Post by jcline on Nov 1, 2006 13:42:33 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
SEC Breaks into Naked Short Enforcement - November 1, 2006
David Patch
Bloomberg, the Wall Street Journal, and the NY Post are all reporting the pending SEC civil action against the $7 Billion hedge fund Sandell Asset Management Corp.
The SEC staff plans to recommend the commission take civil action against Sandell Asset Management Corp. for trading in shares of Hibernia Corp. according to investors in Sandell who have been informed of the investigation by Sandell management. One of the accused is reportedly the founder of Sandell and former Bear Stearns senior managing director Thomas Sandell.
The allegations being exposed are related to a buyout opportunity whereby Hibernia, a New Orleans-based bank had agreed to be bought by Capital One Financial Corp. Sandell had taken out long positions on the buyout until Hurricane Katrina hit the south and had a devastating effect on the Hibernia business model.
Responding to possible reductions in the Capital One offer due to the devastating distruction, Sandell allegedly began shorting the stock in Hibernia beginning in March of 2005. The short interest by Sandell was taking place at a time the stocks value dropped 11% and the shorts being executed did not meet the guidelines for settlement required by law.
The SEC is bringing a naked shorting case against Sandell making this the first of its kind. There have been prior cases where naked shorting abuse resulted in enforcement but in each of the prior cases, the allegations stemmed from a financing deal where the short seller was the participant offering the financing and was using unregistered securities as collateral.
Sandell was an uninterested third party that simply shorted a stock on phantom shares to manipulate immediate profits. If found guilty, Sandell would have revealed the ruthless and unethical nature of hedge funds as Sandell would have tried to seek profits by manipulating a company devastated by a natural disaster.
The timing of this SEC action corresponds directly with the Regulation SHO initiatives and with the reporting daily of fails to deliver by the DTCC to the SEC and SRO's under SHO. The illegal naked short executed by Sandell creates such a fail at the DTCC.
But here is where a history lesson is needed.
In a response to a previous FOIA request on the fails to deliver in Enron's stock during that infamous collapse, the SEC turned down my request due to the lack of information regarding the fails in Enron. The SEC response went further to state that fails data for any company prior to April 2004 was unavailable at the SEC as it was never tracked previously.
And without the data, how would the SEC expect to catch opportunities like Sandell? Answer, They couldn't!
Over the decades in which investors and issuers raised awareness and concerns over the abuses of naked shorting and settlement failures, the SEC was dismissing these concerns without ever having the data to refute such claims. The SEC merely dismissed the allegations based on the views of those that run the financial services industry, Wall Street.
And now that the concerned investors forced a metric to be created (SHO List), suddenly there are violations that just 2 years ago were claimed to not exist. Naked Shorting is not a problem in our markets was the battle cry of the SEC's Division of Market Regulations and specifically former Director now Commissioner Annette Nazareth and Asst. Director James Brigagliano. And these battle cries came without substantiation of the data but instead on the simply personality flaw called denial.
While this case against Sandell is a milestone in SEC regulation, as it becomes the first step in true reforms, this case also shows the conflicts that remain at the enforcement levels.
Hedge Funds like Sandell are not required to register with the SEC so such trivial operations as compliance are not mandated or audited. And if Sandell is not required to maintain a full compliance department, that responsibility rests with the prime brokerage in which Sandell executed these illegal trades.
Who was that prime brokerage firm involved? How did these illegal trades pass through their compliance department? And how many others like this have been executed over the years by this same firm?
There have been no public disclosures by the SEC in having taken any actions against the prime brokerage involved in these illegal trades and yet the media is reporting a settlement with Sandell has been in the works. In earlier cases involving the illegal shorting during financing deals, it was again the hedge funds that saw the regulatory enforcement while brokerage firms like Friedman Billing & Ramsey (FBR) were left unscathed.
FBR has reportedly been in "negotiations with the SEC" for over 2 years regarding the illegal shorting in Comupdyne while the SEC settled with Hilary Shane and John Mangan in 2005 for their participation in the fraud orchestrated through FBR. The difference, political contacts and the power of stolen money to buy good lawyers.
My unsubstantiated guess as to who the prime broker was in the illegal trades of Sandell, Bear Stearns the former home to Thomas Sandell.
And what do we know of Bear Stearns? Back in December 2004 the General Counsel had this to say about settlement failures during a conference call:
"To give you that brief introduction in Reg SHO, the history (of) how we got to where we are today. For the past few years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients, were not following already established rules."
For years they were told rules were not being followed but nothing changed until the rules changed and even then exceptions could remain.
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 Breaks into Naked Short Enforcement - November 1, 2006
David Patch
Bloomberg, the Wall Street Journal, and the NY Post are all reporting the pending SEC civil action against the $7 Billion hedge fund Sandell Asset Management Corp.
The SEC staff plans to recommend the commission take civil action against Sandell Asset Management Corp. for trading in shares of Hibernia Corp. according to investors in Sandell who have been informed of the investigation by Sandell management. One of the accused is reportedly the founder of Sandell and former Bear Stearns senior managing director Thomas Sandell.
The allegations being exposed are related to a buyout opportunity whereby Hibernia, a New Orleans-based bank had agreed to be bought by Capital One Financial Corp. Sandell had taken out long positions on the buyout until Hurricane Katrina hit the south and had a devastating effect on the Hibernia business model.
Responding to possible reductions in the Capital One offer due to the devastating distruction, Sandell allegedly began shorting the stock in Hibernia beginning in March of 2005. The short interest by Sandell was taking place at a time the stocks value dropped 11% and the shorts being executed did not meet the guidelines for settlement required by law.
The SEC is bringing a naked shorting case against Sandell making this the first of its kind. There have been prior cases where naked shorting abuse resulted in enforcement but in each of the prior cases, the allegations stemmed from a financing deal where the short seller was the participant offering the financing and was using unregistered securities as collateral.
Sandell was an uninterested third party that simply shorted a stock on phantom shares to manipulate immediate profits. If found guilty, Sandell would have revealed the ruthless and unethical nature of hedge funds as Sandell would have tried to seek profits by manipulating a company devastated by a natural disaster.
The timing of this SEC action corresponds directly with the Regulation SHO initiatives and with the reporting daily of fails to deliver by the DTCC to the SEC and SRO's under SHO. The illegal naked short executed by Sandell creates such a fail at the DTCC.
But here is where a history lesson is needed.
In a response to a previous FOIA request on the fails to deliver in Enron's stock during that infamous collapse, the SEC turned down my request due to the lack of information regarding the fails in Enron. The SEC response went further to state that fails data for any company prior to April 2004 was unavailable at the SEC as it was never tracked previously.
And without the data, how would the SEC expect to catch opportunities like Sandell? Answer, They couldn't!
Over the decades in which investors and issuers raised awareness and concerns over the abuses of naked shorting and settlement failures, the SEC was dismissing these concerns without ever having the data to refute such claims. The SEC merely dismissed the allegations based on the views of those that run the financial services industry, Wall Street.
And now that the concerned investors forced a metric to be created (SHO List), suddenly there are violations that just 2 years ago were claimed to not exist. Naked Shorting is not a problem in our markets was the battle cry of the SEC's Division of Market Regulations and specifically former Director now Commissioner Annette Nazareth and Asst. Director James Brigagliano. And these battle cries came without substantiation of the data but instead on the simply personality flaw called denial.
While this case against Sandell is a milestone in SEC regulation, as it becomes the first step in true reforms, this case also shows the conflicts that remain at the enforcement levels.
Hedge Funds like Sandell are not required to register with the SEC so such trivial operations as compliance are not mandated or audited. And if Sandell is not required to maintain a full compliance department, that responsibility rests with the prime brokerage in which Sandell executed these illegal trades.
Who was that prime brokerage firm involved? How did these illegal trades pass through their compliance department? And how many others like this have been executed over the years by this same firm?
There have been no public disclosures by the SEC in having taken any actions against the prime brokerage involved in these illegal trades and yet the media is reporting a settlement with Sandell has been in the works. In earlier cases involving the illegal shorting during financing deals, it was again the hedge funds that saw the regulatory enforcement while brokerage firms like Friedman Billing & Ramsey (FBR) were left unscathed.
FBR has reportedly been in "negotiations with the SEC" for over 2 years regarding the illegal shorting in Comupdyne while the SEC settled with Hilary Shane and John Mangan in 2005 for their participation in the fraud orchestrated through FBR. The difference, political contacts and the power of stolen money to buy good lawyers.
My unsubstantiated guess as to who the prime broker was in the illegal trades of Sandell, Bear Stearns the former home to Thomas Sandell.
And what do we know of Bear Stearns? Back in December 2004 the General Counsel had this to say about settlement failures during a conference call:
"To give you that brief introduction in Reg SHO, the history (of) how we got to where we are today. For the past few years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients, were not following already established rules."
For years they were told rules were not being followed but nothing changed until the rules changed and even then exceptions could remain.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006