Posted by: rollingthunder31
In reply to: None Date:4/4/2006 10:27:02 PM
Post #of 2517
Found on another board very interesting read.
Naked shorting.
StockGate: Massive U.S., International Naked Short Selling Scandal Moves To Page One, Fails To Deliver Said To Be ‘Endemic’
4/3/2006
(By Gayle Essary)
StockGate, the term coined by FinancialWire December 29, 2003, to describe the growing illegal naked short selling scandal, has reached critical mass, with lawsuits and subpoenas flying, journalists implicated, and state and federal regulators investigating, making page one news from the New York Times to small town papers everywhere in just one week of frantic developments, including a public admission ...
,,, by a former Depository Trust and Clearing Corp. board member that “fails to deliver are endemic.”
Biovail (NYSE: BVF) has now joined Overstock (NASDAQ: OSTK) in suing Gradient Analytics and alleged co-conspiring hedge funds for stock manipulation, TradeStation (NASDAQ: TRAD) and Bear Stearns (NYSE: BSC) are implicated in an investigation by the NASD of naked shorting, and two journalists from Dow Jones have been subpoenaed by the U.S. Securities and Exchange Commission, although the news organization has stated the SEC may not immediately act on its subpoenas.
FinancialWire covered the scandal almost exclusively for over three years, posting more than 300 articles, despite acknowledged interference from the now-investigated DTCC which told news distributors that because of its coverage, “FinancialWire is not a legitimate news source.”
StockGate has been described variously as a massive pandemic that may bring down the entire financial system as occurred in the Great Crash when similar non-deliveries of certificates were so extensive the SEC and laws against non-settlement came into being, or as simply a “blip,” and in some instances, outrightly the figment of the imaginations of a small group of alarmists.
The key law to come out of the Crash meant to help prevent another one has been SEC Regulation 17A(a)(1)(A), which states: “The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.”
It is this law that critics say the DTCC has set up a work-around, its controversial “Stock Borrow” program, to circumvent. Also at issue is the recently-disclosed fact that certificates in street name are routinely diluted and aggregated to circumvent the one-share-one-vote provisos. The DTCC has fought furiously to convert all holdings to “electronic” so there will be no accountability to individual shareholders.
The DTCC admission, by Bradley Abelow in confirmation hearings for the former Goldman Sachs (NYSE: GS) executive to join his former colleague and new New Jersey Governor Jon Corzine as New Jersey’s State Treasurer, in fact flies in the face of the DTCC’s public claims that fails to deliver are insignificant, and virtually non-existent. His comments may be heard at http://www.njleg.state.nj.us/media/archive_audio2.asp?KEY=SJU&SESSION=2006 The pertinent comments are at the beginning of the audio and after the 1:23:00 period.
Said Abelow on the issue of settlement fails: “No one likes them, no one wants to have them, but they occur with great regularity.”
According to Susanne Tribath, an economist and former DTCC official, Abelow and the DTCC has been “lax” in not preventing stock manipulation. “The board members see the data, they know what is going on, but they have done nothing.”
A DTCC spokesperson, Steven Letzler, rebutted, “We have no clue about naked shorting. Buys and sells – that’s all we see.”
The DTCC has a convoluted ownership chart but is jointly owned and controlled by the New York Stock Exchange and the NASD, both self-regulatory organizations operating under Congressional mandate amid oversight by the SEC.
The DTCC is currently under investigation by a multi-state task force of state regulators, headed by Ralph Lambiase, Connecticut securities head, and former president of the North American Securities Administrators Association, and the state of Utah, whose targets also include Bear Stearns, Morgan Stanley (NYSE: MWD) and Goldman Sachs (NYSE: GS). The investigations serve to amplify the interlocking relationships between the DTCC and the companies under investigation. Current board members of the DTCC include Randolph L. Cowen, Global Head of Technology and Operations, Goldman Sachs Group, and Heidi Miller, Chief Executive Officer, Treasury and Securities Services, JPMorgan Chase & Co., both companies targeted by the state regulators in conjunction with the DTCC.
In addition to its interference with FinancialWire, the DTCC is also believed to have been behind the decision last year by Dateline NBC to cancel and drastically truncate a blockbuster expose on the organization’s alleged role in naked short selling and fails to deliver, which the show’s producers would not deny to FinancialWire.
The SEC this week stepped firmly and aggressively into the arena, although it is not known if it is due to a long-percolating investigation or whether, like in many of the cases brought by New York’s Attorney General Eliot Spitzer, its actions are to prevent a co-opting of its investigatory and regulatory role by states that have once again grown impatient.
On Monday TheStreet.com (NASDAQ: TSCM) reported that a securities crackdown on online brokerages “for allegedly permitting a controversial Wall Street trading practice called naked shorting” had ensued with an investigation into trading practices of some customers of TradeStation. The brokerage was quoted as saying the NASD “could fine the firm for nearly 200 infractions that took place in 2004.”
TheStreet.com emphasized that regulators are not concerned with short-selling, but are looking strictly at “naked shorting, a manipulative practice that enables traders to defy the laws of supply and demand.”
The illegal practice was further described by former Treasury official Robert Shapiro in a StreetSigns interview on General Electric’s (NYSE: GE) CNBC at http://www.vmsdigital.com/MyFiles.aspx?Onum=D755C1B3-9A59-4F34-AB2D-533BA5D4982E
TradeStation said the short sales, some 172 in a two-month period, that were made without an “affirmative determination” that TradeStation could either “receive delivery of the security on behalf of the customer” or “borrow the security on behalf of the customer,” had been “authorized and arranged” by Bear Stearns.
TheStreet.com article disclosed that Rocker Partners, one of those sued by Overstock.com, “owns about 5%” of TheStreet.com. If so, that differs significantly from January 6, when FinancialWire revealed that Rocker owned 2,220,810 shares, only slightly less than founder James Cramer’s own 2,412,246, or 8.77%. Shares closed Friday at $7.89.
TheStreet.com also figured into the controversial subpoenas issued to two journalists, Herb Greenberg of Markethingych and Carol Remond of Dow Jones Newswires, both owned by Dow Jones & Co. (NYSE: DJ), a story that appeared on the front page of the New York Times (NYSE: NYT) Saturday, moving the naked short selling controversy to mainstream attention.
Greenberg was an editor for TheStreet.com when affidavits in the Overstock suit alleged what might be viewed as a relationship so close to Gradient Analytics (then Camelback Research) as to have been potentially conflictual if not collusive. In fact, one affidavit stated that a reporter, Brian Harris, working under Greenberg at TheStreet.com actually wrote some of the reports, and had office space at Gradient. When the story broke, the reporter’s name was apparently mysteriously removed from TheStreet.com’s masthead without notice or explanation.
The SEC is said to be looking into these relationships, and especially whether “research” reports were routinely disclosed to hedge funds Rocker Partners and SAC Capital Management and others, before being released to the public, and whether there was a further knowing or unknowing relationship with certain journalists whereby the reports’ “findings” were disseminated more “explosively” in such a way as to increase the profits of the hedge funds.
According to the New York Times, which draped its story around journalistic freedoms, as did Greenberg in a column, the subpoena asked for notes and discussions that Greenberg may have had with Gradient executives about not only Overstock but also Novastar (NYSE: NFI), Omnivision (NASDAQ: OVTI), Taser International (NASDAQ: TASR) and Navarre (NASDAQ: NAVR), most if not all of which are thought to have been targets of Rocker Partners.
The Times also featured a “character witness” column by Joe Nocera, supporting Greenberg, whom he admitted is an “acquaintance of mine for more than a decade” and one of the “straightest shooters I know.” Nocera quoted Greenberg as saying his subpoena is the “McCarthyism of business journalism,” and blamed the SEC’s now delayed action on a “conspiracy” led by Overstock.com CEO Patrick Byrne.
While the Times celebrated the SEC’s “backing off” as a victory, it did quote Dow Jones spokeswoman Amy Wolfcale as saying the “SEC may come back in the future,” presumably if it finds in the production of documents from Gradient and Rocker that there is indeed something tangible to be explored.
If Greenberg is relying on Nocera to attest to his “straight-shooting,” that may be a dubious endorsement indeed, since Nocera obfuscated the difference between shorting a company because of its poor performance and naked shorting a company in violation of stock manipulation laws, which is what the SEC is exploring.
As a point of fact, Overstock.com has failed to achieve analyst expectations and it has been downgraded by numerous credible, professional and legitimate analysts, none of them so far known to have been “targeted” by Byrne. Legitimate shorters, who must obtain certificates or borrow them, have no doubt seriously dampened the company’s stock price in market bets that the price will go lower if the company continues its weak performance.
However, that is different from the “naked short sales” by those seeking to further manipulate the stock price with no intention of obtaining shares or borrowing them, a practice that is illegal, and now an NASD and SEC target. Freedom of Information requests have revealed massive fails-to-deliver for Overstock.com, and others, and the company and others mentioned remain on the Regulation SHO list, which is the SEC’s own list of companies with fails to deliver over seven days. Overstock.com and many others have been on the list for almost an entire year.
Both Nocera and Greenberg continue to attest to the accuracy and usefulness of Gradient reports, with Nocera chiding SEC Commissioner Christopher Cox that the lawsuits by Overstock and Biovail, a RICO action, amount to “issuer retaliation against research analysts,” a practice that Cox has said he is opposed to. Once more, Nocera failed to describe to his readership the difference between retaliation against research and complaints of either tainted or outright fraudulent research, such as the complaints that led to the Global Research Settlement against Bear Stearns Cos. Inc. (NYSE: BSC), Credit Suisse (NYSE CSR) Credit Suisse First Boston unit, Goldman Sachs Group Inc. (NYSE: GS), Lehman Bros. Holdings Inc. (NYSE: LEH), Citigroup's (NYSE: C) Citigroup Global Markets, J.P. Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MWD), Merrill Lynch Cos. Inc. (NYSE: MER), UBS (NYSE: UBS) unit UBS Warburg, the Piper Jaffray unit of U.S. Bancorp (NYSE: USB), Deutsche Bank Securities Inc. (NYSE: DB) and Thomas Weisel Partners LLC, and Deutsche Bank (NYSE: DB).
Morgan Stanley (NYSE: MWD), U.S. Bancorp (NYSE: USB), Bear Stearns & Co. (NYSE: BSC), the J.P. Morgan Securities unit of J.P. Morgan Chase (NYSE: JPM), and the UBS Warburg division of UBS Paine Webber (NYSE: UBS) were all accused by the regulators of paying other institutional bankers for issuing “guaranteed research” without disclosing the arrangements.
The SEC and the New York attorney general alleged instances of fraud against at least three, Citigroup’s (NYSE: C) Salomon Smith Barney unit, Merrill Lynch & Co. (NYSE: MER) and Credit Suisse First Boston, a unit of Credit Suisse Group (NYSE: CSR).
No one suggested that charges of tainted research amounted to “analyst retaliation.”
The other journalist, Remond, has over the years openly exploited her relationships with some of the largest short seller hedge funds as sources, thought to include Rocker. It is not clear what relationships the SEC is exploring related to Remond.
As some of its detractors hailed the SEC’s moves to investigate these matters, others have noted that the SEC is a multi-headed agency whose various departments and divisions often work with little coordination with each other, and in fact sometimes act in opposition to the other.
In fact, the NASD has been shot down on more than one occasion for seeking to put “teeth” into the laws against naked short selling.
There is little assurance that investigators know of the ingrained intractability of its market regulators, such as James Brigagliano, assistant director of the Division of Market Regulation to Director Annette Nazareth, a protégé of U.S. Senator Charles Schumer who was recently named to the full five-person Commission, who have appeared at forums such as the one sponsored by the North American Securities Administrators Association November 30, 2005 (http://www.ncans.net/files/NASAAtrans.pdf) as apologists for the DTCC, and who have gone on record that there is no serious problem regarding fails to deliver, even as its investigators find otherwise.
It was Nazareth who in a now-infamous New York Times interview, inferred that concerns about naked short selling is simply about investors “who want the price of their stock to go up.”
Together these individuals helped to “grandfather” all market abuses prior to January 1, 2005, a kind of “pardon” or “amnesty,” as part of the introduction of Regulation SHO, a action that some view as outside the authority and regulatory scope of the SEC, although it has not been challenged in court. Detractors also say this “fresh start” only locked in profits for miscreants and massive fails-to-deliver, leaving those seeking to flaunt regulators to continue unabated.
In fact, even as the subpoenas were being received, Eagletech (OTC: EATC) CEO Rodney Young, whose collapsed company was profiled on Dateline NBC due to naked short selling associated with a death spiral financing, was making his case to the SEC Commissioners about how his company had been manipulated and victimized into virtual non-existence by market predators, a case he had previously made on Dateline.
Audio links to that are at http://www.connectlive.com/events/secopenmeetings/sec-021306-archive.asx and http://www.connectlive.com/events/secopenmeetings/sec-021306-archive.ram
At the conclusion of his testimony, the exchange between Young and SEC Commissioner Cynthia Glassman demonstrates that many of the Commissioners themselves may not be fully informed about the special circumstances associated with the development stage companies the SEC grants public trading privileges to.
“My understanding is that companies generally use earnings from operations to pay for costs related to filing the registration statements,” said Glassman, revealing a lack of thorough understanding that most publicly-traded development-stage companies have no earnings whatsoever, and may not for upwards of at least a year or so after start-up.
Former SEC Chair William Donaldson was similarly left flat-footed at a Senate hearing last year when he was asked about rampant naked shorting by the committee chair and began a rambling description of Regulation SHO. The Senators cut him off with “we know about Regulation SHO; we just want to know why it isn’t working.”
He promised to come back with some answers and shortly afterwards simply resigned from the Commission.
Much of the fast-breaking news and discussions are found at http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/Default.aspx, a website favored by Byrne and run by the mysterious Bob O’Brien who uses a pen name he has said is to protect himself and his family against potential harm, a plight also expressed this week to FinancialWire by Gary Vallinotti, the CEO of Jag Media Holdings (OTC: JAGH), who was among those asking Abelow about his role at the DTCC, as well as http://www.investigatethesec.com, whose publisher, Dave Patch, was credited late last year with stimulating Lambiase and the NASAA to look into the issue of naked shorting that the SEC at that point seemed to be dilly-dallying around.
In almost all of the articles now about naked short selling, the debate is whether or not companies are harmed by market manipulation, or whether they “deserve” it due to mismanagement, and so on. Almost none of these debates address the losses in savings and assets by small individual investors, most of which will never be recovered. Not even the SEC or NASD, in their enforcement actions, address this, meaning that regardless of the validity of the allegations, the markets lose more and more available investments and investor confidence, not to mention the destruction of investors’ dreams and aspirations.
There is growing evidence that as this story moves into the mainstream, individual investors may extract their toll on slothful politicians and bureaucracies.
For instance, Harris Interactive has confirmed that the public is now informed and that 76% of investors believe those who naked short stock should suffer penalties as severe or more severe than those imposed for fraud and counterfeiting.
Its survey was conducted among 1,243 investors nationwide, and was commissioned by Working Americans for an Open Economy.
Investors' support for cracking down on naked shorting could play a role in upcoming congressional elections with 38% of investors saying they would be more inclined to vote for a congressional candidate who addresses the issue of naked shorting. Among investors aged 55 or older, fully one-half (50%) say they would be more inclined to vote for such a candidate.
"This study leaves little doubt as to how seriously investors view the illegal practice of naked shorting," said Mark Wirthlin, senior vice president of the Harris-Wirthlin Brand and Strategy Consulting Practice at Harris Interactive. "If this issue moves front and center, it clearly has the potential to influence both legislation and congressional elections."
The study was designed to understand investor attitudes toward the practice of naked shorting. "Naked shorting has become the game on Wall Street in the past 10 years and its pervasiveness creates serious risks to our system," said Steve Wark, spokesperson for Working Americans for an Open Economy. "These results show that the public is ready for the government to take real and meaningful action against hedge funds, brokerages and individuals breaking the law."
When it comes to specific actions that could be taken against those found guilty of naked shorting, vast majorities of investors are behind every alternative tested:
Requiring the federal government to publish the identity of brokerages and individuals found guilty of naked shorting (79%)
Allowing individuals, investors, pension funds, and small companies financially damaged by naked shorting to sue to recover their financial losses (75%)
Revoking the securities licenses of those found guilty of committing naked shorting (75%)
Meanwhile, the SEC is seeking comments on adding OTC and OTCBB companies to its tracking of short interest.
A recent Investrend Poll at http://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 a more recent Investrend Poll, 50% believe that these new scandals will keep individual investors on the sidelines and out of the markets.
http://www.investrend.com/articles/article.asp?analystId=0&id=23298&topicId=137&level=13...
