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New Short Interest report Raises Eyebrows - November 9, 2006
David Patch

The Pink Sheets and Over the Counter Bulletin Boards (OTCBB) represent the "wild west" of Wall Street companies and regulations. It has been place known as a free for all where investors and scam artists fight to the end for the billions of dollars that trade in these markets each year. And as both invariably lose in the battle, financial institutions reap the rewards of their battles.

Until recently, accusations of short selling abuses in these markets were left to mere theories as the nature of shorting and the magnitude of shorting in the Pink Sheets and OTCBB were undisclosed. Unlike the monthly short interest reports of the NASDAQ, NYSE, and AMEX, the "wild west" was free from such market transparencies mostly due to a disinterested regulatory regime.

That all changed this past summer as the short interest reports for these markets are now available monthly for the public to peruse.

Taking a look at the reports for September and October of this year, something stood out that concerns me.

As a retail investor, being able to short a Pink Sheet or OTCBB stock is near impossible. Most firms will not accept such a trade due to the liabilities of these volatile and highly unregulated stocks. But somebody is gaining access to short these securities and by looking at the data, those that are shorting these securities are doing so with a passion and doing so at harm to the retail investor.

On a single day snapshot in September, the number of shorts in these markets of 7800 companies reached over 1 Billion shares with 3469 of these companies reporting less than 1000 shares short. Simply one month later, the number of reported shorts jumped 30% to 1.3 Billion shares with 3370 of these companies reporting less than 1000 shares short.

How were these increased shorts being added and where?

Consider a household name like Delta Airlines (DALARQ) and what Delta means to our lives and our economy.

Delta Airlines increased their reported short interest by 27.5% in the month long period between September and October publications. The growth in reported short positions represented nearly a single day of average trading volume with the most recent short interest levels now representing nearly 4 days of average trading volume necessary to cover.

But Delta Airlines also has a problem with trade settlement on securities sold having been listed on Regulation SHO for nearly the entire listing period. How then are short interests growing by 30% when previous short sales are not yet being properly settled? Where do these shares become available to short when they are unavailable to settle existing failures to deliver in the short sale process?

For the Record, Delta Airlines was an original SHO published company and has remained on the Reg SHO list for nearly the entire publication period [22 months] under several stock symbols as teh company moved through exchange listings.

Another Regulation SHO Company that was delisted from the NYSE and relegated down to the Pink Sheets where abuse lingers freely is Silicon Graphics Corporation.

According to the short interest report on Silicon Graphics (SGID), the increase in short positions was a mere 3682% with the average days to cover the short interest now representing nearly 4 days. The increase in short positions between September and October accounted for 3.88 days of trade volume in a period of 20 total trade days. Short interest trades consumed nearly 25% of all reported trade volume, including double reporting for the month between reports.

Silicon Graphics was repositioned on the Regulation SHO list on September 25, 2006 and based on the requirements for the listing, the qualifying trades occurred directly after the September short interest trade date was posted.

Another eye raising data point comes from the financial sector itself.

Man Group PLC (MNGPF) is identified as a global provider of alternative investment products and solutions as well as one of the world's largest futures brokers. In September, Man group had a short interest of over 2 Million shares and by October, that interest had grown 119% to over 4.6 Million shares. This growth in short interest, as calculated off the average daily volume now represents a days to cover period of 31.27 trade days. With the increase over the past month being 119%, the number of trade days required to satisfy the short selling accumulation over this month long period was 17 days.

In a market where few investors are allowed to short these securities, short selling interests accounted for 17 of the 20 days total trade volume. Amazing.

Man Group is listed on foreign exchanges as well as the US Pink Sheets.

Or how about this lesser known company called Sea Containers Limited (SCRA). Sea Containers Limited had a zero short position at the time of the September publication but had accumulated as many as 2.98 Million shorts by the time October reporting was due. The near 3 Million shares shorted represents approximately 5 days of average daily trade volume in the security.

And just like the other companies, excluding Man Group, Sea Containers was registered with the SEC under Regulation SHO for having excessive persistence in unsettled trades in the system. While Delta Airlines and Silicon Graphics have options markets that regulators can misplace accountability for these failures, Sea Containers Limited does not trade in the options markets and thus all failures executed post August 22, 2006 when Sea Containers was first presented as a threshold security, requires mandatory close-out.

Instead, with excessive fails in the market, traders spent 20% of the month's trade volume selling short a security as the $2.00 stock in September fell to $.97 in October. Are the two correlated? According to regulators it doesn't matter. Liquidity matters in these capital markets and who better to benefit from this liquidity but the financial institutions that execute these trades.

With nearly 8000 public companies trading in this "wild west" environment, the stories like the ones above flourish. Finding these stories was like shooting fish in a barrel.

The last month saw a 30% increase in reported short interests in a market where the retail investor is excluded from executing a short sale which thus begs the question - Who is selling short these markets and taking advantage of the near extinct regulatory oversight of their activities?

Monthly short interest reporting for the micro-cap's can be located at www.otcbb.com and click on the OTC Equity Short Interest link located on the left side. If you want to find out more about how these stocks and the trade settlement process are working, go to www.regsholist.com and select the appropriate symbol.

To jump on the bandwagon of change being a good thing, lets bring on the Democrats and see if they will take charge of the obvious misguided agenda's of Senate Banking Committee and Chairman Richard Shelby. Shelby has held tight to an agenda where our financial institutions must grow at all cost regadless of who is caught in the wake of abuses and these businesses , our local communities, and the safety of the working class financial security have all paid the price.

For more on this issue please visit the Host site at
www.investigatethesec.com.