked up without having Regulation SHO in place. But since Regulation SHO now existed, and a tighter focus on settlement failures was underway, this strange activity should have been an immediate bolt of lightning through every regulatory agency responsible. Global Links trade settlements went from near zero failures to 27 million failures literally overnight as investors lay victim to a market loss of 99% corresponding to such failures.
Fraud is defined as the manipulation of the price of a security. Whether it is to illegally pump up a stock price, raid a stock price, or to simply control pricing through a series of manipulative trades. For Global Links, the stock price, and resultant market cap, was clearly impacted by the trading activities taking place. While the activities may have been positioned off simple human error, the subsequent actions were calculated and thus manipulative and illegal.
In failing to initiate proper actions to address the clerical errors, compliance departments throughout Wall Street positioned their firms for stock manipulation charges. The fact that none seemed compelled to take any appropriate actions would imply that there was possibly collusion between firms to deny taking any action and that escalates simple manipulation into criminal fraud.
The question investors across this nation must ask is, if it was so easy to commit fraud in this case, how much similar type manipulative trading activities have we not yet brought to the surface and how many times have regulators in charge of monitoring brokerage firm activities instead turned a blind eye to the destructive efforts of Wall Street?
The SEC responded with a “no comment” to questions raised regarding the alarming spike in settlement failures and subsequent manipulation of the market cap in Global Links. Some 18 months later the SEC remains just as silent as they were in February 2005 regarding the protection of past and future investors of this security. So much for market transparency.
Special Note: On Tuesday the Attorney General of Louisiana issued a subpoena against UBS Financial seeking detailed information regarding UBS’ trading activities in Sedona Corporation stock. Sedona happens to be the only investigation the SEC has taken civil action on regarding the abusive trading of naked short selling. The SEC closed out an investigation in 2003 against Rhino Advisors, fining them $1 Million for attempting to destroy Sedona through the illegal shorting of securities.
It now appears that the state of Louisiana is not content with the SEC’s limited civil actions and has elected to look closer at Wall Street’s involvement in the confirmed stock manipulation. In taking such steps, another state has stepped up to the table and questioned the overall effectiveness and resolve of the Securities and Exchange Commission. Has the SEC simply denied the investing public adequate protection in efforts to insure Wall Street Institutions remained financially prosperous?
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
How a Series of Clerical Errors leads to Stock Manipulation – August 30, 2006
David Patch
Imagine going into your local bank with a payroll check and making a deposit of that check into your account. The check was for $1000.00 but the clerk at the bank put in an extra zero and suddenly your deposit became $10,000. Your account balance was suddenly $9000.00 richer.
In the world of banking, these events may rarely happen but when they do the bank will quickly identify the error and make the necessary corrections. If the client had somehow spent some of the ill-due money the client would still be required to make proper restitution. Certainly there would be no expectation to keep the money. This chain of events transpires because banks are required to balance out the books.
But what happens when these "clerical errors" happen to take place in the dynamic world of the stock market?
Recently a small Nevada based company called Global Links found out and what they found may surprise you.
On February 1, 2005 Global Links executed a normal corporate action on Wall Street called a stock reverse split. While the reverse split ratio was less than normal, 1 share for every 350 shares held in your account, the process of a stock split is not. For Global Links, the reverse split was intended to bring the pricing of the security to levels where access to financing would be more prominent.
Effective February 1 the total number of shares issued and outstanding in the company was to be 1,158,064 shares, down from a pre-split level of slightly more than 405 Million shares.
But on February 1 something happened that was not to be expected by the company or by shareholders. Instead of taking the shareholder accounts and dividing the pre-split shares by 350, Wall Street firms left the total number of shares in many accounts as what was represented on previous trading days. A shareholder who had for example 350,000 shares pre-split still had 350,000 shares post-split leaving an excess of 349,000 shares in error.
The trading in Global Links post-split likewise saw the effects of excessive shares relative to shares issued and outstanding with settlement failures culminating above 27 Million shares from the trading activity of February 1. More than 30 million shares traded hands that day while realistically only slightly more than 1 million were eligible for trading. What comes from such tremendous volumes attached to trades that could not settle was a severely depressed market cap in the stock.
In fact, the market cap hit was so severe that a single investor purchased 111% of the companies issued and outstanding for a paltry $5000.00 by February 3.
So how does the simple clerical error by our Wall Street Institutions become stock manipulation?
According to some, those shareholders that sold out of their accounts the excess shares they had no right to could be at fault. Investors should have known the shares represented were in error and avoided the trading despite the rapid decline in the stock. The belief is that it is the shareholders responsibility to monitor the record keeping of the brokerage house and not the other way around. Or at least that is one interpretation of the blame game.
Others, including myself, look at this very differently.
In the scenario posed of the bank clerk making a clerical error, the issue was resolved by taking the money back from the party who was the recipient of the excess cash. No harm no foul.
But on Wall Street, stocks trade every day and in the case of Global Links, this stock has traded for 18 months with the illegal and excessive shares still floating in the market place. Instead of halting the stock upon the surfacing of a major problem Wall Street compliance offices and Wall Street regulators sat back and did nothing. There was no balancing of the books as what would happen at a bank.
The result was an injured investing class of people but worse, a company impaired by a severely manipulated market cap.
The equivalent scenario here would be if in that bank example above the bank allowed their client to keep the extra $9,000 that was the result of the clerical error and to debit the account of the corporation that issued that $1,000 payroll check an additional $9,000 to cover the error. Except here, there were thousands of these clerical errors that happened all at once.
According to the Securities Act of 1934, the SEC is empowered to seek civil penalties where such violation of the securities laws directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.
In the case of the clerical errors regarding the trading of Global Links, Wall Street failed repeatedly and consistently in violating the rules of trade settlement and denied all requesting shareholders of these failed trades access to physical delivery of shares purchased. The actions of these firms directly impacted the market capitalization of Global Links as the imbalance between supply and demand continued. Shareholders selling out there positions did so in a panicked market where market makers were failing to perform an orderly market in the security. See for yourself.
Prior to February 1 Global Links had traded near $0.01 with 400 Million shares in circulation. This equates to a near $4.0 million market cap. But on February 1, 2005 the stock opened trading at 9:42:52 at $0.10 with 1.1 million shares legally issued and outstanding reducing the market cap to $100,000 and from there the stock became quickly decimated on extreme volume. By 9:49:58 the stock posted a price of $0.01 and by 10:05:24 it had been reduced to $0.001. By now, over 3 million shares had been recorded trading, 3 times the legal shares issued, and the stock dropped 99% below pre-split levels. It took all of 20 minutes.
With only 1.1 Million shares issued and outstanding, the market cap was reduced to devastating lows of $990.00 in intra-day trading. February 1 closed at $0.001 representing a market cap of barely $1100.00.
The devastating trading on February 1 culminated with 27 million fails to deliver in the settlement system with the Depository Trust holding slightly less than 1 million shares to settle trades with. The fails have been reported by the SEC through a Freedom of Information request.
Global Links bank account [market cap] was besieged with debits [settlement failures] resulting from bank clerk errors [failure to execute a stock split] and 18 months later the investors and the business continue to pay the price. The bank [Brokerage Houses], however, has walked away free and clear of any accountability to a problem they themselves created.
Ironically, the SEC and NASD who have regulatory oversight over the member trading in this security picked up nothing of this event. The meteoric rise in the reported fails in Global Links at the Depository Trust, where fails to deliver are recorded, did not send off any red flags despite a newly active regulation focused directly at settlement failures.
Of concern is that the trading in Global Links should have been picked up without having Regulation SHO in place. But since Regulation SHO now existed, and a tighter focus on settlement failures was underway, this strange activity should have been an immediate bolt of lightning through every regulatory agency responsible. Global Links trade settlements went from near zero failures to 27 million failures literally overnight as investors lay victim to a market loss of 99% corresponding to such failures.
Fraud is defined as the manipulation of the price of a security. Whether it is to illegally pump up a stock price, raid a stock price, or to simply control pricing through a series of manipulative trades. For Global Links, the stock price, and resultant market cap, was clearly impacted by the trading activities taking place. While the activities may have been positioned off simple human error, the subsequent actions were calculated and thus manipulative and illegal.
In failing to initiate proper actions to address the clerical errors, compliance departments throughout Wall Street positioned their firms for stock manipulation charges. The fact that none seemed compelled to take any appropriate actions would imply that there was possibly collusion between firms to deny taking any action and that escalates simple manipulation into criminal fraud.
The question investors across this nation must ask is, if it was so easy to commit fraud in this case, how much similar type manipulative trading activities have we not yet brought to the surface and how many times have regulators in charge of monitoring brokerage firm activities instead turned a blind eye to the destructive efforts of Wall Street?
The SEC responded with a “no comment” to questions raised regarding the alarming spike in settlement failures and subsequent manipulation of the market cap in Global Links. Some 18 months later the SEC remains just as silent as they were in February 2005 regarding the protection of past and future investors of this security. So much for market transparency.
Special Note: On Tuesday the Attorney General of Louisiana issued a subpoena against UBS Financial seeking detailed information regarding UBS’ trading activities in Sedona Corporation stock. Sedona happens to be the only investigation the SEC has taken civil action on regarding the abusive trading of naked short selling. The SEC closed out an investigation in 2003 against Rhino Advisors, fining them $1 Million for attempting to destroy Sedona through the illegal shorting of securities.
It now appears that the state of Louisiana is not content with the SEC’s limited civil actions and has elected to look closer at Wall Street’s involvement in the confirmed stock manipulation. In taking such steps, another state has stepped up to the table and questioned the overall effectiveness and resolve of the Securities and Exchange Commission. Has the SEC simply denied the investing public adequate protection in efforts to insure Wall Street Institutions remained financially prosperous?
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006