Post by jannikki on Mar 14, 2007 19:32:41 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Goldman Fined for Short Sale Fraud - March 14, 2007
David Patch
Imagine you are a hedge fund and you want to manipulate a market through short sales. All you have to do apparently is go set up an account with the number one prime broker in the US illegally execute short sales through the firms automated trading system.
At least that is what the SEC and NYSE recently uncovered was taking place at Goldman Sachs. The result of such findings was to slap the mammoth corporation a paltry $2 Million for their "lack of supervision".
But slaps, more like tickles, from regulators typically come with the accompanied chest thumping and that was how SEC Chairman Chris Cox would address this latest SEC action, with a well publicized chest thumping.
Speaking today before the US Chamber of Commerce during a Summit on Business and Capital Development Chairman Cox took a moment after his speech to identify to reporters that the Commission had settled against Goldman Sachs for the firm’s involvement in two years worth of illegal naked short selling abuses. Cox informed the audience "that is an important case and it reflects our interest in this area" referring to the naked short selling arena of stock fraud.
After viewing the Bloomberg TV expose 'Phantom Shares' last night I should be thankful for such actions and commitment out of the commission. Bloomberg specifically addressed the damages naked shorting can have in the public marketplace and how literally hundreds of billions or more in market capitalization can be stripped from the markets by the process.
Unfortunately for the investing public the euphoria to the joint SEC and NYSE actions were quickly dashed, as the SEC litigation itself was made public.
According to the SEC complaint, Goldman Sachs had been allowing "clients", otherwise known as hedge funds, to execute short sales through Goldman's automatic trading platform by illegally entering the short sales as long sales eliminating the need for Goldman to locate and subsequently borrow the securities for delivery. The complaint alleged, and I have to use alleged because of the "without admitting or denying" clause of the settlement with Goldman, that two "clients" had utilized this illegal scheme over the course of two years.
Now understanding the securities laws in this area, I can find several violations that Goldman Sachs participated in that would require sanctions.
Let’s start with the sale of unregistered securities. Goldman Sachs, being the executing broker, sold stock into the market that, by the SEC's own compliant were shares that had not yet been registered as part of a stock offering. As the executing broker, Goldman holds the compliance responsibilities for the assurances of the client orders, which is what the SEC claimed in the settlement that Goldman did not satisfy.
Goldman Sachs sold short securities without performing the necessary affirmative determination that shares were available to borrow which is yet another violation of the shorting laws. Goldman had no assurances that the stock being sold could meet the requirements of trade settlement and when the trades failed settlement Goldman failed to execute proper buy-ins on the fails electing instead to take shares from inventory to temporarily settle while they waited for the "clients" to receive shares in an offering to be used as the settlement.
Due to these shares sold being marked long, the shares could be executed into the marketplace while the stock was trading on the down tick. Such trading violates the existing up-tick rules and could be trading that would be considered stock manipulation. Selling in excess shares that do not exist to settle, and shares sold into a down tick will create saturation of the bids effectively driving investors (bids) out of the market.
Studies of "bear raids" identify that this as exactly the means to the execution of such a raid.
In the SEC and NYSE press releases the regulators had located the “clients” in this case and each had disgorgement and penalties that reached $1 Million. But what neither release revealed is that these settlements took place nearly 4 years ago.
Yup, the clients that initiated this fraud settled with the SEC in 2003 for their fraudulent trading and yet the company that aided them in the fraud, Goldman Sachs, is only now being fined, and barely fined at that.
Didn’t the Chairman say that this action today illustrated the seriousness of these actions and the interests of the Commission? We’ll have to give the Chairman a free pass here in his spin control; he did come to the Commission after a stint as a politician.
Left unresolved in this case was how far the SEC has gone to determine who else Goldman Sachs allowed these activities to take place with. This case was initiated by starting with the PIPE dealers and working the way up to the prime brokerage. It wasn’t started by looking at the massive trade settlement failure pool and working it backwards through prime brokerage and spraying the enforcement pain across the substantial quantity of naked short selling violators.
When asked whether the SEC was looking beyond this case and beyond Goldman Sachs Chairman Cox slipped into the SEC cone of silence providing the patented SEC “no comment”.
The bottom line in this latest action is that the SEC fails to understand the ramifications of placing meaningless fines on these billion dollar corporations who aid investors in committing fraud. The fine expressed today being the equivalent of a parking ticket and a cost of doing business for Goldman Sachs who simply did not want to invest the capital to create adequate compliance procedures.
Serious concerns by the commission and serious efforts in deterrent would have the greatest impact if they had assessed fines and disgorgement that included all the revenues the firm received from that client over the period in which that client committed the fraud. Goldman allowed this fraud to slip through into the markets over a period of two years because the financial risk was outweighed by the level of revenues Goldman received from these clients in trade commissions and stock lending fees. The revenues the firm received over those two years should be disgorged and penalties assessed based on that level of income. Prime Brokers would certainly consider risk v. reward under those circumstances
Some of the larger hedge funds reportedly provide upwards of $150 million or more in trade commissions annually and thus, how insignificant is a $2 million fine weighed against the potential of losing such a revenue stream by having the client take their business elsewhere.
So with a better understanding of the facts, has this captured regulator taken the fraud seriously or simply placated the investing public with another meaningless settlement?
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007 (posted with permission)
An online newspaper reporting the issues of Securities Fraud
Goldman Fined for Short Sale Fraud - March 14, 2007
David Patch
Imagine you are a hedge fund and you want to manipulate a market through short sales. All you have to do apparently is go set up an account with the number one prime broker in the US illegally execute short sales through the firms automated trading system.
At least that is what the SEC and NYSE recently uncovered was taking place at Goldman Sachs. The result of such findings was to slap the mammoth corporation a paltry $2 Million for their "lack of supervision".
But slaps, more like tickles, from regulators typically come with the accompanied chest thumping and that was how SEC Chairman Chris Cox would address this latest SEC action, with a well publicized chest thumping.
Speaking today before the US Chamber of Commerce during a Summit on Business and Capital Development Chairman Cox took a moment after his speech to identify to reporters that the Commission had settled against Goldman Sachs for the firm’s involvement in two years worth of illegal naked short selling abuses. Cox informed the audience "that is an important case and it reflects our interest in this area" referring to the naked short selling arena of stock fraud.
After viewing the Bloomberg TV expose 'Phantom Shares' last night I should be thankful for such actions and commitment out of the commission. Bloomberg specifically addressed the damages naked shorting can have in the public marketplace and how literally hundreds of billions or more in market capitalization can be stripped from the markets by the process.
Unfortunately for the investing public the euphoria to the joint SEC and NYSE actions were quickly dashed, as the SEC litigation itself was made public.
According to the SEC complaint, Goldman Sachs had been allowing "clients", otherwise known as hedge funds, to execute short sales through Goldman's automatic trading platform by illegally entering the short sales as long sales eliminating the need for Goldman to locate and subsequently borrow the securities for delivery. The complaint alleged, and I have to use alleged because of the "without admitting or denying" clause of the settlement with Goldman, that two "clients" had utilized this illegal scheme over the course of two years.
Now understanding the securities laws in this area, I can find several violations that Goldman Sachs participated in that would require sanctions.
Let’s start with the sale of unregistered securities. Goldman Sachs, being the executing broker, sold stock into the market that, by the SEC's own compliant were shares that had not yet been registered as part of a stock offering. As the executing broker, Goldman holds the compliance responsibilities for the assurances of the client orders, which is what the SEC claimed in the settlement that Goldman did not satisfy.
Goldman Sachs sold short securities without performing the necessary affirmative determination that shares were available to borrow which is yet another violation of the shorting laws. Goldman had no assurances that the stock being sold could meet the requirements of trade settlement and when the trades failed settlement Goldman failed to execute proper buy-ins on the fails electing instead to take shares from inventory to temporarily settle while they waited for the "clients" to receive shares in an offering to be used as the settlement.
Due to these shares sold being marked long, the shares could be executed into the marketplace while the stock was trading on the down tick. Such trading violates the existing up-tick rules and could be trading that would be considered stock manipulation. Selling in excess shares that do not exist to settle, and shares sold into a down tick will create saturation of the bids effectively driving investors (bids) out of the market.
Studies of "bear raids" identify that this as exactly the means to the execution of such a raid.
In the SEC and NYSE press releases the regulators had located the “clients” in this case and each had disgorgement and penalties that reached $1 Million. But what neither release revealed is that these settlements took place nearly 4 years ago.
Yup, the clients that initiated this fraud settled with the SEC in 2003 for their fraudulent trading and yet the company that aided them in the fraud, Goldman Sachs, is only now being fined, and barely fined at that.
Didn’t the Chairman say that this action today illustrated the seriousness of these actions and the interests of the Commission? We’ll have to give the Chairman a free pass here in his spin control; he did come to the Commission after a stint as a politician.
Left unresolved in this case was how far the SEC has gone to determine who else Goldman Sachs allowed these activities to take place with. This case was initiated by starting with the PIPE dealers and working the way up to the prime brokerage. It wasn’t started by looking at the massive trade settlement failure pool and working it backwards through prime brokerage and spraying the enforcement pain across the substantial quantity of naked short selling violators.
When asked whether the SEC was looking beyond this case and beyond Goldman Sachs Chairman Cox slipped into the SEC cone of silence providing the patented SEC “no comment”.
The bottom line in this latest action is that the SEC fails to understand the ramifications of placing meaningless fines on these billion dollar corporations who aid investors in committing fraud. The fine expressed today being the equivalent of a parking ticket and a cost of doing business for Goldman Sachs who simply did not want to invest the capital to create adequate compliance procedures.
Serious concerns by the commission and serious efforts in deterrent would have the greatest impact if they had assessed fines and disgorgement that included all the revenues the firm received from that client over the period in which that client committed the fraud. Goldman allowed this fraud to slip through into the markets over a period of two years because the financial risk was outweighed by the level of revenues Goldman received from these clients in trade commissions and stock lending fees. The revenues the firm received over those two years should be disgorged and penalties assessed based on that level of income. Prime Brokers would certainly consider risk v. reward under those circumstances
Some of the larger hedge funds reportedly provide upwards of $150 million or more in trade commissions annually and thus, how insignificant is a $2 million fine weighed against the potential of losing such a revenue stream by having the client take their business elsewhere.
So with a better understanding of the facts, has this captured regulator taken the fraud seriously or simply placated the investing public with another meaningless settlement?
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007 (posted with permission)