Post by kranker on Dec 10, 2005 17:48:06 GMT -4
Bob O'Brien's Rebuttal and Debunking of the DTCC Information Piece
The DTCC came out with a question and answer piece from their deputy Counsel. Some of the statements towed the company line, but some were frankly perplexing to me.
The entire article can be viewed here. I will pull some excerpts and frame the questions that naturally come to mind.
www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html?shell=false
"Q: @dtcc: DTCC and some of its subsidiaries have been sued over naked shorting. What has been the result of those cases?
Thompson: We’ve had 12 cases to date filed against DTCC or one of our subsidiaries over the naked shorting issue. Nine of the cases have been dismissed by the judge without a trial, or withdrawn by the plaintiff. The other three are pending, and we have moved to dismiss all those cases as well. While the lawyers in these cases have presented their theory of how they think the system works, the fact is that their theories are not an accurate reflection of how the capital market system actually works."
Huh. That's kind of interesting. I guess the recent Eagletech case where a New York judge ordered the DTCC to open their books up doesn't count. Or perhaps he's unaware of it. That seems strange, doesn't it? The DTCC is ordered by a judge in their home state to open the books, and the company's counsel pretends it hasn't happened? Then again, didn't the DTCC also pretend that there were no lawsuits against them as recently as 8 months ago? And BTW, saying that there motions to dismiss all cases is like saying that your copy machine has paper in it - it's standard operating procedure to do so, and proves and means nothing.
"Question: @dtcc: One of the allegations made in some of the lawsuits is that the Stock Borrow program counterfeits shares, creating many more shares than actually exist. True?
Thompson: Absolutely false. Under the Stock Borrow program, NSCC only borrows shares from a lending member if the member actually has the shares on deposit in its account at the DTC and voluntarily offers them to NSCC. If the member doesn’t have the shares, it can’t lend them.
Once a loan is made, the lent shares are deducted from the lender’s DTC account and credited to the DTC account of the member to whom the shares are delivered. Only one NSCC member can have the shares credited to its DTC account at any one time.
The assertion that the same shares are lent over and over again with each new recipient acquiring ownership of the same shares is either an intentional misrepresentation of the SEC-approved system, or a profoundly ignorant characterization of this component of the process of clearing and settling transactions."
Actually, this is a rhetorical dishonesty as far as I can tell. It does not address the allegation that the DTCC sums their cash accounts vs. their share accounts at the end of the day. It does not address the allegation that the NSCC keeps a set of sub accounts wherein the "IOU" for 100K shares is summed against the cash on hand and not reconciled against the DTCC's books. It does not say that the shares in the new customer "B"'s account can't be lent out to customer "C" the next day. Doesn't say any of that.
"Question: @dtcc: Just how big is the fail to delivers, and how much of those fails does the Stock Borrow program address?
Thompson: Currently, fails to deliver are running about 24,000 transactions daily, and that includes both new and aged fails, out of an average of 23 million new transactions processed daily by NSCC, or about one-tenth of one percent. In dollar terms, fails to deliver and receive amount to about $6 billion daily, again including both new fails and aged fails, out of just under $400 billion in trades processed daily by NSCC, or about 1.5% of the dollar volume. The Stock Borrow program is able to resolve about $1.1 billion of the “fails to receive,” or about 20% of the total fail obligation."
So, if I am reading this correctly, the Stock Borrow Program "resolves" about $1.1 billion per day. Times 200 business days - that's about $220 billion per year it "resolves." It isn't really clear to me what that means - that the fails addressed by the stock borrow program is a $220 billion per year cumulative problem? And what about the 80% of the fails that don't get "resolved?" Huh. Now, in Professor Boni's paper, looking at one market maker, she cites 64K+ transactions of fails, with only 86 bought in, over a 2 year period. One MM. So either Professor Boni is lying when she did her report for the SEC, or the DTCC is framing this very carefully in a limited scope so as to make it seem trivial. Both cannot be true.
He then goes on to describe a bunch of the intricacies of the Reg SHO rules, ignoring that the penalty for failing to deliver is to prevent the account at the broker from doing any more shorting - he makes it sound like the whole brokerage is precluded - again, not true. Just the account. So if you are like Mark Valentine was, and had over 1200 accounts offshore - guess how big a deterrent that is? Now, here's my favorite:
" Question: @dtcc: Why won’t you reveal the number of fails to deliver in each position to the issuer of the security?
Thompson: There are a couple of reasons. First, we provide that information to regulators and the SROs so they can investigate fails and determine whether there are violations of law going on. Releasing that information might jeopardize those investigations, and we feel they are the appropriate organizations to get that information since they can act on it. Second, NSCC rules prohibit release of trading data, or any reports based on the trading data, to anyone other than participant firms, regulators, or self-regulatory bodies such as the NYSE or Nasdaq. We do that for the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms."
That sounds great. Except of course that it isn't true. The SEC says that they don't get fail to deliver positions for each security - that they rely on the DTCC to tell them when there's a problem. So we have the DTCC contradicting the SEC. One of them is not correct. And the investigations canard is laughable. How many actions have there been from the SEC on fails or naked shorting over the last 5 years? 10 years? One that I know of, and that one was driven by the Texas law firm and Jag Media, one of the penny stocks that Thompson disparages with such casual disdain earlier. In that case a hedge fund manager, Mark Valentine, and Rhino advisors, were breaking every law that you could mention as part of a systematic trading strategy. The result? After being drug kicking and screaming to the evidence, the SEC reluctantly cut a deal with Valentine, and Rhino got a wrist slap. That's the sum total of the SEC's history of enforcement and investigation on the matter.
So we have the DTCC saying that they won't reveal the information as to how large a problem the fails issue is because they don't want to endanger the regulators' investigations (although how knowing that NFI or OSTK have millions of fails endangers anyone but the DTCC's credibility is a mystery to everyone), and we have the regulators saying they don't get that information. Does that strike anyone as odd? Seems like the SEC is saying that the DTCC is an SRO and as such responsible for policing themselves, and the DTCC saying that the SEC is policing them and geting data to investigate the fails problem, and then the SEC saying they don't get the information.....a lot of a hummana hummana hummannna and not a lot of actual hard answers. Here's some simple, easy questions I encourage everyone to send to Mr. Thompson:
1) How does publishing the level of fails per SHO company endanger anything?
2) What office at the SEC receives the fails per company totals from the SHO list? They say they don't get that info.
3) Does the NSCC keep C and D level accounts where they have payables and receivables in one for stock, and collateral in another? Do they reconcile those accounts against the DTCC's accounts to ensure that there are not large receivables for shares of stock that aren't being bought in, and yet which don't appear to the DTCC?
4) Are there any fails that exceed 1 month of age? If so, what percentage of the total fails are over 1 month of age?
5) What rule or regulation can you cite for not telling a company, who is the sole authorized entity allowed to issue shares of that company, what the level of fails are?
I can't wait to hear the double speak answers to these.
ncans.net/dtc.htm
The DTCC came out with a question and answer piece from their deputy Counsel. Some of the statements towed the company line, but some were frankly perplexing to me.
The entire article can be viewed here. I will pull some excerpts and frame the questions that naturally come to mind.
www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html?shell=false
"Q: @dtcc: DTCC and some of its subsidiaries have been sued over naked shorting. What has been the result of those cases?
Thompson: We’ve had 12 cases to date filed against DTCC or one of our subsidiaries over the naked shorting issue. Nine of the cases have been dismissed by the judge without a trial, or withdrawn by the plaintiff. The other three are pending, and we have moved to dismiss all those cases as well. While the lawyers in these cases have presented their theory of how they think the system works, the fact is that their theories are not an accurate reflection of how the capital market system actually works."
Huh. That's kind of interesting. I guess the recent Eagletech case where a New York judge ordered the DTCC to open their books up doesn't count. Or perhaps he's unaware of it. That seems strange, doesn't it? The DTCC is ordered by a judge in their home state to open the books, and the company's counsel pretends it hasn't happened? Then again, didn't the DTCC also pretend that there were no lawsuits against them as recently as 8 months ago? And BTW, saying that there motions to dismiss all cases is like saying that your copy machine has paper in it - it's standard operating procedure to do so, and proves and means nothing.
"Question: @dtcc: One of the allegations made in some of the lawsuits is that the Stock Borrow program counterfeits shares, creating many more shares than actually exist. True?
Thompson: Absolutely false. Under the Stock Borrow program, NSCC only borrows shares from a lending member if the member actually has the shares on deposit in its account at the DTC and voluntarily offers them to NSCC. If the member doesn’t have the shares, it can’t lend them.
Once a loan is made, the lent shares are deducted from the lender’s DTC account and credited to the DTC account of the member to whom the shares are delivered. Only one NSCC member can have the shares credited to its DTC account at any one time.
The assertion that the same shares are lent over and over again with each new recipient acquiring ownership of the same shares is either an intentional misrepresentation of the SEC-approved system, or a profoundly ignorant characterization of this component of the process of clearing and settling transactions."
Actually, this is a rhetorical dishonesty as far as I can tell. It does not address the allegation that the DTCC sums their cash accounts vs. their share accounts at the end of the day. It does not address the allegation that the NSCC keeps a set of sub accounts wherein the "IOU" for 100K shares is summed against the cash on hand and not reconciled against the DTCC's books. It does not say that the shares in the new customer "B"'s account can't be lent out to customer "C" the next day. Doesn't say any of that.
"Question: @dtcc: Just how big is the fail to delivers, and how much of those fails does the Stock Borrow program address?
Thompson: Currently, fails to deliver are running about 24,000 transactions daily, and that includes both new and aged fails, out of an average of 23 million new transactions processed daily by NSCC, or about one-tenth of one percent. In dollar terms, fails to deliver and receive amount to about $6 billion daily, again including both new fails and aged fails, out of just under $400 billion in trades processed daily by NSCC, or about 1.5% of the dollar volume. The Stock Borrow program is able to resolve about $1.1 billion of the “fails to receive,” or about 20% of the total fail obligation."
So, if I am reading this correctly, the Stock Borrow Program "resolves" about $1.1 billion per day. Times 200 business days - that's about $220 billion per year it "resolves." It isn't really clear to me what that means - that the fails addressed by the stock borrow program is a $220 billion per year cumulative problem? And what about the 80% of the fails that don't get "resolved?" Huh. Now, in Professor Boni's paper, looking at one market maker, she cites 64K+ transactions of fails, with only 86 bought in, over a 2 year period. One MM. So either Professor Boni is lying when she did her report for the SEC, or the DTCC is framing this very carefully in a limited scope so as to make it seem trivial. Both cannot be true.
He then goes on to describe a bunch of the intricacies of the Reg SHO rules, ignoring that the penalty for failing to deliver is to prevent the account at the broker from doing any more shorting - he makes it sound like the whole brokerage is precluded - again, not true. Just the account. So if you are like Mark Valentine was, and had over 1200 accounts offshore - guess how big a deterrent that is? Now, here's my favorite:
" Question: @dtcc: Why won’t you reveal the number of fails to deliver in each position to the issuer of the security?
Thompson: There are a couple of reasons. First, we provide that information to regulators and the SROs so they can investigate fails and determine whether there are violations of law going on. Releasing that information might jeopardize those investigations, and we feel they are the appropriate organizations to get that information since they can act on it. Second, NSCC rules prohibit release of trading data, or any reports based on the trading data, to anyone other than participant firms, regulators, or self-regulatory bodies such as the NYSE or Nasdaq. We do that for the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms."
That sounds great. Except of course that it isn't true. The SEC says that they don't get fail to deliver positions for each security - that they rely on the DTCC to tell them when there's a problem. So we have the DTCC contradicting the SEC. One of them is not correct. And the investigations canard is laughable. How many actions have there been from the SEC on fails or naked shorting over the last 5 years? 10 years? One that I know of, and that one was driven by the Texas law firm and Jag Media, one of the penny stocks that Thompson disparages with such casual disdain earlier. In that case a hedge fund manager, Mark Valentine, and Rhino advisors, were breaking every law that you could mention as part of a systematic trading strategy. The result? After being drug kicking and screaming to the evidence, the SEC reluctantly cut a deal with Valentine, and Rhino got a wrist slap. That's the sum total of the SEC's history of enforcement and investigation on the matter.
So we have the DTCC saying that they won't reveal the information as to how large a problem the fails issue is because they don't want to endanger the regulators' investigations (although how knowing that NFI or OSTK have millions of fails endangers anyone but the DTCC's credibility is a mystery to everyone), and we have the regulators saying they don't get that information. Does that strike anyone as odd? Seems like the SEC is saying that the DTCC is an SRO and as such responsible for policing themselves, and the DTCC saying that the SEC is policing them and geting data to investigate the fails problem, and then the SEC saying they don't get the information.....a lot of a hummana hummana hummannna and not a lot of actual hard answers. Here's some simple, easy questions I encourage everyone to send to Mr. Thompson:
1) How does publishing the level of fails per SHO company endanger anything?
2) What office at the SEC receives the fails per company totals from the SHO list? They say they don't get that info.
3) Does the NSCC keep C and D level accounts where they have payables and receivables in one for stock, and collateral in another? Do they reconcile those accounts against the DTCC's accounts to ensure that there are not large receivables for shares of stock that aren't being bought in, and yet which don't appear to the DTCC?
4) Are there any fails that exceed 1 month of age? If so, what percentage of the total fails are over 1 month of age?
5) What rule or regulation can you cite for not telling a company, who is the sole authorized entity allowed to issue shares of that company, what the level of fails are?
I can't wait to hear the double speak answers to these.
ncans.net/dtc.htm