November 18, 2005 (FinancialWire) Signaling impatience, state regulators will host a globally webcast forum in Washington, DC, Wednesday, November 30, in what is admittedly a shot across the bow at the U.S. Securities and Exchange Commission to “consider additional measures to limit the detrimental impact of abusive naked short-selling of the stock of small businesses,” according to Patricia D. Struck, president of the North American Securities Administrators Association.
November 18, 2005 (FinancialWire) Signaling impatience, state regulators will host a globally webcast forum in Washington, DC, Wednesday, November 30, in what is admittedly a shot across the bow at the U.S. Securities and Exchange Commission to “consider additional measures to limit the detrimental impact of abusive naked short-selling of the stock of small businesses,” according to Patricia D. Struck, president of the North American Securities Administrators Association.
Struck said NASAA will examine the “effectiveness of Regulation SHO,” which has thrust a giant spotlight on settlement failures impacting millions of shareholders in hundreds of companies, ranging from the largest, such as Martha Stewart Living Omnimedia (NYSE: MSO) to the smallest, such as Great West Gold (OTCBB: GWGO), as well as reputedly resulting in the meltdown of Refco (OTC: RFXCQ) and the subsequent investigations, including a probe of Credit Suisse First Boston (NYSE: CSR).
NASAA Director of Communications Bob Webster told FinancialWire that a panel of leading financial and academic experts for the event, scheduled from 1 p.m. to 3 p.m. at the Paris Ballroom of the Sofitel Lafayette Squre Hotel at 806 15th Street NW, will be released Monday, November 21.
The announcement is at
www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/3923.cfm Those who wish to reserve a seat should contact Lonnie Martin at 202-737-0900 or email Martin at lm@nasaa.org
NASAA had previously signaled it growing discomfort with the pace of the SEC response to a scandal that some believe could implode the entire U.S. financial system the same way Refco was brought down after what may have been a mammoth $10.5 billion exposure to what bankruptcy accountants entered as “securities sold, not yet purchased.”
Ralph Lambiase, the Connecticut state regulator and immediate past president of NASAA, has recently established a multi-state task force on naked short selling, and he has warned the SEC about the need to “do something” about the imperious Depository Trust and Clearing Corp., which he and others appear to believe is at the heart of fails-to-deliver.
The DTCC has furiously fought to punish and impede any media that has dared to mention it in connection with StockGate.
Recently, Larry Thompson, Chief Counsel for the Depository Trust and Clearing Corp., mounted what appears to be a brazen and open libel of FinancialWire directly in the face of warnings that members of his Board of Directors received only days before for what Attorney Marshal Shichtman, Esq., referred to as reckless and apparently willful misbehavior against the media.
All 20 members of DTCC’s board, including Jill M. Considine, Chair and CEO, and Donald F. Donahue, COO, DTCC; Jonathan E. Beyman, CEO, Lehman Brothers (NYSE: LEH); Randolph L. Cowen, Global Head of Technology and Operations, Goldman Sachs Group (NYSE: GS); Dianne Schueneman, Senior VP, Merrill Lynch & Co. (NYSE: MER), New York; Douglas Shulman, President, NASD, Inc., Washington, DC; and Timothy J. Theriault, President, The Northern Trust Co. (NASDAQ: NTRS); and Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange, had been asked by Shichtman to “reign in” Thompson and other high executives of DTCC following two documented instances of media tampering involving FinancialWire.
The latest attack came in a letter to Financial Express in India, in response to Sucheta Dalal's column, 'Pitfalls ahead in new Sebi proposal?” Stating that the reference to the Depository Trust & Clearing Corporation is “largely inaccurate,” Thompson said that “DTCC's stock borrow programme is not being probed by NASD or any other regulator.”
Earlier in the year, the DTCC’s counsel had also said it had not been sued despite public evidence that it had been.
Thompson said that DTCC's subsidiaries serve as the central infrastructure in the US for post-trade clearance and settlement of virtually all trading of equities and fixed income securities. “Our activities are highly regulated by the US Securities and Exchange Commission, the Federal Reserve and the New York state banking department.
“Ms Dalal's reliance on Financialwire is unfortunate. It is not a legitimate news source.”
He added that on her reference to lawsuits, DTCC has been sued by a handful of companies and investors in regard to naked short-selling. In every case but two (which are still pending dismissal motions), the cases have been dismissed or withdrawn by the plaintiffs.
“DTCC does not regulate short selling (naked or otherwise) or other marketplace transactions, and has no power either to allow or stop it. Regulatory and enforcement powers rest with the SEC and with the exchanges upon which the transactions are conducted.”
Shichtman was not available to comment Thursday but the published statement is very similar if not the same as has been made to distribution vendors of the newswire in attempts to directly interfere with its publication.
Financial Express has been asked by FinancialWire to ascertain Thompson’s “proof” behind his assertions, noting that its team of editors and reporters, most of whom are profiled at
www.financialwire.net , have extensive journalism backgrounds, and that there is no basis whatsoever for what now appears to be libelous comments.
The most recent effort, the week of September 18, followed the DTCC’s successful interference with FinancialWire’s distribution via Investors Business Daily and Yahoo, Inc. (NASDAQ: YHOO) on February 7, 2005, a deed to which attorneys for the DTCC admitted to in a letter to Shichtman in April, in what appears to have been at the time a full-court press against unfriendly news.
On April 10, for example, a much-vaunted expose on General Electric’s (NYSE: GE) Dateline NBC program was abruptly and suspiciously cancelled, and run weeks later in an extremely truncated form that made no mention of the DTCC, said to have been the program’s primary target. The extent of potential interference in that programming remains a mystery, as those close to it have all declined to discuss it.
If there was interference, it would surely denigrate NBC in stark contrast to the standards set by CBS’s 60 Minutes in the infamous “Big Tobacco” expose that became a highly-acclaimed movie, “The Insider,” and more recently the movie “Good Night, and Good Luck,” about how that network stood up to Joe McCarthy in the Communist media-baiting era of the 50s.
On or about the same time, the DTCC had castigated EuroMoney after a March, 2005 article on illegal naked short selling quoted then U.S. Securities and Exchange Commission Head of Market Regulation Annette Nazareth’s assistant, James Brigagliano that prior lawbreakers were “grandfathered” because “we were concerned about generating volatility where there were large pre-existing open positions, and we wanted to start afresh with new regulation, not re-write history.” Nazareth, now an SEC Commissioner, had previously told the New York Times that naked short selling amounted to no more than complaining shareholders “who want their stock to go up.”
Since, one of those “large pre-existing open positions,” apparently in the neighborhood of $10.5 billion, has come back to haunt the SEC, in the form of a line item, “securities sold, not yet purchased” in the bankruptcy filing of Refco (NYSE: RFX; OTC: RFXCQ), according to the Financial Times. These events apparently have created a huge crisis of confidence in the institutions previously believed to be there to protect the individual investor and create a level playing field.
A recent Investrend Poll at
www.investrendinformation.com showed that a whopping 89% of online respondents believe the SEC should be “hugely” blamed for the Refco meltdown. An even more lopsided 92.05% stated that the DTCC should “be punished” for censorship violations of the First Amendment. And in the current Investrend Poll, 50% so far believe that these new scandals will keep individual investors on the sidelines and out of the markets.
The DTCC remains under intense pressure from regulators over its controversial “stock borrow program,” its move to automated settlements that has unsettled many in the financial community, including foreign exchanges such as Sebi in India, according to the Financial Express, that are now reconsidering copying such a system, and from a score of lawsuits claiming the agency’s policies and loans have undermined the financial system and hurt hundreds of small public companies and thousands of individual investors who have lost millions.
The DTCC itself admitted in its front-page editorial complaining of Euromoney and the charges it expected from Dateline NBC, that $6 billion of securities go unsettled every day. The admittance was in the form of a boast that this amounted to just a small segment of each day’s clearances.
In his letter, Shichtman noted that while the DTCC’s standing of an SRO, is “highly disputed,” and with it “any claim to any type of immunity,” that it has a “heightened responsibility to the public” as a quasi-SRO “solely owned by SROs,” meaning NASD and the NYSE. He asked the DTCC directors to set a proper “tone at the top” by reigning in the media-bashing and news interferences practiced by the DTCC’s top executives.”
He said that the DTCC’s guise of its interference as “free speech” does not excuse slander, libel and tortuous interference, nor, if the DTCC is held to be a government-aided organization, the clear violation of FinancialWire’s First Amendment rights.
DTCC board members include Gerald A. Beeson, Senior Managing Director and CFO, Citadel Investment Group, Chicago; Jonathan E. Beyman, CEO, Lehman Brothers (NYSE: LEH), New York; Frank J. Bisignano, CEO Global Transaction Services, Citigroup (NYSE: C), New York; Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD), J. Charles Cardona, Vice Chair, The Dreyfus Corp.; Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc., New York; Arthur Certosimo, Executive VP, Bank of New York (NYSE: BNY), New York;
Also, Jill M. Considine, Chair and CEO, The Depository Trust & Clearing Corporation (DTCC), New York; Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB), Charlotte, NC; Randolph L. Cowen, Global Head of Technology and Operations, Goldman Sachs Group (NYSE: GS); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC), New York; Norman Eaker, Principal, Edward Jones, Des Peres, MO; Allan D. Greene, Executive VP, State Street Corp. (NYSE: STT), Boston, MA; and
Also, Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange, Boston; Heidi Miller, CEO, JPMorgan Chase & Co. (NYSE: JPM); Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR), New York; Ronald Purpora, CEO, Garban LLC, Jersey City, New Jersey; Dianne Schueneman, Senior VP, Merrill Lynch & Co. (NYSE: MER), New York; Douglas Shulman, President, NASD, Inc., Washington, DC; and Timothy J. Theriault, President, The Northern Trust Co. (NASDAQ: NTRS), Chicago.
Citing FinancialWire’s coverage of the widening financial scandals associated with naked short sales, Financial Express had said the Securities and Exchange Board of India (Sebi) must rethink any automated trading systems such as those used and proposed by the Depository Trust and Clearing Corp., which it said American investors no longer trust.
Columnist Dalal cited manipulative scandals involving Refco (NYSE: RFX) and Overstock.com (NASDAQ: OSTK) as reasons M. Damodaran, Sebi chief, should go slow on permitting short-selling by institutional investors. Short sales abuses have vexed and embarrassed American regulators as well as institutions such as Goldman Sachs (NYSE: GS) and Credit Suisse First Boston (NYSE: CSR).
Financial Express said that automation has its downsides. “Unless the regulatory system is constantly alert, ingenious crooks are always working to identify weak links.”
The article is at
www.financialexpress.com/fe_full_story.php?content_id=106477 Dulal said that a “lending and borrowing mechanism is expected to prevent rampant price manipulation and keep out naked short-sales, that led to the demise of the old badla-based system of forward trading. Will it achieve this aim?
“It is pertinent to look at the growing US controversy over illegal naked short-sales and its consequences. FinancialWire … posted an article in March 2005 about a Michigan man, Robert C Simpson, who acquired 100% of the issued and outstanding stock of Global Links Corp. Two days later, he found over 50 million shares of the company shares were traded on the bourses. This case came up for discussion by the Senate Banking Committee and was probably the earliest official acknowledgement of naked short-sales (without first borrowing shares, as is legally required).”
“Since then, Patrick Byrne, CEO of a company called Overstock has gone public with the fact that his company’s float changed hands four or five times in a day. How, in a perfectly functioning lending and borrowing mechanism? And where are all the extra shares coming from to give delivery, unless there is a large incidence of illegal naked short-sales? Byrne has publicly alleged his father failed to get delivery of 200,000 shares purchased by him through a blue-chip brokerage firm. He is quoted as saying anywhere between 5-20 million counterfeit shares are currently in the marketplace, presumably on the major exchanges alone.
“The US debate is important, as their trading system has become the global standard for capital markets. It is, hence, pertinent to note that extraordinary trading volumes (yet unexplained phenomena in highly manipulated Indian stocks as well) and short delivery during settlements are increasingly being flagged as manifestations of a possible scam.
“More startling, many investors have accused The Depository Trust & Clearing Corpo-ration (DTCC), a holding company that clears and guarantees almost all trades in the US, of engineering naked short-selling schemes. The DTCC has faced 12 lawsuits in this connection. Most of these were dismissed, but the corporation itself has admitted, in a Q&A posted on its website, that naked short-selling occurs, but the extent to which it occurs is unclear.
“The DTCC’s stock lending and borrowing programme also continues to be under regulatory scrutiny by the NASD and other government agencies. The US debate attributes naked short-selling to counterfeiting and collusion between brokers, dealers and, of course, shadowy hedge funds. In most cases, the sales, accompanied by large, unexplained trading volumes, aimed to destroy the value of small companies.
“An October 13 report by FinancialWire also suggests research analysts, especially Net-based ones, also have a role to play in setting the stage for shorting. It quotes specific examples of alleged collusion between broker-dealers and independent research firms to publish negative information, to beat down the prices of target companies.
“This raging American debate over rampant price manipulation and misuse of automated trading systems is extremely relevant for us, since Sebi plans to permit short-selling by institutional investors. Indian investors, too, have noticed that a large and unexplained spurt in trading volumes always signals the start of a big price ramping operation. Our stock exchanges and regulators simply sleep over this phenomenon, even when these are pointed out to them.
“Second, Indian regulators are clueless about the true beneficial ownership of the most powerful market segment, namely, foreign institutional investors. Add Sebi’s record of poor prosecution of important cases and our slow judicial system and we have a recipe for serious trouble. Sebi may end by attempting to regulate institutional short-sales, while remaining partially blindfolded.”
Meanwhile, according to Financial Times, the $10.590,379,000 “securities sold, not yet purchased” line item in the Refco (NYSE: RFX) bankruptcy balance sheet is not only naked short selling, it is under intense investigation by authorities. The article is at
www.efinancialnews.com/index.cfm?page=home&pdigest=18500000000074245&uid=5405-7710-922621-810209 FT says that the firm’s IPO underwriters Goldman Sachs (NYSE: GS) and Credit Suisse First Boston (NYSE: CSR) both have investigators looking into the illegal but allegedly widely practiced manipulative practice among essentially unregulated hedge funds and other financial institutions that now appears to be a naked short sales bubble that could imperil the U.S. and worldwide financial markets.
Overstock’s CEO Patrick Byrne appeared on News Corp.’s (NYSE: NWS) Fox with Neil Cavuto to state that there are at least twelve Refco’s “buried in the system,” and Cavuto said some say it could be as many as 60 institutions ready to implode. He said a “systemic” problem could cost the Depository Trust and Clearing Corp. as much as $100 billion to clean up.
The video for this is at
www.vmsdigital.com/MyFiles_Detail.aspx?mediaId=86578&onum=CDD7589F-A1E6-4B07-B635-4731FE7B438A The line item was so unbelievably monumental that two of the major critics of naked short selling, Dave Patch, of InvestigatetheSEC.com, and Bob O’Brien, director of the National Coalition Against Naked Short Short Selling, were reluctant to positively identify the $10.5 billion as Refco’s naked short position. The Financial Times says investigators are not so reticent, and “have been unable to find which shares, if any, were involved.”
The document is at
bankrupt.com/refco.txt Critics have said that if you lift the covers off similar financial institutions and hedge funds, and even many of Wall Street’s top investment banks and brokerages, the $10 billion exposure at Refco could be multiplied 100 times over, and may inhabit every nook and cranny on the Street. Few companies initiate buy-ins, and such exposure is just bounced around, or “borrowed” from a DTCC. that may also be at significant risk should it be forced to call in its “loans.” The DTCC has also said that there are $6 billion in “fails to deliver” every single trading day. That could add up to some $1.5 trillion every year, not counting attrition from late deliveries.
Already the SEC and the U.S. attorney is probing a $1.4 billion hedge fund, Alexandra Investment Management LLC, and it is not yet known what that investigation will uncover. The fund has revealed that regulators are investigating “numerous participants” in PIPEs, an anacronym for private investments in public equities. Often such investigations end, however, with only a knuckle knock, with no restitution to shareholders of targeted small public companies.
The U.S. Securities and Exchange Commission is under heavy scrutiny as well over Refco since many claim it is just the tip of the iceberg in the illegal naked short selling scandal known as StockGate.
Said the New York Post:
“It is believed the monies at the heart of the Refco scandal are in fact unsettled funds related to the illegal naked short selling, and many have theorized that there may be untold billions of dollars in other financial institutions and hedge funds in the same leaking lifeboat.”
The Post said no new laws are needed. “Enforcement is needed.”
In his Fox appearance, Byrne said he does not expect the SEC to be able to clean up this situation, and hinted that it will require either judicial or Congressional intervention.Gadfly David Patch’s CNBC interview questioning the SEC’s involvement is at
www.vmsdigital.com/MyFiles.aspx?Onum=8FD88353-D1CF-49AB-96FB-F5B3D748534DHis site,
www.investigatethesec.com , has long held that the SEC has scrambled to protect illegal manipulators for fear that the lawbreaking had gone on so long and that it is so huge that it threatens the nation’s financial underpinnings. On CNBC, Patch again asked why the SEC can sit by and watch scores of companies listed on the Regulation SHO threshold list for almost a year, signifying that they are in continuous default of settlements required by the law.
He also asked why the SEC would try to “grandfather” the millions of settlement failures that preceded Regulation SHO, which went into effect in January. The “grandfathering” still hasn’t been court-tested as to whether it may be a kind of “pardon” that only a President may issue.
The SEC and the Depository Trust and Clearing Corp. continue to stonewall any attempt to require transparency in the marketplace as to the extent of fails to deliver, which some see as just a euphanism for “counterfeit shares.”
This scandal comes hard on the heels of allegations of misdeeds by Gradient Analytics and employees of TheStreet.com (NASDAQ: TSCM), in conspiracy with David Rocker and Rocker Partners in manipulating the stock of Overstock.com (NASDAQ: OSTK) and others comes another explosive case, this time against Refco Inc. (NYSE: RFX), one of the primary alleged miscreants in destroying Sedona Corp. (OTCBB: SDNA), once a Nasdaq-listed company.
Not since the Enron and Worldcom scandals has the financial markets been under such growing suspicion, except this time the cancer is not just in a treatable part of the body. This time it has spread through the lymph nodes and appears to be present in every vital organ as scores of companies seem permanently entrenched in the threshold lists maintained by Nasdaq and the NYSE, signifying over three-quarters of a year of the existence of counterfeit shares and unsettled trades.
Overstock CEO Patrick Byrne, for instance, has released transcripts of discussions between himself and Morgan Stanley (NYSE: MWD) over shares that he could not get delivery on, and says his father has still not gotten delivery on 75,000 shares that he bought.
Byrne said that he believes between 5 million and 20 million counterfeit shares are currently in the marketplace, presumably on the major exchanges alone.
He has also added libel to the list of legal charges against Rocker and Gradient and others.
Former Refco CEO Phillip Bennett has been arrested on charges of deliberately misleading shareholders when they purchased shares in the company’s recent public offering. He had been placed on leave by his company as it launched an investigation into $430 million the company said was owed by an entity he controlled in a transaction that was hidden from the public.
The company had already lost $1.65 billion in market value, leaving investors in the public offering extremely angry.
Also fired was Santo Maggio, president of Refco Securities, whom the company said was believed to have known about Bennett’s activities.
According to the New York Post, Maggio was already “in the middle of an SEC probe that would have probably gotten him suspended one year from his supervisory duties” related to Refco’s relationship with Rhino Advisors, a hedge fund that illegally shorted the stock of Sedona Corp.
The new case winds its way right back to the growing StockGate scandal as the Post quotes a “source familiar with the investigation” that the receivables in the latest probe “probably came from short sale positions made from a shuttered hedge fund.”
The levees protecting the underworld of naked short selling, despite efforts of many regulators to try to prop up a system on weakened stilts appear to be crumbling, forecasting a potential Wall Street disaster that would not be unlike what happened in New Orleans and in other low-lying real estate.