|
Post by kranker on Dec 10, 2005 17:40:46 GMT -4
March 2005 Naked Short Selling and the Stock Borrow Program In recent months, there has been a fair amount of media coverage of naked short selling, Regulation SHO and even DTCC’s role in that via the Stock Borrow program operated by DTCC subsidiary National Securities Clearing Corporation (NSCC). Because there has been much confusion about these issues, and much misinformation, @dtcc sat down with DTCC First Deputy General Counsel Larry Thompson to discuss these issues. @dtcc: Let’s start with the question, what is naked short selling and why has it suddenly become an issue? Thompson: Short selling is a trading strategy where a broker/dealer or investor believes that a stock is overvalued and is likely to decline. It is an integral part of the way our capital market system works. Basically, it involves borrowing stock that you don’t own and selling it on the open market. You then buy it back at a later date, hopefully at a lower price, and as a result, making a profit. Naked short selling is selling stock you don’t own, but not borrowing it and making no attempt to do so. While naked short selling occurs, the extent to which it occurs is in dispute. @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 Nine of the cases have been dismissed by the judge without a trial, or withdrawn by the plaintiff.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. @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. @dtcc: Another allegation is that the Stock Borrow program has become “a reliable source of income” for NSCC? Some articles have said we make almost $1 billion from it. Thompson: This statement is purposely misleading. One billion dollars represents our total revenue from all our operations of all subsidiaries. The fact is that there are NO separate fees for transactions processed through the Stock Borrow program. There is just the normal fee for delivery of the shares, which is 30 cents per delivery. If you assume we make an average of 22,000 deliveries through Stock Borrow a day, there would be about $6,600 extra a day in revenue over 253 trading days, or about $1.67 million a year in additional revenue, out of $1 billion. All of our members know that DTCC and all its subsidiaries operate on a “not for profit” basis. What that means is that we aim to price our services so that our revenues cover our expenses. @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. The Stock Borrow program was created in 1981 with the approval of the SEC to help reduce potential problems caused by fails, by enabling NSCC to make deliveries of shares to brokers who bought them when there is a “fail to deliver” by the delivering broker. However, it doesn’t in any way relieve the broker who fails to deliver from that obligation. Even if a “fail to receive” is handled by Stock Borrow, the “fail to deliver” continues to exist, and is counted as part of the total “fails to deliver.” If the total fails to deliver for that issue exceeds 10,000 shares, it gets reported to the markets and the SEC. @dtcc: If the volume in the Stock Borrow program is so small, why are these companies suggesting it is a major issue? Thompson: Frankly, we believe that the allegations are attempting to purposely mislead those who are not familiar with this program. A number of small OTCBB and so-called “pink sheet” companies have contended that this practice is driving down the price of their shares and driving them out of business. According to their own 10K and 10Q reports financial auditor’s disclosure statements, many of these firms have admitted that “factors raise substantial doubt about the company’s ability to continue as a going concern.” They have had little or no revenue, according to their financial reports, and substantial losses, for periods of seven or eight years. One of these companies has been cited for failing to file financial statements since 2001. Another has been cited by the SEC for press releases that misled investors on expanding business contracts that didn’t exist. They will do anything they can do that takes people’s attention off that kind of record, especially if they can convince a law firm to take the case on a contingency basis, which is what has happened. @dtcc: Who are the law firms bringing these suits? Thompson: The main law firms engaged in these lawsuits, and they have been behind virtually all of them, were principally involved with the tobacco class action lawsuit. They like to bring suits in multiple jurisdictions in an attempt to find any jurisdiction where they might be successful in winning large judgments. @dtcc: What causes a fail to deliver in a trade? Is it all naked short selling? Thompson: There can be any number of reasons for a “fail to deliver,” many of them the result of investor actions. An investor can get a physical certificate to his broker too late for settlement. An investor might not have signed the certificate, or signed in the wrong place. There may have been human error, in that the wrong stock (or CUSIP) was sold, so the delivery can’t be made. Last year, 1.7 million physical certificates were lost, and sometimes that isn’t discovered until after an investor puts in an order to sell the security. There are literally dozens of reasons for a “fail to deliver,” and most of them are legal. Reg SHO also allows market makers to legally “naked short” shares in the course of their market making responsibilities, and those obviously result in fails. We can’t do anything about them but what we are doing: that is, report all fails of more than 10,000 shares in any issue to the marketplaces and the SEC for their action. @dtcc: What happens then? Thompson: The markets check to see if the amount of fails to deliver is more than 1/2 of 1% of the total outstanding shares in that security. If it is, then it goes on a “Threshold List.” If it is then on the Threshold List for 13 consecutive settlement days, restrictions on short selling then apply. The “close-out” requirement forces a participant of a registered clearing agency to close out any “fail to deliver” position in a threshold security that has remained for 13 consecutive settlement days by purchasing securities of like kind and quantity. If the participant does not take action to close out the open fail to deliver position, the participant is prohibited from making further short sales in that security without first borrowing or arranging to borrow the security. Even market makers are not exempt from this requirement. @dtcc: So Reg SHO doesn’t force them to close out the position, but if they don’t, they are prohibited from making any additional short sales without borrowing the shares first? Thompson: That’s right. @dtcc: Does DTCC have a regulatory role in naked short selling? What authority does it have to force companies to settle a fail? Thompson: Naked short selling, or short selling, is a trading activity. We don’t have any power or legal authority to regulate or stop short selling, naked or otherwise. We also have no power to force member firms to close out or resolve fails to deliver. That power is reserved for the SEC and the markets, be it the NYSE, Nasdaq, Amex, or any of the other markets. The fact is, we don’t even see whether a sale is short or not. That’s something only the markets see. NSCC just gets “buys” and “sells,” and it’s our job to try and clear and settle those trades. @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. @dtcc: How does DTCC respond to claims that shares from cash accounts and/or retirement accounts and/or institutional accounts are being put into the lending pool of the Stock Borrow program? Thompson: It is our broker and bank members who control their DTC accounts. They can and do segregate shares that they are not permitted to lend out. Neither NSCC nor DTC monitor or regulate that activity. It is done by the SROs and the SEC. However, there is no requirement that brokers or banks participate in the Stock Borrow program, and neither DTC nor NSCC can take shares from an account unless those shares are voluntarily offered by the broker or bank member. @dtcc: Do you think there is illegal naked shorting going on? Thompson: Certainly there have been cases in the past where it has, and those cases have been prosecuted by the SEC and other appropriate enforcement agencies. I suppose there will be cases where someone else will try to break the law in the future. But I also don’t believe that there is the huge, systemic, illegal naked shorting that some have charged is going on. To say that there are trillions of dollars involved in this is ridiculous. The fact is that fails, as a percentage of total trading, hasn’t changed in the last 10 years. @ www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.htmlwww.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html?shell=false
|
|
|
Post by kranker on Jul 2, 2006 10:01:01 GMT -4
March 30, 2005 04:39 PM US Eastern Timezone DTCC Announces Effort to Correct Record on Its Stock Borrow Program & Naked Short Selling NEW YORK--(BUSINESS WIRE)--March 30, 2005--The following statement was issued today by Stuart Z. Goldstein, managing director of DTCC Corporate Communications and spokesperson for the company: "The Depository Trust & Clearing Corporation (DTCC) has provided its bank and broker customers with a detailed explanation of its Stock Borrow program and the issue of naked short selling in an effort counter a widespread campaign of distortions and misleading information. DTCC has published a Q&A interview with our First Deputy General Counsel in its own newsletter, @dtcc, which is distributed to over 7,000 readers throughout the financial services industry. Our aim is simply to correct misstatements of fact. We have confidence that our regulators, who carefully review our activities, understand that short selling is a trading strategy and is not related to the post-trade clearance and settlement process. We've made the Q&A interview available on DTCC's web site at www.dtcc.com, so journalists and investors can get a more accurate understanding of our role in the completing the trading process. It is a highly automated environment that can handle in a given day up to 4.6 billion shares traded across all U.S. markets." We believe that those involved in the litigation on naked short selling have been part of these efforts to try and achieve in the media what they have not achieved in a court of law. To date, nine of the suits brought against DTCC and its subsidiaries variously alleging either we 'counterfeit securities certificates,' 'that our Stock Borrow program reaps billions in profits' and that we 'directly contribute to naked short selling,' have been dismissed or withdrawn. These assertions are false." About DTCC Through its subsidiaries, DTCC provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities and over-the-counter derivatives. DTCC's depository also provides custody and asset servicing for more than two million securities issues from the United States and 100 other countries and territories. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC has operating facilities in multiple locations in the United States and overseas. For more information on DTCC, visit www.dtcc.com. home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20050330005817&newsLang=en
|
|
|
Post by kranker on Jul 2, 2006 10:01:48 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
|
|
|
Post by kranker on Jul 2, 2006 10:02:38 GMT -4
Press Release Source: Eagletech Communications, Inc. Open Letter to Depository Trust and Clearing Corporation First Deputy General Counsel Larry Thompson on the Largest Breach of Public Trust in History Wednesday April 6, 10:36 am ET PLANTATION, Fla., April 6 /PRNewswire-FirstCall/ -- Eagletech Communications, Inc. (OTCPK: EATC), today released its response to the Depository Trust and Clearing Corporation First Deputy General Counsel Larry Thompson's recent postings at www.dtcc.com seeking to mislead the public about the DTCC's role in the largest breach of public trust in history. Dear Mr. Thompson: I wish to remind you that on March 4, 2005 Eagletech Communications, Inc.'s Attorneys announced the ruling of the Supreme Court of the State of New York, wherein the DTCC was compelled to produce the Company's trading records Today, more than one month later, the records have not been forthcoming as ordered by the court. Instead, as First Deputy General Counsel for the DTCC, I believe you have undertaken a campaign to disseminate misinformation, lies, and half-truths when confronted with facts made public by your detractors. On March 5, 2005 one day after the announcement of the aforementioned court ruling, your interview @dtcc.com, entitled "Naked Short Selling and the Stock Borrow Program", stated: "One of these companies has been cited for failing to file financial statements since 2001." Congratulations! You did get one right. On February 15, 2005, the Securities and Exchange Commission deemed it necessary for the protection of investors to institute proceedings pursuant to Section 12(j) of the Securities Exchange Act of 1934 In the Matter of Eagletech Communications, Inc., Respondent. On the same day The SEC also filed an Enforcement Action against 17 Defendants, all associated with the Company's first Investment Banking firm, for manipulation of the Company's stock. Also on that day, a New Jersey Grand Jury unsealed an Indictment charging 4 of the 17 with criminal charges. I was not surprised since the evidence used by the SEC and the Justice Department in both investigations was obtained from discovery in the Company's 2001 civil lawsuit against several of the same perpetrators. The evidence was obtained from defendants residing in the Bahamas, outside both of the agencies' jurisdictions. Plaintiff's Attorneys shared the discovery evidence freely with the investigative agencies. What was surprising was that the Company's three official complaints of naked short selling, counterfeiting of the Company's stock, and other criminal misconduct made in 2002 to the SEC were to my knowledge ignored. The first complaint to the SEC transmitted the Company's civil lawsuit alleging that 5 of the managing directors of Salomon Smith Barney along with other SSB employees worked in concert with criminal securities manipulators. Three years of evidence gathering implicates now convicted securities manipulator Anthony Elgindy, his associate Peter Michaelson, members of organized crime, manipulator Jonathan Curshen, his Offshore Management Company Red Sea Management, Market Makers WIEN Securities, Knight Securities, and scores of Wall Street professionals. Additional evidence obtained from the SEC's own website contributes to the description of a scheme to destroy the value of the Company's stock and ultimately the Company for the profit of the perpetrators. A second complaint to the SEC resulted in the presentation of pattern of evidence of naked short selling and counterfeiting of securities in 200 companies, to SEC Enforcement Attorney Justin Arnold at a meeting in the SEC's Miami office. The third complaint submitted by U.S. Congressman Peter Deutsch on the Company's behalf received no acknowledgement from the SEC at all. Mr. Thompson, in your interview you state (referring to Eagletech): "Frankly we believe that the allegations are an attempt to purposely mislead those who are not familiar with this program." Consider this. Forensic Economist and Professor of Finance at Fordham University Graduate School of Business, John D. Finnerty after four years of research in March 2005 released what will likely become the definitive work on this subject for Juries across America. In his 73 page Treatise entitled, Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation, Professor Finnerty on page 37 has this to say about the Stock Borrow program: " ... The stock borrow program can facilitate naked shorting in two ways. First, sellers can continue to fail to deliver because the NSCC can borrow the shares it needs to meet its clearing obligations through the stock borrow program. It does not have to force the seller who fails to deliver to buy in shares, nor does it have to go into the market to buy in the shares. It simply borrows them from another member firm to effect the buy-in. Since the NSCC covers the short position, the buyer of the stock also never has to buy them in. Second, the stock borrow program allows the shares to be recycled. Each stock loan gives rise to another stock futures contract. Any single share could actually be relent multiple times, giving rise to multiple futures contracts. Each futures contract credited to a broker-dealer's sub-account at the DTC continues to be reported on the broker-dealer's books as a share held either in its proprietary account or in a customer account. In either case, the account holder believes he owns a real share with all the rights attached to it. Consequently, the stock borrow program effectively creates additional unauthorized shares of the issuer's stock. These undated stock futures contracts, which the financial press has referred to as phantom shares, inflate the amount of stock that is available for trading and also increase the amount of stock that is available for lending to short sellers ... " The entire text is available for download at: papers.ssrn.com/abstract=687282. Mr. Thompson maybe you don't realize that just as it is against the law to counterfeit United States currency it is also a Class B Federal felony punishable by up to 25 years in prison to create counterfeit corporate securities. The law makes no distinction between the counterfeiting of a development stage startup public company and for example, Microsoft Corporation. By the way, while listed on the "Pink Sheets" in 1975 Microsoft reported three employees and income of $16,000 for the period. Lucky for Microsoft that the Stock Borrow program wasn't created until 1981! Lucky for me, I could be typing this letter on a typewriter! I've included this link to United States Code, Title 18, Chapter 25, Section 514, also refer to Section 513 for definitions: caselaw.lp.findlaw.com/casecode/uscodes/18/parts/i/chapters/25/toc.htmlEagletech Communications, Inc. representing itself Pro Se has answered the charges of the SEC with the Affirmative Defense that grandfathering all pre- Regulation SHO delivery failures and that seeking to de-register the Company's stock in order to protect future shareholders is a subterfuge to misrepresent its real intentions. In my opinion this action against the Company is designed to conceal its own culpability in, using the SEC's own words, "delivery failures greater than a company's total public float." De- registration of the Company's shares stands to reward manipulators just as a bankruptcy would, since the manipulators would never have to purchase the stock to close out delivery failures still on the DTCC's books. In my opinion the SEC's decision to grandfather known criminal securities manipulation has violated the Constitutional 5th Amendment rights of Eagletech shareholders by an inverse taking of their property without due process and without compensation. In a motion to SEC Administrative Law Judge William T. Kelley filed on March 22, 2005, I have asked that the approximately 100 pages of evidence of criminals in the act of manipulating the Company's stock filed with the Company's answer, and by reference Eagletech's trading records ordered to be produced by the DTCC, be referred to the U.S. Secret Service, the U.S. Justice department and as 18-USC-514 states "any other such agency having such authority. Since the DTCC is incorporated as a State of New York Special Purpose Trust Banking Organization I believe Elliot Spitzer, New York's Attorney General, would have that authority. It would also appear that the SEC's Congressional Oversight Committees, the Senate Banking Committee and the House Financial Services Committee would have such authority to investigate these crimes. Since viewing Senator Robert Bennett's impassioned admonition to SEC Chairman William Donaldson in a Senate Banking Committee hearing that "Regulation SHO in not working" I have hope that other members of the SEC's Oversight Committees can be convinced to take a serious look at this issue. For your convenience I have included a link to the video record of the hearing: After installing Real Player navigate to 1:19:30 for video of the Senators admonishment, banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=140. The appropriate response to this letter would be with facts not rhetoric. In the @dtcc interview you ask yourself the question "does the Stock Borrow program counterfeit shares?" Only by producing Eagletech's court ordered trading records will the real answer be known! In addition, would you please include with any response to this letter, (1) your Bar number and (2) the State in which you are admitted to practice law. And just so there is no confusion about the authenticity of my allegations I will be posting the evidence of the alleged criminal misconduct on the Company's website at www.eagletech1.com . biz.yahoo.com/prnews/050406/nyw122.html?.v=4&printer=1
|
|
|
Post by kranker on Jul 2, 2006 10:04:51 GMT -4
Friday, April 08, 2005 by bob obrien An Open Letter To Mr. Thompson of the DTCC - Part 1 . Dear Mr. Thompson: I am again writing to you in the hope that you will take a moment to help me understand where I went wrong. It is important to me personally as well as to my organization, the National Coalition Against Naked Short Selling, to apprehend where our reasoning went awry. In your recent @dtcc “interview” of March 5 you made a number of comments that would lead the reader to believe that the NSCC’s stock borrow program did not allow that subsidiary of the DTCC to lend out more shares than a participant firm held, or that were authorized and registered by the issuing company. The way the answers were worded, one could easily draw the conclusion that you had truthfully and fully addressed the issue. You had apparently put to rest the nasty rumor that the DTCC created an unauthorized, unregistered float of shares over and above those legally authorized by the company in question – what some would argue convincingly is electronic counterfeiting of stock. In point of fact, in one artfully worded section, you went as far as to denigrate your detractors as either “intentionally misrepresenting” the “SEC approved system” or of being “profoundly ignorant” of the way the process works. Your words: “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.”<br> Strong language designed to end any idle and erroneous speculations by the dim, or the uninformed, or the dishonest. This was in conflict with the way that I understood that the system worked, so I sent you an email around April first, requesting clarification, and offering a very specific description of how I believed the process functioned. I can understand that you might be occupied with many important tasks and obligations, and thus might not have the time to get around to clearing up the issue for the largest entity of its kind, one of your main detractors, a coalition that has run full page advertisements in the Washington Post and has been involved in the only television footage ever aired that described the naked short selling abuse story. But I had hoped that you would seize that opportunity to disabuse us of our misunderstanding, so that we could fold up our tent, apologize for inconveniencing you, and move on to other things. Because surely we had gotten it all wrong – you literally called us cretins or crooks for our flawed take on the matter. It seemed reasonable to expect some response, given that you are the spokesperson for this issue that the DTCC has put forward to explain things. So far, nothing, but I have remained hopeful; cautiously optimistic, if you will. Imagine my surprise today when I read Professor John Finnerty’s March, 2005 abstract titled “Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation” – in which the Professor of as venerated an establishment as Fordham University agreed with my supposedly incorrect understanding! Apparently he is either as intellectually dishonest or as “profoundly ignorant” as the members of NCANS are - not to mention the attorneys that are suing you, and the reporters you castigated at Euromoney. So now to the problem. Either we are all badly wrong, or you are lying. Given that you are an officer of the court, an attorney, and the representative of a self-regulatory organization that is dependent upon the investing public’s belief that you are honest in your dealings, I find it disturbing to consider that you might be bald-faced lying, in print - and therefore conclude that we must all have it wrong. The alternative explanation would be that you are deliberately misleading the American public and mischaracterizing the operations of the NSCC, in an effort to obfuscate the truth. I find it hard to comprehend that you as an individual, as well as the DTCC, could be involved in this type of possibly criminal dishonesty. I’m hoping that you will grace us with the few moments it should take a gentleman of your robust and comprehensive knowledge of the system, and explain how, and where in the process, the professor has this wrong. To save you the time of looking it up, I have taken the liberty of excerpting pages 35 and 36 of his abstract: “The NSCC was created in 1976 through the merger of three major clearing corporations (NYSE, AMEX, and NASD). NSCC works in conjunction with the DTC to provide centralized clearance and settlement for broker-to-broker stock trades in the United States. The NSCC clears and settles transactions through the Continuous Net Settlement (CNS) system. It guarantees completion of the transactions by assuming (a) the obligation of the buyers to pay for the shares upon delivery and (b) the obligation of the sellers to deliver the shares. During the trading day, the CNS continually nets all trades by its members in each security. The member’s previous trading day’s closing net long or short position is continually updated with the day’s purchases and sales. At the end of the trading day, the member’s updated net long or short position in each stock is communicated to the DTC for overnight processing. Each short position is compared to the member’s DTC account to determine if the member has enough shares on deposit to settle the short position. If so, then the DTC transfers the required number of shares from the member’s DTC account to the NSCC’s DTC account. Based on instructions from the NSCC, the DTC transfers shares received from members with short positions to the accounts of members with long positions. If the member with a short position does not have enough shares in its account to cover the short position, then the NSCC has five choices. It can wait another day to see whether the seller cures the fail by delivering the shares. Second, if it determines that the open short position is a high-priority obligation, it can attempt to arrange to borrow enough shares through its stock borrowing program to satisfy the open position (NSCC, 2003). If it is unable to borrow the shares, then the DTC has the three remaining choices: (a) it can demand a dealer buy-in (forcing the selling broker-dealer to buy the shares in the open market and deliver them to the DTC), (b) buy the shares itself in the open market and charge the cost of the buy-in to the account of the seller, or (c) as a last resort, demand that the seller break the trade and compensate the buyer for the associated cost. "The NSCC’s stock borrow program permits it to borrow shares from participating members to cover end-of-day open short positions that it deems to be of high priority. Addendum C-1 of the Rules and Procedures of the NSCC (2003) governs the operation of the stock borrow program. Members who wish to participate in the program inform the NSCC each day of the number of shares of each stock in their general un-pledged account at the DTC which they are willing to lend. After the NSCC determines the number of shares it would like to borrow to satisfy all high-priority open positions, it applies a formula to determine from whom it will borrow the shares. The formula favors members who have the lowest stock loans from the NSCC and who pay the most clearing fees to the NSCC. When it borrows shares, the NSCC debits the lending member’s DTC account but also credits that member with a long position in a special CNS sub-account set up specifically for the stock borrow program. The sub-account holds what is tantamount to an undated stock futures contract with the NSCC as the obligor. The NSCC also credits the lending member’s regular CNS account with funds equal to the market value of the borrowed shares, which the lending member may invest overnight in an interest-bearing account. The DTC credits the borrowed shares to the NSCC’s DTC account, which eliminates its short position, and transfers them to the buyer’s DTC account. The buyer acquires all right, title, and interest in the borrowed shares – just as it would in any cash transaction that settles the regular way – including the right to vote the shares, receive dividends, resell them, or lend them (e.g., back to the NSCC through the stock borrow program). The NSCC charges a fee to each member with a short position that triggered the NSCC’s need to use the stock borrow program. The NSCC returns the borrowed shares when it receives deliveries against outstanding short positions that exceed the amount of shares it needs to satisfy high-priority open short positions. The stock borrow program can facilitate naked shorting in two ways. First, sellers can continue to fail to deliver because the NSCC can borrow the shares it needs to meet its clearing obligations through the stock borrow program. It does not have to force the seller who fails to deliver to buy in shares, nor does it have to go into the market to buy in the shares. It simply borrows them from another member firm to effect the buy-in. Since the NSCC covers the short position, the buyer of the stock also never has to buy them in. Second, the stock borrow program allows the shares to be recycled. Each stock loan gives rise to another stock futures contract. Any single share could actually be re-lent multiple times, giving rise to multiple futures contracts. Each futures contract credited to a broker-dealer’s sub-account at the DTC continues to be reported on the broker-dealer’s books as a share held either in its proprietary account or in a customer account. In either case, the account holder believes he owns a real share with all the rights attached to it. Consequently, the stock borrow program effectively creates additional unauthorized shares of the issuer’s stock. These undated stock futures contracts, which the financial press has referred to as phantom shares, inflate the amount of stock that is available fortrading and also increase the amount of stock that is available for lending to short sellers (SEC, 2003b).”<br> Again: “Consequently, the stock borrow program effectively creates…additional …unauthorized….shares…of…the…issuer’s…stock.”<br> Now, I am likely a bit provincial, naïve, misinformed, dare I say, “profoundly ignorant.” The good Professor, however, seems to be both worldly as well as erudite, and fluent in the minutiae of the matter. So please, favor us with a simple, short explanation of precisely where we have this wrong. Feel free to highlight the text from the Professor’s work, and provide a one or two sentence explanation of his error. I’m confident that the few minutes that will take you will pay enormous dividends in terms of ending this pervasive ignorance, which apparently infests the hallowed halls of academia, as well as the unsophisticated streets of Mainstreet USA. Feel free to use small words if you like, so that we all can follow along – let’s not leave anyone behind. -------------------------- I would encourage anyone that is interested to email this, with my compliments, to Mr. Thompson at Lthompson@DTCC.com - or reach out and touch him at (212) 855-3240 and ask him to please respond. In fact, go ahead and post a comment here if you sent this to him, so that we can keep track of the number of folks he is too busy to respond to. I am a huge believer in giving one every opportunity to demonstrate one’s honesty and integrity. Or giving them enough rope... bobosrevenge.blogspot.com/
|
|
|
Post by kranker on Jul 2, 2006 10:09:03 GMT -4
Posted by: bobo 2/1/2006 6:33 PM Sitting on the plane yesterday, I was reading over some of the work a friend of mine produced on naked short selling, and it occurred to me that this info belongs in a venue where the public can access it. So I broke my commitment to take a few days off, away from computers, to post this - and then I will really stay offline... By way of introduction, let me say that there are authorities, and then there are authorities. The gentleman in question is a true expert on the topic, partly because he’s been studying the issue for about 25 years – his comments to the SEC on Reg SHO have taken on near mythical status, as they so clearly warned of the abuse that would come should the SEC not implement the safeguards he’d advocated. His name is likely familiar to many who have closely followed this topic – Dr. Jim DeCosta. The challenge in presenting the true state of the union is to provide data, supported by research, in bite-sized morsels that people can digest. I feel that his work is among the most comprehensive I’ve seen on the subject, so I leaned on him to allow me to publish a small sampling of his material. His premise has always been that the solution to the entire NSS mess lies in educating the investing public, the regulators, the Judiciary, and anybody else with a vested interest in the clearance and settlement system. He’s written 2-1/2 unpublished books on naked short selling, which contain more data than any other work on the subject I’ve seen. In Chapter 42 he delineates some of what he calls “Not so bullet points”. He lists 40 of them, but I’m only going to publish the first dozen for now, as there is a lot of information to assimilate. So without further ado, the first of Dr. Jim’s bullet points: ------------------------------------- “I want to end this Chapter 42 with 40 “Not so bullet points” in regards to DTCC behavior in general. Many of these were revealed in the above analysis of the DTCC’s “Self-interview” and others were covered in previous chapters. My goal here is to get all readers on the same wavelength and build a foundation from which we can tackle the concepts in the last 28 chapters of this book and then move onto Book #3. 40 NOT SO BULLET POINTS IN RE: NAKED SHORT SELLING 1) Legitimate and illegitimate electronic book entries at the DTCC: Every trade involving a failed delivery that is allowed to “clear”, or more accurately, is bailed out, by a DTCC Stock Borrow Program (SBP) pseudo-borrow (a) results in a “Counterfeit Electronic Book-Entry” (“CEBE”) – an electronic book-entry held at the DTCC without corresponding paper-certificated shares held in a DTCC vault, or anywhere else, to justify their existence. (a) “Pseudo-borrow” is defined as an illegitimate borrow made from a self-replenishing anonymous pool especially one whose contents are admittedly not monitored. Why are these pseudo-borrows illegitimate? Because the admittedly unmonitored contents (or “pseudo-shares” theoretically “borrowed” from the SBP lending pool to cure the failed delivery), are allowed to be replaced right back into the same pool of lendable shares by the new purchaser’s broker/dealer, as if they never left in the first place. (Chapter 4) Even if all of the “Shares” residing in the lending pool at a given time were legally there, i.e. a margin agreement was signed approving their being loaned or hypothecated, this policy would still be insane. The DTCC tells us that 20% of all failed deliveries at the DTCC are dealt with via the SBP’s creation of these CEBEs. This violates Section 17A of the ’34 Act, as Section 17 A only allowed the DTCC to convert 100 million “Acme” paper-certificated shares held in their vault [and under their legal custody] into 100 million Acme electronic book-entry “Shares” in their “book-entry” system. The reasoning for moving from paper to electronic book-entries was that electronic book-entries are much more efficient to process - especially important in the midst of the 1969 “paperwork crisis” that drove the move to automation. The CEBEs created by the SBP are above and beyond what Section 17 A permitted. NASD Rule 11830 later expanded the one-for-one ratio of paper-to-electronic shares, and effectively allowed there to be 100.5 million Acme shares (0.5% above the number of shares outstanding) held in electronic book-entry format, before buy-ins of the overage of delivery failures was mandated. Rule 11830 provided the critical “metric” in regards to the number of “Unaddressed delivery failures” (the size of the naked short position at the DTCC) above which action was mandated, to halt the incredibly obvious dilutional damage incurred by an issuer, and the investors therein. 2) CEBEs. CEBEs cause artificial dilution because they represent readily sellable share facsimiles, without any rights attached - misrepresented (a) on an investor’s monthly brokerage statement as being genuine “Shares” (with an attached package of rights). They are readily sellable facsimiles by necessity, because there is no way a DTCC participating b/d could refuse to take a sell order, or refuse to provide voting privileges, for something that it has implied to its client as being genuine “Shares held long” on their behalf (as per the fiduciary duty of care owed as an agent/broker, to its client that paid it a commission). Recall from earlier chapters how the perceived value of each of the (dozen or so) component rights which make up a genuine “Share” are what gives a “Share” its value. The components of the rights package are the “Share.” As an example, the dividend “Right” attached to a corporation paying a generous annual dividend, would have a commensurately larger perceived value ascribed to that particular right. Paper certificates and electronic book entries are mere formats to account for “Share” ownership; they’re not the “Share” – and formats have no intrinsic value – it’s the package of rights that has the value. (a) (Misrepresentation: A false representation of a matter of fact that should have been disclosed, which deceives another so that he/she acts upon it to his/her injury) 3) Unaddressed CEBEs kill corporations, via massive dilution, if they are not constantly and rigorously monitored for their quantity, age, and the legitimacy of the failed delivery that procreated them. In naked short selling (NSS), the mere method of placing the bet against a corporation increases the odds of winning the bet, because of the dilutional damage done with each negative bet placed that didn’t involve a legitimate “borrow”. Note that even legal short selling done as sloppily as it is done on Wall Street via “iffy locates” (as the SEC calls them), causes artificial dilution - but legal short selling has a built-in “Governor”: there are only a finite number of legitimate shares legally-loanable. NSS has no such “Governor”, and there’s no limit to the damage that can be inflicted upon an issuer. As mentioned before, “pricing efficiency” mandates that all short sales or “negative votes” against a corporation be counted - but only if they are preceded by a legitimate “borrow”. This lack of a “Governor” creates the self-fulfilling prophecy aspect of NSS; just keep selling nonexistent shares until the company goes down. It’s analogous to ballot box stuffing. The mindset of the abusive DTCC participants and their co-conspirators becomes, “don't worry nobody's watching and you'll never be bought in, because the DTCC can be 100% counted on to pretend to be “powerless” in collecting the IOUs owed directly to them as the loan intermediary in the SBP “pseudo-borrow” process. 4) The only modality available to address archaic, excessive or illegitimate CEBEs is an open market "buy-in" - except for the extremely rare “negotiated settlement” with the victimized issuer. 5) Buy-ins force the seller of the nonexistent shares (who has refused to deliver them in a timely manner), to open his wallet, grab the investor’s money that he acquired under false pretenses as the share price “tanked,” and spend this money on purchasing the shares that he has already sold, but refuses to repurchase and deliver even after inordinate amounts of time. (See Dr. Boni’s research) Recall the 2 parameters from earlier chapters that help address any intent to defraud issues – the length of time of this “refusal”, as well as whether or not the price has been declining during the “refusal” period. An abusive MM that refuses to cover even when the share price is tanking is, by definition, not acting in a bonafide market making capacity, and thus isn’t deserving of the pre-short-sale borrowing exemption accorded to “bonafide” MM’s only, and only while acting in that capacity. Recall that a true, bonafide MM deploys the proceeds from naked short sales at higher levels to post bids at lower levels, in order to flatten out the position and stabilize the markets. As we’ve seen time and time again, abusive market makers with these “stabilizing bids” are nowhere to be found as the share price of a victimized issuer drops - in fact, they’re still selling aggressively. If you know that you’re not going to be caught or prosecuted, why would an abusive DTCC participant decrease the size of the pile of booty taken from naïve investors by covering his naked short position? Why not increase the size of this plunder more yet? Decisions, decisions, increase or decrease the stack of stolen money sitting in front of one. Recall the “triple whammy” from earlier chapters that occurs if an abusive DTCC participant did choose to cover. First of all, if you’ve been the only seller for a couple years, the mere action of stopping the selling will cause the share price to gap upwards, as it has been actively forced downwards in the past. Secondly, this increase in share price from the cessation of active selling will increase the collateralization requirements for the naked short position still on the books. Thirdly, if the abuser not only stops selling but actually starts buying then the share price will have am even greater tendency to gap upwards, which will exacerbate the collateralization requirements, as well as the price needing to be paid for future covering. In other words, THEY CAN’T COVER, and the SEC knew this when they grandfathered in all preexisting delivery failures as part of Reg SHO. The mandated buy-in approach is extremely efficient because it results in the bill for the buy-in landing in the lap of the fraudster doing the naked short selling, no matter how many layers of “dummy, straw, or nominee” corporations he is acting through (usually in various offshore havens with various banking secrecy laws, that are inexplicably allowed to interface with the DTCC – Canada included). None of the intermediaries in these transactions are going to bail out those that actually placed the order. The clearing firms holding these NSS positions in their “DTCC participant” securities accounts have been well-collateralized, due to the theoretically ultra-high risk nature of the naked short selling of penny stocks -so there is money sitting there ready to be deployed. 6) The very obvious buy-in solution is violently fought by the DTCC, as well as the SEC, as witnessed in the research results of Evans, Geczy, Musto and Reed (2003), showing that only one-eighth of 1% of Rule 11830 mandated buy-ins are ever effected. Why? In the case of the DTCC, it’s because their abusive market maker participants/owners, aware of how easy it is to steal a naïve investor’s money, are net naked short almost all of the development-stage corporations they make a market in. They know how tipped the playing field is and how these OTC markets are essentially rigged in favor of the DTCC participants owing a fiduciary duty of care to their clients - the investors whose money they are rerouting into their own wallets. They wouldn't be caught net long a development-stage micro cap corporation to save their lives. They may or may not know all of the intricacies of naked short selling, but they all know enough to work from a net short position. The reason why the SEC adamantly opposes buy-ins is a little more problematic, and the subject of a variety of theories held by various securities scholars. We’ll review them in future chapters. A truly bonafide MM will hover near net neutral positions, sometimes net long, sometimes net short. He doesn’t get painted into a corner with a massive naked short position that forces him into criminal behavior to avoid financial catastrophes. He’s happy with living off “the spread”. Unfortunately for most MMs, these spreads became razor-thin after decimalization was instituted 5 years ago. Unlike an abusive MM that’s sitting on an astronomic naked short position in need of constant collateralization, the bonafide MM is not afraid to let a market with an imbalance of buy orders over sell orders advance in price until it reaches its own equilibrium level. The bonafide MM would naturally rather NSS shares at higher levels than at lower levels. The truly bonafide MM doesn’t dictate share price – rather, he buffers the wild swings in share price, and injects much needed liquidity into the markets of thinly-traded securities, and provides “pricing efficiency”, as noted in Chapter 18. The abusive MM, however, does not have the “luxury” of allowing prices to advance in buy order-dominated markets, as the cost to collateralize large naked short positions in advancing share price environments makes it cost-prohibitive. Abusive MMs are often forced to put a blanket of naked short sales over markets where they “accidentally” ran up a huge naked short position, but where buy orders keep coming in. You’ll recognize this scenario when you see victimized issuers mysteriously trading their entire float of shares every 3 or 4 days with the market going absolutely nowhere. Does anybody really think that all of these issuer’s shareholders got up one morning and simultaneously decided to sell all of their shares? Unfortunately for U.S. citizens, this buy order-dominated scenario often occurs in promising development-stage corporations with a wonderful prognosis for success, that now have to be snuffed out, lest abusive DTCC participants take a huge financial hit. Many NSS proponents are of the mindset that all U.S. development-stage companies that advance in share price are by default “scams” in the midst of a “pump and dump” form of securities fraud. The irony of the SEC’s historical lack of success in stamping out “pump and dumps” is that they inadvertently welcomed an “irrefutable” form of fraud involving the blatant theft of money from naïve investors (NSS), in order to address a “suspected” form of fraud which gave rise to the “vigilante” type of naked short seller. 7) At the DTCC, the deterrence value of untimely buy-ins (which provides the “natural” deterrent to NSS abuses) has been surgically removed by DTCC policies, making the risk/reward ratio of this form of securities fraud incredibly low. The consistent refusal of the DTCC to buy-in the IOUs owed directly to them as the “loan intermediary” in the SBP’s pseudo borrowing process, is one of the two main factors that creates an invitation for fraudsters to pile on naked short sales on already brutalized victim companies. This refusal to buy-in is one of the most important pillars supporting that which many securities scholars refer to as “DTCC sponsored NSS” – namely the 100% certainty the fraudsters have that the DTCC will refuse to call in their own IOUs (while acting as the “loan intermediary” of the SBP) because of their claim of being “powerless” to do so. An equally important pillar supporting NSS “DTCC style” involves the ability to count on the DTCC to claim to be equally “powerless” in monitoring and buying-in the failed deliveries of their participants/owners held in an “ex-clearing” format. The claim here is that these non-CNS delivery “arrangements” (I love that term “arrangements”!) associated with failed deliveries represent “contracts” between the DTCC’s participants/owners, and that the DTCC does not monitor “contract” law – only “securities” laws. This, despite the fact that they volunteer to process the cash part of these naked short sales (leading to failed deliveries), and still “clear” these trades and issue “securities orders” to allow these “non-CNS delivery arrangements”. This de facto serves to artificially delay settlement, as expressly forbidden by 15c6-1 of the ’34 act. 8) NASD Rule 11830 defines the threshold for the number of CEBEs (above which mandated buy-ins are necessary) as 10,000 shares AND 0.5% of the number of shares legally issued. Any CEBEs exceeding this level indicates that abusive dematerialization (as reviewed in Chapter 3) is occurring. This level is where the alarm bells should create a deafening noise but unfortunately for investors the wire to that alarm bell was effectively short-circuited by several of the rules and regulations of the DTCC and NSCC. 9) The conventional metric for determining the age of CEBEs (above which buy-ins should occur) would naturally correspond to the spirit of Addendum C to the rules and regulations of the NSCC, which created the SBP for deliveries that for legitimate reasons couldn’t quite be delivered by settlement day. The authors of Addendum C were well aware that it was critical to keep the lifespan of the CEBE extremely short. The assumption was that the DTCC would rigorously monitor the age, quantity, and legitimacy of these representations of shares, as they were clearly capable of causing massive damage via artificial dilution. From a statistical point of view, the question that begs to be asked is: Is it a coincidence that the DTCC management: 1) allows its participants/owners to naked short sell with abandon, 2) refuses to monitor the age, quantity and legitimacy of the resultant failed deliveries, 3) refuses to call in its own IOUs resulting from its participants’ abuse of the SBP (because of its self-imposed “powerlessness” to do so), 4) refuses to monitor its participants’ failed deliveries in the ex-clearing netherworld (because of their theoretical “contractual” nature), despite the DTCC being an SRO in charge of “regulating the conduct and business practices of its members” as well as 17 A’s mandate to “promptly and accurately “settle” all transactions, and 5) goes well out of its way to remove the one natural deterrent to naked short selling abuse - the open-market buy-in? A second question begging to be asked is: when does a long litany of coincidences fail to plausibly remain a coincidence? Remember, the DTCC is its owners. It's not some independent 3rd party, off to the side. There are 2 parties in the investment arena: the investors, and the DTCC-participating “Wall Street professionals” - with a vastly superior “KAV” factor (Knowledge of, Access to and Visibility of the clearance and settlement system). The DTCC portends to be playing an intermediary role between the buying and selling parties, while acting in the capacity of a “contra-party” to all trades, and the “loan intermediary” in the SBP pseudo-borrow process. But, as mentioned in earlier chapters, you can’t play a legally defensible “intermediary” role when you ARE one of the two parties being “intermediated”. 10) The methodology of monitoring for the legitimacy of failed deliveries was probably assumed by Congress and the SEC to involve the DTCC’s monitoring of their participating market makers’ usage of the bona-fide market maker exemption, and detection of any suspicious trading patterns and failed delivery patterns. These patterns jump out at you when access to this data is attained, and yet no matter how often an abusive clearing firm fails delivery of shares of a given issuer, all further delivery failures of this issuer’s shares by the abusive clearing firm are still assumed to be “legitimate”, as if by default. Recall the Compudyne case cited earlier, involving nearly a thousand consecutive trades failing delivery, without a single alarm bell going off. Every regulator and SRO seems to think that the monitoring for bona fide market making activity is the job of a different regulator and SRO - which leaves us with a regulatory vacuum, and the resultant “Industry within an industry” we refer to as naked short selling. 11) As the DTCC has been recently yelling from the mountaintops, the SEC did indeed authorize the SBP in 1981 to address legitimate failed deliveries – provided that the reason for the delay was of a legitimate nature (and there are indeed “legitimate” reasons for short-term delays in delivery). The assumption was that the DTCC would create checks and balances to monitor for abuses of this ultra-risky gamble (which allowed for the deliberate creation of a minute amount of “counterfeit” share “replicas” in an effort to enhance efficiencies in the clearing process). We have already identified over a dozen of these theoretical “quests for enhanced efficiencies” that have been abused by some DTCC participants to gain leverage over the investors they owe a fiduciary duty of care to, so it is questionable if that assumption was a reasonable one. Be that as it may, the other assumption was that the participants of the DTCC would act in good faith with this gigantic new responsibility (and incredibly large temptation to leverage their “KAV” factor and steal from investors). As it turns out there is way too much money “in play” on Wall Street to assume that those with an inherent advantage won’t leverage it. 12) Dr. Leslie Boni, while working as a visiting economic scholar for the SEC, was given access to the DTCC records. This was heretofore unheard of, except for perhaps the New York Supreme Court’s granting of discovery into the DTCC trading records to the CEO of Eagletech, in their NSS case. Professor Boni found two distinct sub-types of delivery failures whose “median” ( half younger than and half older than) age was about 13 days. Half of delivery failures averaged about 6-7 days, assuming a bell-shaped curve distribution, and were of the type that the SBP was created to address. The older half of delivery failures, however, averaged approximately 106 days, again based upon a bell-shaped curve distribution. The overall average, or “mean” age of delivery failures, was 6 days plus 106 days divided by 2, equaling 56 days as opposed to T+3. These findings were obviously not consistent with the intentions of the SBP, as promulgated by Addendum C. Some DTCC participants had obviously chosen to not act in good faith, but rather to leverage their superior knowledge, access and visibility and abuse the SBP for their own monetary gain. They learned that nobody at the DTCC was rigorously monitoring for the age, quantity, or legitimacy of these failed deliveries, and that they could sell nonexistent shares all day long, and actually get access to the unknowing investors’ money. All they had to do was let the SBP allow these trades to “clear” via a pseudo-borrow, from what turns out to be a self-replenishing lending pool, whose contents are also admittedly not being monitored (see the @dtcc self-interview where the DTCC admits that they have placed their participants on the honor system in regards to what they place into the lending pool). Once this bogus trade cleared, then all the fraudsters had to do was to collateralize this debt on a daily marked-to-market basis. The precipitous fall in share price resulting from all of this artificial dilution involving “Share facsimiles” led to an unconscionable result - the investor’s money actually falls into the lap of the naked short selling fraudsters, despite the fact that they were still refusing to purchase the shares required to cover the short sale after inordinate amounts of time. As it turns out, short covering is not necessary to gain access to the defrauded investors’ money. One must only collateralize the ever-diminishing debt, as the share price does its 100% predictable plunge driven by all the artificial dilution being created. Unlike the DTCC and its participants, there are those investors and securities scholars who find this concept disturbing – and one hopes that the Senate Banking Committee and the House Financial Services Committee, the overseers of the SEC, will as well. Recall from earlier chapters that the risk of being bought-in was essentially zero, as the DTCC could be counted on to see to that via their policies and procedures. The closest thing to a real buy-in was just another trip to the self-replenishing lending SBP lending pool via the DTCC’s “Procedure X-1” Policy. “ www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/BlogID/1/Default.aspx
|
|
|
Post by kranker on Jul 2, 2006 10:12:12 GMT -4
STOCKGATE TODAY An online newspaper reporting the issues of Securities Fraud DTCC Accounting Standards; By the Numbers – March 7, 2006 David Patch For the past several years the Depository Trust Clearing Corporation (DTCC) has taken it upon themselves to venture into a full public campaign aimed at clarifying what they perceive to be misrepresentations stated about their methods of operations. Plaintiffs claiming illegal stock settlements involving shorting abuses have named the DTCC as a defendant in several lawsuits over these past years raising the ire of the Wall Street operation. In each case, the plaintiff has contested that the DTCC creates “counterfeit” securities within their Stock Borrow Program (SBP) to settle out a trade that has effectively failed the settlement process and that short sale investors are using this process to manipulate the price of securities. The plaintiff’s claim is that the SBP and the Fails-to-Deliver (FTD) hidden by the SBP are flooding the markets with excess supply of shares which creates a sell side imbalance on the stock price. The sellers then utilizing this sell side leverage to effectively cover the FTD when the price has fallen to profitable levels. The DTCC has set up a special section on their home page dedicated to the illegal short sale process now known as naked shorting. In that section, the DTCC has published materials that can lead you to certain conclusions if the material is taken at face value. The question is, how transparent has the DTCC been in their presentation of material? I researched the DTCC site and conducted some of my own analysis of the DTCC contentions based on the data provided. Let’s start with the understanding that the DTCC is the national clearance and settlement system for the US Capital Markets. The DTCC 2004 annual report identified that $1.1 Quadrillion in securities were settled through the DTC. Reports out of the DTCC identify that 2005 was even greater. This number represents the sub total dollar value of all trades settled through the Depository Trust Operations. That’s a lot of dough. But the fraud the plaintiffs speak of is with regards to those trades that fail settlement within the requirements of 3 business days after execution. What happens to them and how big a problem is it? In a March 2005 Interview with DTCC Newsletter @dtcc, General Counsel Larry Thomson claimed that 24,000 transactions daily failed the required settlement period. Thomson further went on to identify that approx. $6 Billion in new and aged fails were on the books of the DTCC daily and that the $6 Billion represented approximately 1.5% of the $400 Billion in trades that reach settlement daily. The problem is the DTCC accounting standards are all messed up. The DTCC is misrepresenting their numbers by continually comparing different time standards to the analysis. The $1.1 Quadrillion is an annual figure, the $400 Billion is a daily figure, and the $6 Billion is an accumulation of both daily and pre-existing fails. – Apples to Oranges to Banana’s. And these guys are the accountants for the market settlement system. So to understand the magnitude of the settlement failure problem, in annual dollar value, I went to the press releases presented by the DTCC regarding the NASAA Public Forum held in November of 2005 to address naked shorting abuses. According to Securities and Exchange Commission Asst. Director of Market Regulation James Brigagliano, “While there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without incident.” So what does 99% settlement accuracy represent? If the DTCC settles $1.1 Quadrillion in trades annually, 99% on-time settlement represents a staggering $10 Trillion in settlement failures. Of this $10 Trillion in failures, the DTCC also claims that 10% of all fails are settled outside the window of 20 business days. Again doing the math, $1 Trillion in annual trades executed exceed 20 business days in which the seller of that security makes good to the buyer of that security. One Trillion in investor capital is not seeing delivery of what was purchased for greater than one calendar month. And the DTCC is happy about this! How damaging can these delays be? In 2001 a seller of shares in Eagletech Communications sold shares into the market at $11.00/share. Tens of thousands of illegal shares were sold into the market to unsuspecting buyers. The sellers failed making good on delivery of the shares sold for over 250 consecutive trade days and only then delivered the security at a time when the stock was trading at the significantly reduced value of $0.50/share. The profit to the sellers for the illegal sale of securities was 21 times their ultimate investment since this investment involved selling first, taking the money, and only buying back at a later date. This data, remarkable as it is, comes directly from the records maintained at the DTCC and was released by the SEC under court order. The DTCC has refuted that this is a cause for concern. As an engineer by degree, we are trained to measure the quality of our operations by a standard called sigma. Designs, manufacturing processes, accounting are all developed to meet quality levels and standards equal to six-sigma. Six-Sigma represents a level of quality equal to 3.4 defects per 1 Million events. To apply a six-sigma standard to the financial settlement process, the dollar value of annual settlement failures, with a $1.1 Quadrillion in trades settled annually, would be approx $3.5 Billion annually. By the DTCC’s own comments, they carry a liability of $6 Billion in aged and new settlement failures on their books daily. How important is this? This is your financial future, your investments, and the manner in which Wall Street respects your financial safety. This is not how your widget in the dishwasher is machined and there is no rework process if a failure took place. In the financial environment, a lost investment has no recovery plan and a manipulated investment rarely has a satisfactory reconciliation. On March 1, 2006 the DTCC announced that they are refunding the member firms of Wall Street a record $528 Million in rebates after already providing these firms with a $161 Million reduction in clearance and settlement fees. Funny, my Commissions on trades never changed and Wall Street did hand out $22 Billion in bonuses this year. I wonder if I was serviced properly with my share of the rebate. For those investors who were on the failing end of some $10 Trillion in trade executions annually, we could all come to the logical conclusion that the DTCC would be better served taking the excess cash from operations and invest it on making the settlement process more efficient and more secure to the investing public. The SEC and NASD have shown through recent enforcement activity that settlement failures are a venue for manipulation and while this rebate money looks good in the bonus checks of the Wall Street employees, it would look better if it were used to clean up the loophole used to defraud the unsuspecting public. The DTCC has the authority to suggest policy changes to correct the loophole. Unfortunately the DTCC Management has elected to spend their resources documenting a paper trail of misleading commentary aimed at spinning a known bad situation into a non-event and diverting the rest back to the firms represented by the DTCC Board Members. The DTCC is free to correct my assumptions if they so choose. Evidence will be required however. FOIA requests submitted to the SEC for information on the dollar value of settlement failures have repeatedly been turned down leaving us to fend for ourselves. For more on this issue please visit the Host site at www.investigatethesec.com . Copyright 2006
|
|
|
Post by kranker on Jul 2, 2006 10:23:09 GMT -4
June 28, 2006 02:47 PM US Eastern Timezone DTCC Clarification on Fails to Deliver NEW YORK--(BUSINESS WIRE)--June 28, 2006--The Depository Trust & Clearing Corporation (DTCC) today issued a clarification of a statistic it reports each year in its annual report. The clarification is intended to provide a more accurate description of a statistic on failed transactions - including "Fails To Deliver" (FTD) - that certain third parties have persistently misinterpreted or misrepresented, seeking to buttress their contention that the levels of FTDs is evidence of abusive short selling and "naked short selling." These parties cite DTCC's reported statistic as the amount of FTDs each day. Their characterizations are grossly inaccurate and paint a distorted picture of the reality of the marketplace. National Securities Clearing Corporation (NSCC), a subsidiary of DTCC, acts as a central counterparty to virtually all broker-to-broker trades in the U.S. As such, the numbers NSCC reports relating to "failed transactions" reflect both buy and sell sides of a trade. These numbers include both fails to deliver and their offsetting fails to receive, so that the number thus doubles the amount involved (i.e., the same transaction is counted twice, once on the "deliver" side and once on the "receive" side). In DTCC's most recent annual report indicated that as of December 31, 2005, NSCC had fails outstanding worth approximately $6 billion. This value is persistently described by third parties as the value of FTDs as of that date. Since it is actually the value of all fails - i.e., both fails to deliver and fails to receive - effectively, the $6 billion cited by third parties actually represents $3 billion in fails to deliver, or about 1.1% of the $266.5 billion in trades processed on the average day by NSCC in 2005. Moreover, the $3 billion figure also represents all fails to deliver at NSCC, including fails in fixed income trades (corporate and municipal bonds). While the number of fails and percentage of fails in fixed income trades changes each trading day, on December 31, 2005, fixed income trade fails were equal to approximately 15% of all fails. Importantly, DTCC notes that this FTD total reported is not just for equities on the "threshold list" of companies, but rather reflects fails on all equities and corporate and municipal bonds. For over one year, DTCC's Web site has reported that the $6 billion as "fails to deliver and receive" thus enabling people interested in the topic to understand that the figure reflects both halves of a transaction. (See www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html.) Nonetheless, third parties persist in applying the number to fails to deliver only. The DTCC Web site has also made clear that the figure is not a daily amount of fails, but a combined figure that includes both new fails on the reporting day as well as aged fails. While DTCC does not know the reasons for a fail to deliver (this is only known by the broker-dealer and the marketplace), as the SEC has pointed out, "There are many reasons why NSCC members do not or cannot deliver securities to NSCC on the settlement date. Many times the member will experience a problem that is either unanticipated or is out of its control, such as (1) delays in customer delivery of shares to the broker-dealer; (2) an inability to borrow shares in time for settlement; (3) delays in obtaining transfer of title; (4) an inability to obtain transfer of title; and (5) deliberate failure to produce stock at settlement which may result in a broker-dealer not receiving shares it had purchased to fulfill its deliver obligations." With information on the actual FTD situation readily available, DTCC believes the failure to use the proper number in any meaningful discussions of naked short selling reflects a conscious attempt to mislead the investing public and undermine the confidence in the workings of our capital markets.
|
|
|
Post by kranker on Jul 2, 2006 10:23:43 GMT -4
Press Release Source: Overstock.com Overstock Celebrates New Spirit of Glasnost at DTCC Friday June 30, 3:50 pm ET SALT LAKE CITY, June 30 /PRNewswire-FirstCall/ -- Overstock.com® (Nasdaq: OSTK - News; www.overstock.com ) CEO Patrick M. Byrne issued the following statement today in response to a Depository Trust & Clearing Corporation press release about its "failure to deliver" data. Dear DTCC, On Wednesday you issued a clarification regarding a statistic about which you feel there has been, "a conscious attempt to mislead the investing public and undermine the confidence in the workings of our capital markets." For the last year a handful of lawyers and economists (who think that your firm is "engaged in a conscious attempt to mislead the investing public and inflate the confidence in the workings of our capital market"), have repeatedly asked for clarification concerning the $6 billion "fails" number which you have yourself publicized (Former Undersecretary of Commerce Dr. Robert Shapiro asked about it point blank in his public letters to "Euromoney" magazine and to Jill Considine, CEO of the DTCC). If it is true that your $6 billion figure counts the value of the fail separately on both sides, it's unique in financial reporting: all other trades as reported by the DTCC and the stock exchanges -- daily trading volume, or the value of all daily, monthly or annual trades -- count values or costs once, not twice. Moreover, if that is the system you use to come up with the $6 billion figure, you have taken a long time to clarify the record (you might mention it to the SEC, which uses "fails" and "fails to deliver" synonymously in their Freedom of Information Act responses). So I suspect I speak for all of us when I say that I am touched by the new spirit of glasnost that animates your communications. While I applaud this new spirit of transparency from DTCC, I wish to take advantage of it by requesting additional clarifications that will go far to allay any remaining skepticism of the investing public. 1. I want to know the difference between the number of shares a company has issued and the total number of long positions of everyone in the world in that stock. I believe the difference is the sum of the short position, failed to deliver short sales, failed to deliver long sales, failed to receive long and short sales, open positions, desked trades, and ex-clearing balances. My questions here are: Did I miss any nook or cranny? Do market-making and ex-clearing balances always fall into one of these categories? Do failed to receive long and short sales double-count precisely the failed to deliver ones precisely (and if so, should not be counted)? 2. Ex-clearing seems like a fascinating and unfairly maligned practice. Together we can clear up the suspicions that linger concerning this no doubt honorable activity. Your General Counsel Larry Thompson gave a kind of self-interview ( www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html ) where he asserted that 18% of fails are addressed by the DTCC's Stock Borrow Program (SBP). I think that means that 82% aren't, but feel free to correct my math on that. In any case, presumably this 82% resides in ex-clearing. This would suggest that the total number of fails in a stock should equal (100/18) = 5.55 X the number that reside within the DTCC. Many DTCC skeptics believe that these items and practices expand exponentially the number of shares in a company's float, though the shares represented are "manufactured" by the brokerage community and were never issued by the company: market participants in the Caribbean privately suggest, however, that the real ratio is 10-20 to 1. Which is correct, 5.55 or 20? Are you aware of the practice of "bed & breakfasting shares" and could you describe its impact on ex-clearing balances? Most respectfully, are you aware of all ex-clearing balances? 3. I'd like to work through one example in an effort to dispel the aspersions cast on your fine firm. A recent SEC Freedom of Information Act response (thesanitycheck.com/Blogs/DavePatchsBlog/tabid/66/EntryID/344/Default.aspx) shows that in 2005, during a period when Regulation SHO was in full operation, "fails" (as the SEC calls them) in OSTK were 36,681 shares at the start of the January, then rose steadily to end 2005 at 2,062,328 shares (and actually topped 2.3 million once in the fourth quarter of 2005). If the number of OSTK's fails track Mr. Thompson's statistic, Mr. Thompson's math suggests that the true fails thus reached 2.3 million X 5.55 equals approximately 13 million fails. If I believe the Caribbean ratio, then fails reached 2.3 million X 20 = 46 million fails. Of the roughly 20 million shares issued and outstanding of OSTK, 12 million are closely held (mostly in paper), and only 8 million see their settlement entrusted to the DTCC. What I think this means is that the total fails position in OSTK as a percentage of the float reached either 25% (if I believe the SEC) or 163% (if I believe DTCC General Counsel Larry Thompson) or 675% (if I believe some Caribbean wise-guys). Since I would never want to be one of those making, "a conscious attempt to mislead the investing public and undermine the confidence in the workings of our capital markets," I wonder if you might (in the spirit of glasnost) indulge me an additional "clarification" on this detail. With regret, I must inform you that some cynics continue to doubt you. For example, you note that you settle $266.5 billion of trades per trading day but only $3 billion, or 1.1%, remain unsettled at the end of each day, and 15% of these are bonds. Skeptics, however, indicate that if one consistently leaves bonds out of the count, then 85% X $3 billion equals approximately $2.5 billion equities fail are unsettled at the end of every day, and since you only settle $82 billion of equity trades per day it means that 3% of trades remain failed. In addition, as your website boasts that 96% of trades are settled through your Continuous Net Settlement system, it would appear that the accumulated fails are somewhere between 1/3 and 1/2 of a day's trading. These skeptics note also that these numbers count the current value of the failed stocks, not the value of stocks at the time the failures occurred, nor the value of stocks that have been delisted or represent ownership in companies that have gone bankrupt. Finally, they believe that you have glossed over the issue of the huge numbers of protracted fails documented in the Boni report (which indicates that fails persist for an average of 56 days) and attested to indirectly at least by the Regulation SHO Threshold Securities lists and the SEC FOIA responses on total numbers of outstanding fails. Such cynics argue that real disclosure would include percent of value, percent of trades and percent of shares alongside dollar value, number of trades and number of shares. But I, for one, am convinced that you will continue your efforts to keep America's capital markets as transparent as they are today. Sincerely, Patrick M. Byrne CEO, Overstock.com Overstock.com, Inc. is an online "closeout" retailer offering discount, brand-name merchandise for sale over the Internet. The company offers its customers an opportunity to shop for bargains conveniently, while offering its suppliers an alternative inventory liquidation distribution channel. Overstock.com, headquartered in Salt Lake City, is a publicly traded company listed on the NASDAQ National Market System and can be found online at www.overstock.com. Overstock.com is a registered trademark of Overstock.com, Inc. (Logo: www.newscom.com/cgi-bin/prnh/20030520/LATU020LOGO-a )
|
|