the Darkside revisited

[Svenwulf]

always good to repost this for new folks, about 20 minutes i think:

http://www.businessjive.com/nss/darkside.html

prompted by the receipt of the following. congratulations, Mr. Bagwell.

Subject: File No. S7-21-06
From: H Glenn Bagwell, Jr.
Affiliation: Attorney

February 12, 2007
To the Commission:

Thank you for the opportunity to comment on certain proposed amendments to Regulation SHO, reference File No. S7-21-06.

It is disappointing yet telling that the Commission focuses its efforts on removing a hindrance, however feeble and easily avoided, to market manipulation and unbridled short selling by removing at this time one of the few regulatory limits on bid slamming by short sellers.

The investing public had hoped the Commission would first take substantive action to prevent the daily bear raids and short side manipulation against victim issuers (and their shareholders) that result from the counterfeiting of securities and so called "naked" short selling. Yet the theft continues as Wall Street makes the Commission look ever more hapless and foolish, or worse, bought and paid for, on this incredibly important issue.

The Commission knows that settlement failures are epidemic on all U.S. public markets and exchanges. The Commission knows that Wall Street's brokers, market makers, prime brokers, clearing firms, and their bank and hedge fund masters--aided and abetted by the utterly corrupt Depository Trust and Clearing Corporation (DTCC)--are stealing billions annually from the investing public by taking investors' money and exchanging that real money for what amounts to nothing more than fraudulent unregistered securities created by the manipulators themselves, without the consent or even the knowledge of the corporations these counterfeit securities purport to represent, much less the victim purchasers of the fake securities.

Market makers on over the counter securities abuse their special "market maker exemption" on a daily basis as they short sell "naked" the shares of small issuers for quick profit, colluding to stack offers and thus "paint" the Level 2 screens of their victims as weak while overwhelming buy side pressure with counterfeit securities and depressing the prices of their victims. Then these Commission-blessed predators have the gall to submit comment letters to the Commission claiming that removing the grandfather clause will reduce market liquidity. Meanwhile, as an example, no one from Knight Trading or Deephaven Capital Management has gone to jail or even been indicted for abusing the former's market maker exemption in conjunction with the latter's PIPE investments.

While Wall Street and Congress fret over the loss of world "market share" for American securities exchanges and markets and blame it on too much regulation, the brontosaurus in the room is studiously ignored by the regulators, politicians, and New York financial media. These guys can continue to fiddle while their money masters torch Rome, but the rest of the world knows that if their companies list on the U.S. exchanges or markets, the regulators and self regulatory organizations (SRO's) here will not protect them from financial industry predators who artificially and illegally increase the supply of victim securities to depress the prices thereof.

Since Wall Street has decreed that the Commission permit all of them to hit bids without restraint (after all, why should market makers, specialists and other counterfeit long sellers have all the fun?), and has provided the Commission with a few industry shills to provide "academic" cover for the decision, we the public know that the "fix is in" and this proposed rule may as well be labeled final now.

However, as a corporate and securities lawyer who sees more and more potential investors giving up on the U.S. markets, and more and more private companies refusing to list in the U.S., in both cases because of the unregulated and uncontrolled bear raids and stock counterfeiting that occur daily in the U.S. markets and exchanges, I would like to go on record requesting that the Commission, as a symbolic gesture, restrain itself from removing this minimal protection against attacking bids until the Commission or at least the SRO's begin enforcing the current rules and regulations and require settlement of all trades in a timely manner.

The Commission must amend Regulation SHO to immediately eliminate the grandfather clause and the market maker exemption. It is unfathomable that the Commission continues to stall these initial amendments to Regulation SHO. The Commission should go further and require all market makers and specialists as well as every other market participant to timely deliver all the securities they purport to sell, and if delivery is not timely made to immediately buy them in at market prices to prevent settlement failures.

The Commission must remove the financial incentives for market predators to continue to create and sell unregistered securities and in general abuse the settlement process. Don't let them have any of the cash, including any commissions, until they settle the trades. Don't let their clearing firms mark down the prices of shares the participants short as the prices are driven down. Force the clearing firms to police themselves and their participant firms. Shut down the DTCC's corrupt stock "borrow" program for good. And finally, start referring these criminals to the U.S. Department of Justice for criminal prosecution for market manipulation and for the counterfeiting of corporate securities, which is what planned, non-incidental settlement failures are.

Sincerely,
H. Glenn Bagwell, Jr., Esq.

SHO links for the three major US exchanges:

http://www.nyse.com/Frameset.html?displayPage=/threshold/

http://www.nasdaqtrader.com/aspx/regsho.aspx

http://www.amex.com/amextrader/

[Svenwulf]

i held off posting this, not wanting to feed the animals. it is important imo. i respect Cramer, mainly because he does speak frankly about things like the following, but always remember that wall street is designed to take your money. instead of bashing Cramer, he should be viewed in terms of a reformed rum runner. who better to show the feds where the shine is stashed? i personally am more concerned with feds not interested in looking for the shine, but i understand most's reluctance in pointing out their lack of enforcement. Cramer is a much easier target. in any event, enjoy:

Damn the Torpedoes - March 2, 2007
David Patch

As a kid I always thought torpedoes were these missiles shot from the hulls of submarines. It was a sign of war times and war movies. Little did I know that the guys on Wall Street had a different use for the term best associated with destruction and death.

Jim Cramer, in today's RealMoney.com blog identifies how short sellers would "break the market" through a process they labeled "torpedo". In the blog Cramer states:

"On days like today when I was short, I would come in with a lot of firepower and try to blast things down at 2:45. I wasn't alone. We were never organized, but we did get the call from the trading desks that other guys were torpedoing the tape."

Cramer drafts these words like they were a badge of honor and proceeds to say:

"And don't forget, it's fun for these guys to try to break the market. And there's a level of sport in the bigs that can't be denied."

This is the guy CNBC hangs their reputation on as being out there to protect the general investing population. Its fun for these guys [for which Jim was one] to destroy the portfolios of others as part of a game? I thought Jim was about making me money.

A closer look into this public dialogue raises some serious concerns over whether our regulators are really in touch with market operations, liquidity, and in general how hedge funds operate. These concerns are only exacerbated by the recent proceedings where a ring of traders, compliance officers, and hedge funds operated an insider-trading ring that has been going on for the better part of this decade.

According to Cramer he would go in and blast a stock [torpedo] to drive the stock price down. I guess that begs the question, when is aggressive trading no longer trading but manipulation? Blasting a stock down hoping to force others to panic and do the same seems to encroach on bear raid manipulation. In fact, lets read the laws straight out of the SEC handbook.

Rule 10b-5 of the Exchange Act of 1934 states that it is unlawful "to effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange or in connection with any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others."

If a torpedo was intent on driving out the "weak kneed investors" hasn't Mr. Cramer just admitted to fraud by my interpretation of this law as it had the intent of inducing fear into others and forcing them to sell? I think that would be for regulators to sort out but certainly you readers are welcome to formulate your own opinions.

It only gets better though.

To address the potential of such sudden volume shifts, the SEC created special exemptions to market makers and specialists to allow them opportunity to sell what they do not hold in inventory as part of bona-fide market making. The intent was to take out the sudden burst of buy side pressures by allowing Wall Street to temporarily sell shares that did not otherwise exist.

The implication of this exemption was that market makers and specialists would likewise temporarily purchase securities in a bona fide market if necessary to flatten out a sudden influx of sell side volume entering a market. Cramer's observations and practices would imply that the buy side protections required by market makers were not taking place. Torpedoes only work if the market makers and specialists walk away from the bid during the raid and Cramer claimed they worked so well they were detectable.

Today, under Regulation SHO we have massive levels of failed stock deliveries in the system where the market lobbyist and hired guns The Securities Industry and Financial Association (SIFMA) have lobbied regulators to ignore these excessive and long standing fails in the system as necessary for the market protections. These fails being excused as Wall Streets need to sell non-existent inventory to stop buy side enthusiasms.

SIFMA apparently wants to allow a Wall Street exemption on one side of a trade but also wants to ignore the lack of fiduciary duties on the other side. SIFMA wants Wall Street to be able to sell what they don't own, which is profitable as it comes with a payment for non-existent goods, but does not want to sure up the venue where they are expected to buy securities where such would require each to come up with the capital to pay for such a transaction.

I guess in understanding the shear magnitude of the trade settlement problem one concern I have would be whether these torpedoes resulted in timely settlement of the trades or whether these torpedoes resulted in a settlement failure. Imagine selling with firepower into a market, with the intent of breaking the market, and it turns out the tools used were not even legal tender, a certified and existing share. A bear raid leveraged off shares that did not even exist to sell in the first place would be a real novel game.

Bull's eye - another investor portfolio knocked dead for Wall Street revenue growth.

Finally, my dissections of Cramer's comments lead me to where he admits that the trading desk will notify a fund manager that "other guys were torpedoing the tape."

How does such proprietary information come to hedge fund managers?

Now traders can of course see how a market is moving and react to the data the market provides. But if traders are capable of picking up a "torpedo" the data has to tell them that it is a short sale intent on breaking the market. That is more data than simply; "we have a seller out here".

How come traders can pick up the signs of a torpedo that by all accounts appears illegal and yet the SEC, NASD, and NYSE market surveillance teams can't?

Were the hedge funds receiving the proprietary information of other investors in the market and what they were doing? If so that too is illegal. In fact, the DTCC and SEC have stated that a simple publication of the level of fails in any particular stock cannot be published daily because "the fails statistics of individual firms and customers is proprietary information and may reflect firms' trading strategies. The release of this information could be used to engage in unlawful upward manipulation of the price of the securities in order to "squeeze" the firms improperly."

Chairman Cox is about to embark on a campaign where his foundation is to defend that the SEC's " role is to be the investors' advocate. I want to make sure that every company understands that so long as they treat their investors well, the S.E.C. will be friendly to them."

I say it is about time he steps up to the plate then and advocate for the investor and not the lobbyists who protect the wayward industry and the hedge funds who brazenly manipulate our markets. If I were SEC Director of Securities I would make a call to Mr. Cramer post haste and get clarification on what he means when in his blog he states "and it will happen again" referring to the torpedo.

Damn the Torpedoes, Full Speed Ahead. There appears to be a war taking place in these capital markets and the investors appear to be fighting it with the butter knives supplied by Chairman Cox and his staff.

Thanks to Jim Cramer for so eloquently presenting exactly what is wrong with the US Capital Markets and the conflicts between the average investor and the greed of the wealthy.
Since the last time I wrote about Mr. Cramer I was presented with the threat of a lawsuit, I will disclose here that the comments made regarding illegal trading activities are my personal interpretations of Mr. Cramers comments and that I have no direct evidence of wrongdoing. I would not want Mr. Cramer to misinterpret this as anything otherwise where he feels compelled to again threaten my personal opinions with a lawsuit. We know that both he and I are way too busy to address such matters in a courtroom.

For more on this issue please visit the Host site at www.investigatethesec.com (outbind://9-00000000E44134A2FFC375479C0D516316CFF3A024212400/www.investigatethesec.com)

Copyright 2007

[TonyM]

Nice read, doesn't that just give you the warm fuzzies as your about to make a trade?

[optimus25]

"Reminiscence of a Stock Operator"

They were called Plungers back then...guys that could come in and cause a stock to plunge on short sells...interesting read.

[aiki14]

"Reminiscence of a Stock Operator"

They were called Plungers back then...guys that could come in and cause a stock to plunge on short sells...interesting read.

That's one of my "You should read this before you decide to trade" books. Still timely 80 years later.

[Svenwulf]

"Reminiscence of a Stock Operator"

They were called Plungers back then...guys that could come in and cause a stock to plunge on short sells...interesting read.

not to sound insulting, but plungers are for backed up toilets. playing games through legitimate methods, like the bear raid on the close, imo is perfectly acceptable. maybe even necessary. but let us focus on the following:

SIFMA apparently wants to allow a Wall Street exemption on one side of a trade but also wants to ignore the lack of fiduciary duties on the other side. SIFMA wants Wall Street to be able to sell what they don't own, which is profitable as it comes with a payment for non-existent goods, but does not want to sure up the venue where they are expected to buy securities where such would require each to come up with the capital to pay for such a transaction.

***more***

A bear raid leveraged off shares that did not even exist to sell in the first place would be a real novel game.

***more***

Were the hedge funds receiving the proprietary information of other investors in the market and what they were doing? If so that too is illegal. In fact, the DTCC and SEC have stated that a simple publication of the level of fails in any particular stock cannot be published daily because "the fails statistics of individual firms and customers is proprietary information and may reflect firms' trading strategies. The release of this information could be used to engage in unlawful upward manipulation of the price of the securities in order to "squeeze" the firms improperly."

[safeman]

WOW! I just listened to the entire presentation. Now does this mean we have to second guess every long positon we enter into? How can you tell if you just made a bad choice or if the company you are long in is being attacked by short sellers or deliberate ftd trading? Reviewing insider trading and institutional support? Does this help? How do you maintain confidence in your long positions?
Very enlightening, but also raises more questions!

[Svenwulf]

thank you safeman for taking the time. understanding the dry nature of the subject, i am always looking for things like the above presentation to get people interested without putting them to sleep.

the question about second guessing long positions is quite legitimate. more than likely, due to the nature of strategic ftds, smaller companies should be most vulnerable. and that is what makes these ftds such a threat to our economic future- innovation traditionally provided by these small entrepreneurs can be/ is being destroyed by financial manipulation.

as individual investors, i feel we have little way to know the status of possible manipulation in any investment possibility. without inside knowledge, one must explain poor share price performance with a poor business or poor investor sentiment. but the truth is we can never know, since the sho regs are so limited:

In fact, the DTCC and SEC have stated that a simple publication of the level of fails in any particular stock cannot be published daily because "the fails statistics of individual firms and customers is proprietary information and may reflect firms' trading strategies. The release of this information could be used to engage in unlawful upward manipulation of the price of the securities in order to "squeeze" the firms improperly."

institutional and insider ownership are good investment criteria, regardless of reg sho considerations. since we are talking about small and micro cap companies, these ownership figures must not be compared directly to "blue chip" companies. also consider insiders are most likely unaware of strategic ftds until long after the damage has been done, and could very well be buying phantom shares along side you until then.

in any practical terms, i imagine the surest defense small time retail traders and investors (like me) have would be the avoidance of investment in small and micro cap companies. but even a well known company like overstockdotcom is not immune:

http://dealbook.blogs.nytimes.com/2006/04/14/weekend-reading-profile-of-a-short-seller/

a more creative, but as yet unapproved, suggestion that would encourage market forces to correct instances of strategic ftds would be the "dividend capture plan." <next post> i would encourage all interested parties to increase fellow investor awareness. lend support to petitions/ letters of comment you agree with on the subject by signing and forwarding to you local regulators and representatives. finally i would push for more disclosure/ "teeth" in the current sho regs so all market participants have access to materially important information. best wishes!

[Svenwulf]

Dividend capture plan-

"What would happen if we fought back, lawfully, and used the system's larcenous counterfeiting against it?"
That was the question that Tommytoyz posed when he structured this idea, and requested a comment letter from the SEC on it. We had knocked it around, refining the pros and cons of it, and my feeling was that the SEC would simply crush anyone attempting to lawfully profit from Wall Street's criminal and contemptuous conduct. Tommy came up with the idea of testing the idea formally by requesting a position from the SEC. Brilliant, actually. So off went the letter.
His idea is simple, really. Secure the dividend rights to a company's stock from a majority of shareholders, and then invest into the company, with the intent that the company pay out 90% of what was received, as a dividend.
The investors would not have any rights to sell the stock, and would be precluded from doing so, or in any way benefiting outside of capturing the dividend. Wouldn't own it. Would be a dividend investor, period. All within the legal limits of what you are supposed to be able to do in the markets. Sounds pretty straightforward, right? Again. Nothing illegal.
Here's the key to the idea's appeal. On companies where the system has created 200, 300, 500, 1000% or more share entitlements than actual shares issued by the company, the brokers would be required to pay the dividend to all the entitlement holders.
Simplified, if a company had a million shares issued, and you were able to get 3 million entitlement dividend rights from consenting shareholders, you could invest ten million dollars into the company, and the company would pay out $9 million of it as dividends ($9 per share), keeping $1 million for their trouble, and the investor would see $28 million in dividends. Rinse next month, and repeat. It would add up pretty quickly. Maybe next month, invest $20 million. Whatever you feel like tripling. Have fun with it.
And nobody wants to sell shares - the investors don't own any. In fact, it would be best if the shares stayed flat in price - nobody but long speculators would benefit from a price rise, and that isn't what the investors are - again, they don't even own the shares, merely the dividend rights. So they don't want those that they secured the rights from to sell - they want them to hold forever, in exchange for some compensation. They want it to go on forever. So what it isn't is a manipulative device to increase or decrease the value of the shares.
What it is is a mechanism to exploit the exploitation by the brokers who see fit to sell 10 times the outstanding shares of a company, figuring that there is no appreciable downside to doing so. The hypothetical dividend capture investors would make money from knowing these ropes, by merely appropriately targeting companies that have been victimized by having untold amounts of their shares created out of thin air, for the benefit of Wall Street,
Read his request to the SEC (http://www1.investorvillage.com/smbd.asp?mb=4148&mn=24105&pt=msg&mid=988830). He spent a lot of time on the phone with them today, and they basically wouldn't comment - even though supposedly they have no particular interest in whether brokers are profitable or not, or get themselves in binds via illegal activity or reckless abuse of loopholes - theoretically, in a fair market, Tommy's strategy would be the balance to counter that abuse, sort of the equivalent of shorting the short sellers and brokers and extracting a perennial tax on those who abused us.
So it is OK for them to take trillions from our savings and depress the value of our shares and never deliver and to defraud us of ownership rights. That's just fine. But if you are like Tommy and want to turn the tables, and financially benefit by lawfully extracting financial benefit from researching and investing in companies where this would work, you can expect the SEC to knuckle punch you in the throat.
I think we should all be asking why pros can steal our money using technical niceties, but when we attempt to derive financial benefit from spotting the worst of the crooks in action and holding their feet to the fire to fulfill their dividend obligation, the alarm bells start sounding throughout the SEC. They wouldn't even respond to this request in writing, as though even acknowledging the collosal systemic risk the system has created for itself whilst ripping us off might create a firestorm.
So the SEC won't even decline to offer an opinion letter on it in writing, as that would be evidence that they know about this and could be shown to be aware of the illegal rigging of the system, as well as their blatant favoritism of the industry over the protection of investors.
Maybe everyone should write the SEC, citing this idea as one you are interested in trying (we can start a partnership if you like, and invest therein - a hedge fund - to do it - there's a funny idea), and for which you want a formal opinion on from the SEC. If they say you can't do it, have them cite the specific reason why - supported by the relevant code. Remember, nobody involved wants to sell shares, or even own the shares. The company wants the $1 million to use as working capital, so there is a benefit to them. Shareholders benefit as that increase to the book value would theoretically increase the value of their holding.
And the investors would have a financial perpetual motion machine, fueled and paid for by the crooks, until the crooks on Wall Street stopped printing shares in their back rooms.
Simple concept, that. Create actual material disincentives to defrauding investors - you could lose money doing it if our little hypothetical investment group took you on. Imagine. An actual downside to crime.
And while you are at it, ask the SEC why they would be against something so simple, that actually benefits and protects investors in the company, benefits the company, and encourages integrity in the market by serving as a powerful reason NOT to counterfeit shares or get in too deep taking investor dollars and delivering nothing.
Why would regulator object to the crooks getting caught in their own criminal scheme, and having to pay the price of doing so?
Ask them.
And tell them to put it in writing. If they try to argue 10b5, they are full of it. It isn't.
If they disagree, have them explain why, in writing. Remember, theoretically, they work for you.
Copyright ©2006 Bob O'Brien

[safeman]

Dry yes but neccesary for the protecton of my money. There is a great deal here for me to learn and it all helps. Every new lesson learned builds upon the previous one.
DCP is an interesting idea. Simple yet brilliant. I'm impressed, anyway.

Are we to believe that large fund managers are susceptible to these forces also. I have always believed that there is safety in numbers.
Thanks for the good stuff you post, sven, it's always interesting. As is so much that is posted by others.

[Svenwulf]

bloomberg has a special tonight, "phantom shares." you can watch it for free online, with no commercials. you might have to scroll to find it, hosted schneider.

http://www.bloomberg.com/news/av/

i like the line, "if you ran a better liquor store, maybe it would stop getting robbed."

[aiki14]

bloomberg has a special tonight, "phantom shares." you can watch it for free online, with no commercials. you might have to scroll to find it, hosted schneider.

http://www.bloomberg.com/news/av/

i like the line, "if you ran a better liquor store, maybe it would stop getting robbed."

An obscure trading method? That's a generous description of such a sleazy practice.

[Svenwulf]

amazing what a single national news program can do to shine the sun. just from forbes, i had trouble locking it down:


Goldman Snared In Naked Shorting Probe
Liz Moyer, 03.14.07, 4:10 PM ET
One of Wall Street's biggest prime brokers has been taken to task by the Securities and Exchange Commission and the Big Board for not catching on to its customers' illegal trading activities.
Goldman Sach's (nyse: GS - news - people ) clearing and execution division is paying $2 million to settle accusations it relied too heavily on what its customers told it without investigating trading activity that showed signs of something being amiss.
The SEC and NYSE Group's (nyse: NYX - news - people ) regulatory arm announced the enforcement action Wednesday. They contend that Goldman's reliance on its customers' assurances was "unreasonable" in a case involving illegal short selling in shares of NYSE- and Nasdaq-listed stocks during and after the bursting of the tech bubble in 2000 to 2002.
Prime brokers coordinate trades, lend stocks for trading and provide other services for hedge funds and smaller broker-dealers, and the business has become increasingly lucrative. According to New York-based research firm Vodia Group, prime brokers--Goldman, Morgan Stanley (nyse: MS - news - people ) and Bear Stearns (nyse: BSC - news - people ) are the big three--rake in as much as $10 billion annually.
It is also a business increasingly under scrutiny by those who say illegal trading is flourishing under the not-so-watchful eyes of those who are in a position to stop it.
Several private lawsuits have been filed since last year against the dozen or so top Wall Street banks, most recently a $3.5 billion suit filed last month in California state court by Overstock.com (nasdaq: OSTK - news - people ), a Salt Lake City-based Internet retailer.
That suit claims 10 brokerages engaged in a "massive, illegal stock market manipulation scheme" to distort its stock by allowing naked short selling, that is, allowing shares to be sold short without being properly borrowed. Naked short selling creates a number of problems, most notably trade delivery failures in the stock in question. Sometimes it is accidental and sometimes it is deliberate, part of a strategy to short stocks that are hard to borrow.
The SEC has been debating ways to close loopholes in a two-year-old regulation originally passed to clamp down on the deliberate form of naked short selling, but it has yet to announce revised rules even after receiving hundreds of comment letters on proposed amendments.
The proliferation of electronic trading might even be making it easier to pull off trading scams like naked short selling, regulators said Wednesday. The Goldman enforcement case centers on trades ordered by clients through its REDI electronic exchange access system that were improperly marked "long" sales when they were actually short sales.
The customers, Ethan Weitz and Robert Altman of Orinco Partners, were shorting shares of companies that were about to do a secondary or repeat stock sale, covering the open short position with the offering shares. This violates trading rules. Weitz and Altman paid $1 million to settle SEC charges in the scheme in 2003.
The SEC and NYSE Regulation said Wednesday that Goldman's clearing division (formerly Spear Leeds & Kellogg, which was acquired by Goldman in mid-2000) could have discovered that its trading and clearance records revealed the pattern of unlawful trading. They also said Goldman could have discovered that it was improperly lending the customers borrowed and proprietary securities to make deliveries on their long sales and closing their short positions with shares they purchased in the secondary and follow-on.
Goldman's records had information that reflected the customers were engaged in a pattern of selling securities short and repeatedly failing to deliver, the SEC said. Goldman records also had information reflecting it was improperly lending customers securities to make deliveries on these purported long sales.
Linda Chatman Thomsen, the SEC's director of enforcement, said allowing customers to use direct-access computer trading systems "does not obviate a broker's own responsibilities under the commission's short sale rules, and it certainly does not allow a broker to ignore apparent discrepancies indicating illegal trading by its customers."
Susan Merrill, the executive vice president of enforcement at NYSE Regulation, said "blind reliance" on what customers say is "inappropriate when a firm is confronted with a customer's repeated failures to deliver and other evidence of improper short selling."
Josh Galper, the managing principal of Vodia Group, says electronic systems were less sophisticated seven years ago than they are now, and that Goldman's REDI now has a stock availability feature that would make it harder to pull off the same scam today.
Apart from whether the enforcement action will have a chilling effect on communications between brokers and customers, the small fine relative to Goldman's prime brokerage business isn't likely to have much of a deterrent effect on the rest of the industry.
Goldman was censured and subject to a cease-and-desist order in the matter.
"While the NYSE and SEC have proven themselves to be serious about reporting violations related to trades monitoring and securities lending," Galper said Wednesday, "the dollar amount of fines in this and other recent cases appears to be more a cost of doing business than a real reason to make change happen."

8O

[TonyM]

I don't understand how the blame can go anywhere but to the brokers, they are the one's facilitating the trade. How is it possible to not know that there are not any shares available to borrow? The whole three day settlement rule makes no sense to me, if we can execute millions of trades in milliseconds how or why is it not possible to settle at the end of the day? There is a simple way to stop the naked short selling imo, require the brokers to actually locate the needed shares to borrow, if they can't find anyone to guarantee delivery then obviously the customer's order goes unfilled, violations should be backcharged to the broker in the amount of the phantom shares they claimed to have borrowed. Here's another idea, all stock owners should have the option to allow the borrowing of their stocks and be compensated for doing so. Think about the lunacy of the short sell from this perspective: I own 1 million shares of xyz stock, you want to borrow them so that you can drive the price of the stock down, if I had any choice in the matter I would tell you to screw off.

[Svenwulf]

..looking around for soapbox..

i totally agree that no one other than the prime brokers could be considered guilty in these situations. the t+3 requirements, perhaps antiquated now, still serve the purpose of increasing "business cash flow" (think brokers) at the expense of the smallest investors (long only, under 25k) point of fact, brokers are required to locate shares to borrow (anyone get a fill on a NEW short the last week?) but even a back charge for phantom shares might fail to eliminate the problem, since the cost would probably be less than the benefit. if one does not want their shares in a company loaned to short sellers, one still has the option of taking delivery of the certificates. of course efforts are underway to make stock ownership entirely electronic. which in turn would eliminate the need for t+3. one last point, brokers charge other brokers to borrow shares for short sale. some deep discount brokers, in my limited understanding, actually pass this fee along to their traders. and of course this fee is greater in proportion to the existing short interest.

short selling is not bad. it is not evil. it is an important, legal, and effective market force. naked short selling, or plainly, stock counterfeiting, is not legal. more importantly, it deprives our economy of possible innovation, undermines the credibility of capital markets, and is a de facto tax on savings and investment for every working American.

..enough, i better save some for sunday..

[TonyM]

I understand and agree that short selling is not illegal, evil or bad, obviously the naked short selling is. However I still can never get over the issue of borrowing my shares if I don't want them loaned out, and especially not without compensating me for it, and I'd like the option of recalling them at any time with or without notice.

I think of it in these terms; I valet park my car and the parking company loans out my car while I'm not using it. I know that they might loan out my car, but I don't have any choice unless I don't want to park my car at all, I also know that my car might be devalued when they give it back to me, and I have no choice but to accept this arrangement. That doesn't sound odd?

[Svenwulf]

dont suppose anyone is actually making money with this. prime brokers looking nervous? anyone watching tzoo and grow on the sho list?

[Svenwulf]

pbs' frontline had a nice story on mr. Aguirre, among other things. could be a tipping point to mass media attention? the site is kinda tough to navigate, but in the middle right part, you can actually get the program streamed to you with your choice of application. "program resources."

http://www.pbs.org/now/shows/315/index.html

on a less serious note, history channels "modern marvels" had a rerun about "the stock exchange." strictly for consumption by total market geeks or non gamers, imo.

[Svenwulf]

***edit- actually it was "now," not "frontline."

[Svenwulf]

so after the primary brokers have had a few years to cover themselves, they give up the grandfather provision in exchange for the tick rule? wow, that's a nice trade, imo. the house always wins, eh? best wishes...

http://www.nytimes.com/2007/06/14/business/14sec.html?_r=1&ref=business&oref=slogin

S.E.C. Ends Decades-Old Price Limits on Short Selling


By FLOYD NORRIS (http://topics.nytimes.com/top/news/business/columns/floydnorris/?inline=nyt-per)
Published: June 14, 2007
The Securities and Exchange Commission voted yesterday to end price restrictions on short selling, meaning that investors seeking to sell a share that they do not own will no longer be barred from doing so because the price of the stock is falling.
The 5-to-0 vote, ending a rule that had been in place since 1938, when short sellers were blamed by some critics for having caused the 1929 market crash and the Depression that followed, came as the commission also voted to make it harder to engage in naked shorting, the practice of selling shares that have not been purchased or borrowed.
Christopher Cox, the S.E.C. chairman, called naked short selling “a fraud that the commission is bound to prevent and to punish.”
When a naked short sale is made, it leads to a failure to deliver the stock when the trade settles three business days later. There are many other reasons for fails, but such sales are believed to be the primary one for many stocks.
The S.E.C. adopted a rule, known as Regulation SHO, in 2004 that was intended to reduce naked short selling by requiring the publication each day of a list of securities with heavy fails. Brokers are required to cure the fails within 13 days. But fails existing before the stock went on the list were grandfathered.
Yesterday’s vote will remove the grandfather provision, and the commission said it was also considering removing an exemption from the rule for options market makers who need to sell short to hedge an options position.
The new rule will take effect 60 days after it is published in the Federal Register, and traders will have 35 days after that to clear up fails that had been grandfathered.
The commission says naked short selling has been reduced by Regulation SHO, but some stocks have remained on the Regulation SHO list for many months. The leader in that regard is Overstock.com (http://www.nytimes.com/mem/MWredirect.html?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=OSTK), which has appeared for 538 consecutive trading days. It has also been the leader in condemning such sales and has sued many Wall Street firms for facilitating such trades.
The commission does not regularly release the exact number of fails in stocks on the list, although figures can be obtained on a delayed basis through the Freedom of Information Act.
James A. Brigagliano, an associate director of the commission’s division of market regulation, said that the S.E.C. would release such numbers on a quarterly basis, with a delay, as soon as details were worked out.
The ban on selling short while a share price was declining, called the tick test since it barred selling unless the last change in price was an uptick, had come to seem irrelevant. A test that repealed the rule for many stocks seemed to make little difference in their trading, and that part of the rule change was adopted with little controversy.
The commission said that it was proposing for comment a rule to eliminate the exemption to Regulation SHO for options market makers, but it would also ask for comments on possible ways to narrow the exemption.

[Svenwulf]

token enforcement?

SEC Fines Sandell Asset Management For Naked Short Sales

October 10, 2007
The Securities and Exchange Commission today said it has settled an enforcement action against New York hedge fund adviser Sandell Asset Management for engaging in improper short sales. The allegations are in connection with trading in the securities of Hibernia Corporation in the immediate aftermath of Hurricane Katrina.
Hibernia was a New Orleans-based bank holding company and the subject of an acquisition agreement with Capital One Financial Corporation at the time Katrina occurred. As part of its merger arbitrage investment strategy, Sandell held approximately 9.3 million shares of Hibernia stock for one of the firm's hedge fund clients. According to the Commission, Sandell’s traders believed that Capital One would lower its offering price for Hibernia shares in the wake of Katrina, and began to sell short as many shares of Hibernia stock as possible, improperly marking certain sales orders as "long" or misrepresenting them to the broker-dealers executing some of the trades.
"By mismarking certain trades and falsely claiming that firm personnel had located stock to borrow, Sandell Asset Management gained an unfair trading advantage over other market participants,” said Scott Friestad, associate director of the SEC's Division of Enforcement. “This settlement deprives the firm of the profits made from the improper trading, and includes penalties and other sanctions designed to deter others from engaging in similar misconduct."
Without admitting or denying the Commission's allegations, Sandell agreed to pay more than $8 million to settle the charges, including $6.7 million in disgorgement, $730,811 in prejudgment interest, and a $650,000 civil penalty. Also, CEO Thomas Sandell, senior managing director Patrick Burke, and head trader Richard Ecklord were ordered to pay civil penalties of $100,000, $50,000 and $40,000, respectively.



http://www.finalternatives.com/node/2625

[aiki14]

token enforcement?


By a token agency.