STOCKGATE The Counterfeiting Of American Stock Shares.

August 25, 2005 (FinancialWire) With JPMorgan Chase & Co. (NYSE: JPM), Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc., Morgan Stanley (NYSE: WMD) and Merrill Lynch & Co. (NYSE: MER), who dominate the credit-derivatives market, reportedly among 14 banks being called on the carpet by the NY Fed over "unconfirmed trades," and a super task force of regulators reportedly auditing the top brokerages over allegations of illegal naked short selling, it could soon be "SHO and tell" time.

Regulators are smarting over allegations that they gave super hedge funds a free pass because "fails to deliver" were just too massive to reconcile in the "grandfather clause" in Regulation SHO after the FTDs couldn't be cleaned up even with a six months notice, and there is growing evidence that the U.S. Securities and Exchange Commission, the NASD and the New York Stock Exchange are not about to let some state regulator do another "Spitzer" on them.

The North American Securities Administrators Association, representing state regulators, was sharply critical of the Depository Trust and Clearing Corp., co-owned by the NYSE and NASDAQ, during the comment period over Regulation SHO, and FinancialWire has been aware for some time that some state regulators have been looking into why the DTCC has fails to deliver amounting to $6 billion a day.

NASDAQ may soon pull out of the DTCC and form its own clearing group, according to Traders Magazine. A break-up of the DTCC has been editorially endorsed by Investrend Information, publishers of FinancialWire.

A growing chorus has also risen from Congress to "make Regulation SHO effective," rather than what critics say it has been so far, a showcase of illegal manipulation.

TheStreet.com's (NASDAQ: TSCM) RealMoney said that the market "dived" Wednesday over the Fed letter, saying the market may be concerned this is "another Long term Capital type event in the making."

A banking industry group was quoted as saying as recently as July 27 that an "urgent" effort is needed to tackle the "serious" accumulation of trade confirmations.

At the same time, news reports say that examiners from the NASD, NYSE and SEC are "in the middle of a sweep designed to ferret out brokerages breaking rules designed to eliminate naked short selling."

A battle royale, including competing lawsuits, are being waged between Overstock.com (NASDAQ: OSTK), which alleges that Rocker Partners, a major hedge fund said by some to be the leading shorter of a large segment of the NYSE Regulation SHO "threshold list," is engaging I illegal manipulative activites.

TheStreet.com's Kevin Kelleher said the "scarcity of hard data on the illicit trading tactic so far has only polarized the debate on how serious a problem it has become."

Despite a number of semi-favorable articles in TheStreet.com, Overstock CEO Byrne has named the company as a part of the media conspiracy supporting misdeeds by hedge funds.

The hedge funds, Kelleher said, say that "most of the positions created by failed deliveries are related to options trading and not a concerted effort to drive stocks down.

"That may be the case. But without better data on stocks that failed to deliver, the rest of us will never know for sure.

"Meanwhile, what little data are available suggest that naked shorting may indeed be out of control and that a much-ballyhooed trading rule known as Regulation SHO has so far done little to rein it in."

He said that naked shorting "is in essence make-believe short-selling. In the same way kids play doctor without the medical equipment, naked shorters sell unborrowed stocks, stocks that no one has borrowed and possibly never will. The SEC allows naked shorting in two cases: to maintain liquidity in hard-to-find shares and for anyone who shorted unborrowed shares before 2005. That second exemption has generated its own share of controversy."

He said that the outcry has steadily increased. "In recent months, newsletters like CrossCurrents and Biotech Monthly have sounded alarms on naked shorting."

"I'm quite confident that this is a much larger issue than anyone cares to consider," Kelleher quotes CrossCurrents editor Alan Newman. "It's hard to find bears any harder-core than Newman, who in February 2000 put a then-unthinkable 3000 target on Nasdaq and who today expects the Dow to sink to 8500. When the uber-bears are worried about the adverse impact of shorting, it's time to start worrying."

Newman explains naked short-selling in eye-opening clarity, he notes: "Selling unborrowed shares means the buyer doesn't get delivery of the shares he bought. "There are now two actual owners of the same shares. The exact same shares now show up long in both accounts," Newman says. "Every 100 shares of a naked short is a duplication of real shares, just as if the shares had been photocopied and distributed."

Kelleher also quotes Larry Thompson, the First Deputy General Counsel at the Depository Trust and Clearing Corporation, a central clearinghouse for trade settlement, that about 1.5% of the dollar volume of stocks traded each day fail to deliver. In a Q&A published this March on the DTCC site, "fails to deliver and receive amount to about $6 billion daily ... including both new fails and aged fails."

Overall, said TheStreet.com, "1.5% of volume may not be much of an impact. But judging from the way some stocks spend weeks and months on the threshold list of shares that face persistent delivery failures, the naked shorting is concentrated in illiquid shares known to be hedge fund targets. The bulk are traded over the counter, but some are well known, such as Netflix, Netease (NASDAQ: NTES), Shanda Interactive (NASDAQ: SNDA), and Taser International (NASDAQ: TASR).

He said that perhaps the most telling data came from a simple Freedom of Information Act filed by an individual investor who asked the SEC for aggregate data on failed deliveries on the NYSE and Nasdaq. Before Regulation SHO was passed in September 2004, an average of about 155 million shares a day failed to deliver on the two exchanges, excluding OTC and Pink Sheet stocks, TheStreet.com says the data showed.

"After Regulation SHO was passed, the delivery failures rose, averaging 205 million shares a day in December and rising as high as 259 million on Dec. 22 alone. Since the law went into effect on Jan. 3, the delivery failures have declined, but are still only about 20% below their levels of last summer.

"The SEC, wanting to avoid short-squeezes in dozens of stocks caused by the closing out of naked short positions, opted to 'grandfather in' any failed deliveries before Jan. 3. But that opened the door to another problem: In the four months between the date Regulation SHO went into effect and the date it took effect, the grandfather provision gave anyone who was so inclined a generous period of time to build up naked short positions in any stock he liked.

"Or, to use the counterfeit analogy, imagine outlawing the printing of funny money, but giving everyone four months to print up as much as they'd like. Only then would counterfeit dollars be illegal -- but only to print, not to use."

He points out that "it wasn't as if regulators weren't expecting this. The NASD, in a 2004 proposal to tighten rules on naked short-selling, wrote, "Naked short-selling ... can result in long-term failures to deliver, including aggregate failures to deliver that exceed the total float of a security. NASD believes that such extended failures to deliver can have a negative effect on the market.

"Among other things, by not having to deliver securities, naked short-sellers can take on larger short positions than would otherwise be permissible, which can facilitate manipulative activity. Further, significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends."

Some 93.89% of the respondents to the Investrend Poll at http://www.investrendinformation.com said that the DTCC should be "punished" for its interferences with the media, especially FinancialWire, which has been reporting on this issue for almost two years.

The censorship has since admitted to in a letter posted at http://www.investrend.com/Admin/Topics/Articles/Resources/349_1113403487.pdf .

More than a half dozen highly-ranked Republican and Democratic U.S. Senators have weighed in that the U.S. Securities and Exchange Commission's much-ballyhooed "Regulation SHO" has highlighted the massive extent of the illegal practice but has done nothing to stop it.

The main lists for Regulation SHO are at http://www.nasdaqtrader.com/aspx/regsho.aspx and http://www.nyse.com/Frameset.html?displayPage=/threshold .

Even the DTCC has admitted its "fails to deliver" is massive, amounting to upwards of $6 billion a day, according to DTCC Deputy General Counsel Larry Thompson.

A former U.S. Under Secretary of Commerce for Economic Affairs, Robert J. Shapiro, now chair of Sonecon, LLC, a private economic advisory firm, accused Thompson of making "inaccurate or misleading" statements. Shapiro, who holds a Ph.D from Harvard University, was the principal economic advisor to former President Bill Clinton in his initial Presidential campaign.

Shapiro currently provides economic analysis to the law firms of O'Quinn, Laminack and Pirtle, Christian, Smith and Jewell, and Heard, Robins, Cloud, Lubel and Greenwood, on issues associated with naked short sales, which he noted includes "matters raised in an interview published by @DTCC with DTCC deputy general counsel Larry Thompson."

He asserted in his letter that "the extent to which [naked short selling] occurs is in dispute. While this statement may be narrowly correct, objective academic analysis has established that naked short selling has been a widespread practice and one which, when allowed to persist, can pose a threat to the integrity of equity markets. A recent study by Dr. Leslie Boni, then a visiting financial economist at the SEC, analyzed NSCC data and found that on three random days, an average of more than 700 listed stocks had failures-to-deliver of 60 million-to-120 million shares sold short ' naked shorts ' that had persisted for at least two months. In addition, over 800 unlisted stocks on any day had fails of 120 million-to-180 million shares sold short that also had persisted for at least two months. The total number of naked shorts, including those that had persisted for less than two months, was presumably considerably greater.

"Regarding the extent of naked shorts, Thompson has provided closely-related additional information: 'fails to deliver and receive amount to about $6 billion daily.including both new fails and aged fails.' Thompson minimizes this total by comparing it to "just under $400 billion in trades (emphasis added) processed daily by NSCC, or about 1.5% of the dollar volume." By most people's standards, a problem involving hundreds of millions of shares valued at $6 billion every day is a very large problem. Moreover, the $6 billion total substantially underestimates the actual value of all failed-to-deliver trades measured when the trades actually occurred. Most of the $6 billion total represents uncovered or naked short sales, many of which have gone undelivered for weeks or months with their market price being marked-to-market every day. As a stock's price falls, the market price of naked shorts in that stock also declines, reducing the total value of the outstanding failures-to-deliver cited by Thompson.

"In other respects, Thompson's comparison to the '$400 billion in trades processed daily by NSCC' seems disingenuous and misleading, because that $400 billion total covers not only U.S. equity trades which can involve most of the failures-to-deliver at issue, but many other transactions also processed by the NSCC. The value of all equity transactions on U.S. markets in 2004, for example, averaged $82.3 billion/day. If Thompson is correct that the daily value of fails-to-deliver averages $6 billion, that total is equivalent to 7.2 percent of average daily equity trades or nearly five times the 1.5 percent level suggested by Thompson.

"Furthermore, the DTCC reports on its website that on a peak day, 'through its Continuous Net Settlement (CNS) system, NSCC eliminated the need to settle 96 percent of total obligations.' Assuming that CNS nets out the same proportion of trades on other days, $384 billion of the $400 billion in daily trades cited by Thompson are netted out, leaving only $16 billion in daily trades that require the actual delivery of securities. The $6 billion of fails-to-deliver securities existing on any day are equivalent to 37.5 percent of the average daily trades that require the delivery of securities, or 25 times the 1.5 percent level cited by Thompson.

"Thompson tries to explain the large numbers of shares that go undelivered ' in most cases arising from naked short sales -- by citing problems with paper certificates, inevitable human error, and the legitimate operations of market makers. This also seems misleading or disingenuous. Regarding problems with paper certificates, the DTCC estimates that 97 percent of all stock certificates are now kept in electronic form. Nor can human error or legitimate market-making operations explain the high levels of failures-to-deliver that persist for months ' on any day, an average of 180 million-to-300 million shares have gone undelivered for two months or longer ' as documented by Dr. Boni's analysis of NSCC data.

"Thompson also disparages the attorneys who represent companies that have been damaged or destroyed by massive naked short sales, and their shareholders, by claiming falsely that the cases in this matter have almost all been dismissed or withdrawn. The legal firms that I advise -- O'Quinn, Petrie and Laminack; Christian, Smith and Jewell; and Heard, Robins, Cloud, Lubel and Greenwood ' have not lost any motions against the DTCC or its affiliates and currently have one case against the DTCC pending in Nevada and another case against the DTCC pending in Arkansas. In addition, on February 24, 2005, these attorneys were granted an order by the New York Supreme Court ordering the DTCC to produce trading records involving two companies they represent, including records from the Stock Borrow program, which may establish whether large-scale naked short sales were used to manipulate and drive down the stock price of those two companies.

"Thompson also asserts that the plaintiffs suing the DTCC for damages associated with the handling of naked short sales rely on "theories [that] are not an accurate reflection of how the capital market system actually works." This assertion is inaccurate. There is no dispute about how the capital markets work -- nor any doubt that naked short sales have been used to manipulate and drive down the price of stocks, as seen in numerous death-spiral financing cases. The issue here is the DTCC's role in allowing or facilitating such stock manipulation through its treatment of extended naked short sales.

"In explaining the DTCC's role in these matters, Thompson rejects the claim that the NSCC's Stock Borrow program allows the same shares to be lent over and over again, potentially creating more shares than actually exist or 'phantom' shares. By Thompson's own account, shares borrowed by the NSCC to settle naked short sales are deducted from the lending member's DTC account and credited to the DTC account of the member to whom the shares have been sold. Therefore, those same shares become available to be re-borrowed to settle another naked short sale and, if that happens, to be re-borrowed again and again to settle a succession of naked short sales. Throughout this process, the actual short sellers may continue to fail-to-deliver the shares to cover their shorts and, as Dr. Boni's analysis of NSCC data found, the underlying failure can age for months or even years. The process which Thompson describes is one in which shares can be borrowed and lent over and over again, introducing more shares into the market than are legally registered and issued. If any ambiguity remains, Thompson can clarify it by responding to the following query: Once a share that has been borrowed through the NSCC Stock Borrow program is delivered to the purchaser, is that share restricted in any way so it cannot be lent again?

"It is important to note that the Stock Borrow program is used when continuous net settlement cannot locate the shares to settle. As a consequence, Stock Borrow is usually called into play when there are relatively few shares available for borrowing. These are propitious conditions for market manipulation: Unscrupulous short sellers undertake large-scale naked short sales involving stocks for which few shares are available for trading and lending, relying on the Stock Borrow program to borrow the limited available shares, again and again, at sufficient levels to drive down the market price of the shares.

"Thompson notes that of approximately $6 billion in outstanding failures-to-deliver existing on any day, "the Stock Borrow program is able to resolve about $1.1 billion . or about 20% [18 percent] of the total fail obligation." In this statement, Thompson raises very serious questions about the integrity and operations of the NSCC and DTCC, which he can clarify by responding to the following queries: If the Stock Borrow program "resolves" only 18 percent of total fails, what is the disposition of the remaining 82 percent of outstanding fails? When failures-to-deliver occur that are not resolved through Stock Borrow, does the NSCC credit the undelivered shares to the member representing the buyer, creating genuine "phantom shares"? Finally, how many shares do the borrowing brokers, clearing firms and other participants in the Stock Borrow program owe the NSCC on a typical day, and what is their total value?

"In a related matter, Thompson tries to distance the DTCC from charges that shares held in restricted accounts ' for example, cash accounts, retirement accounts and many institutional accounts ' are improperly lent through the Stock Borrow program by claiming that responsibility for segregating restricted shares from lendable shares falls to the "broker and bank members" of the DTCC, while responsibility for monitoring or regulating their performance in this matter falls to the stock exchanges and the SEC. As a trust company, the DTCC cannot hold that it has no role, duty or responsibility to ensure the probity of its operations. Thompson could address this issue by responding to the following queries: What procedures does the NSCC have to ensure that shares held in members' accounts for possible loan through the NSCC Stock Borrow program are unencumbered by regulatory or legal restrictions from being pledged or assigned and eligible to be borrowed? On any given day, how many participants in the Stock Borrow program have lent shares that exceed their lendable shares, in what numbers and of what value?

"Thompson also tries to distance the DTCC as far as possible from the naked short selling that generates most of the extended failures-to-deliver: 'We don't have any power or legal authority to regulate or stop short selling, naked or otherwise. We also have no power to force member firms to close out or resolve fails to deliver . we don't even see whether a sale is short or not.' In fact, the DTCC chooses to not distinguish short sales from long sales, chooses to not regulate or stop extended naked short sales, and chooses to not force member firms to resolve protracted naked short sales.

"First, Regulation SHO requires that all transactions be clearly marked short or long. If the DTCC and NSCC do not know whether sales are short or long as Thompson contends, they choose to not know. Second, the NSCC has a clear responsibility and adequate means to stop naked short sales of extended duration, with no legal barrier that would prevent them from so doing. As a trust company with an acknowledged duty to provide investors certainty in the settlement and clearance of equity transactions, the DTCC chose to carry out that duty by assuming the role of counterparty to both sides of every equity transaction, through the operations of the NSCC's CNS system and the Stock Borrow program. By allowing short sellers to fail-to-deliver shares for months or even years, the NSCC clearly fails to provide certainty in settlement to the buyers, sellers and issuers of securities. Since it is widely known that extended naked short sales have been used to manipulate stock prices in cases of death-spiral financing, and the NSCC created the Stock Borrow program to address failures-to-deliver that prominently include naked short sales, the NSCC and DTCC share a responsibility with the SEC and the stock exchanges to protect investors by resolving extended fails.

"Third, the DTCC and NSCC have the clear capacity to force member firms to resolve the extended failures-to-deliver of their customers by purchasing shares on the open market and deducting the cost from the member's account. A 2003 study by Dr. Richard Evans and others provides evidence that forced buy-ins by any party occur very rarely. They found that a major options market maker who failed to deliver all or a portion of shares sold in 69,063 transactions in 1998-1999 was bought-in only 86 times or barely one-tenth of 1 percent of the fails. Thompson can clarify investors' understanding of their operations by responding to the following query: What proportion of shares that are persistent fails-to-deliver, of one month or longer, are ever bought in?

"Thompson acknowledges that the DTCC and NSCC know precisely how many failures-to-deliver exist for each stock and the precise duration of each of these fails. Yet, the DTCC refuses to disclose this information even to the issuer of the stock in question, which Thompson justifies by citing 'NSCC rules' prohibiting such a release of data based on 'the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms.'

"This response is both disingenuous and revealing. We know now, for the first time, that the DTCC has full knowledge of the extent of protracted, large-scale naked short sales in all particular cases. We also know now that the DTCC has had this information for at least a decade, since Thompson also notes that 'fails, as a percentage of total trading, hasn't changed in the last 10 years.' Yet, based on the DTCC's own rules, it allowed these abuses to persist and fester. The DTCC and NSCC can change their rules at any time. Moreover, in this case, those rules are unjustified. Data documenting outstanding short sales in each stock are currently issued publicly, so further data on how many of those short sales are naked would not reveal additional information about the trading patterns of individual firms or in any way empower manipulators. In fact, the DTCC could substantially disarm manipulators by both publicly reporting naked short sales in each issue and pledging to force buy-ins of all naked short sales that persist for more than a limited period.

Surely, if large-scale, extended naked short sales have effectively created "phantom" shares, companies have a responsibility to their shareholders and the right to secure this information from the organization which manages the settlement of short sales. At a minimum, the DTCC should respond to requests by issuers for data on extended failures-to-deliver in their own stocks, both in the past and currently, so they can take steps to resist stock manipulators or bring them to account for past manipulation.

Thompson also claims that the DTCC did not create or manage the Stock Borrow program to serve its own financial interest, insisting that the service generates less than $2 million a year in direct fees to the DTCC and that all DTCC services are priced on a "not for profit" basis that seeks to match revenues with expenses. Without further information, these responses beg the question of whose private financial interest has been served by the Stock Borrow program, especially as the DTCC is owned by the stock markets, clearinghouses, brokerage and banking institutions that use its services. Thompson and the DTCC can clarify this serious matter by responding to the following queries: Do DTCC participant/owners receive interest or other payments through or from the Stock Borrow program for lending the shares of their customers and, if so, how much have they received for these activities over the last 10 years? Further, do DTCC participant/owners receive any dividend, interest or other payments or distributions from the DTCC or its subsidiaries?," Shapiro concluded.

Neither Thompson nor the DTCC have responded to Shapiro's wide-ranging allegations.

Recently, former SEC Attorney Peter Chepucavage, previously a staffer for the U.S. Securities and Exchange Commission's Division of Market Regulation, and a key participant in the release of Regulation SHO, has left the SEC and is now challenging his former agency over the regulation's inability to reign in illegal market manipulations.

"I am responding to your Request for Public Comments on Summary of Proposed Committee Agenda. I wish to incorporate and expand upon the comments of Brad Smith regarding a macro or more comprehensive approach to small companies and to use his term small to medium enterprises (SME'S). A more comprehensive approach is necessary and appropriate because there is a need to review not only the small company issuers but also the markets and broker dealers involved in the raising of capital for SME's and the public perception of the regulation of those markets.

"In a recent explanation of the key points of Reg. SHO, the staff stated "Speculative stocks, such as microcap stocks, often have a high probability of declining in value and a low probability of experiencing above average gains." The committee should review the underlying data for this proposition to determine whether it is true for all low priced stocks in general or just those traded on the pink sheets and otcbb with a view to determining whether such stocks could ever be suitable for retail investors or whether they should only be sold to investors qualified by knowledge of these markets.

"In the column Washington Investing, Wash Post 5/23/05 p.1 Jerry Knight refers to the "purgatory of the Pink Sheets, a nearly unregulated neither market for trading stocks." The committee should evaluate this statement and if necessary recommend increased practical regulation such as short sale reporting and Reg SHO coverage.

"Reg. SHO excluded these stocks from its coverage and the committee should therefore review why the most speculative stocks are not included.

"The SRO short sale reporting rules exclude these stocks from their coverage. See petition of the Pink Sheets to include them as an example of a market seeking more regulation.

"The SRO'S have failed to enforce their locate requirements for short sales thereby encouraging naked shorting in these markets. Except for one case, the penalties imposed over the last 10 years include modest fines probably less than trading profits made. "These stocks are not eligible for margin or options and thus the loan supply is curtailed enabling naked shorts and the inability to hedge. See Comments of Professor Angle to Reg SHO.

"The Commission is reluctant to provide an arbitrage exemption for short sales which makes the distribution of many small company issues thru Pipes and Wt arbitrage. The committee should review the merits of such an exemption.

"The presidents and CEO'S of small broker -dealers believe they are often held responsible for their employees conduct while those of large broker dealers rarely are . They also believe penalties imposed on small bd's constitute a much larger portion of their net capital and are inherently unfair. This is an old argument but continues to resurface and should be addressed.

"The chairman of the PHLX recently noted that he worried that the Commission staff would be overwhelmed with the NYSE/ARCHIPELAGO and NASDAQ/INSTINET mergers and not have time for the rule filings of other smaller SRO's.

"Small companies are more likely to be referred to as penny stocks, unless like Lucent at $2.50 a share they are listed on the NYSE.

"There may be no reliable evidence that small bd's and small companies create more regulatory issues than the Enrons, Worldcoms, Tycos and other similar large companies that have required significant regulatory resources. The committee should review whether they do in fact create more regulatory issues.

"There is a proliferation of unregistered finders operating in the area of SME'S because of the lack of clear guidance from the Commission. It should also consider studying the role of finders in the process and might consider whether those finders should be registered as investment advisers rather than bd's.

"The Committee should not be reluctant to challenge conventional norms in its approach. The Committee should therefore recommend a special study of the regulation of SME's and small bd's to determine if the regulatory scheme is adequate and consistent and does not impose a greater burden on them especially in light of their job creating value in the U.S. It might also recommend the creation of an independent small business/small bd office at the Commission with a significant increase in staffing. While it is not the Commission's role to encourage small to medium enterprises or bd's, it is their obligation not to hinder them and to pay equal attention to them. This Committee has a rare opportunity to set a future agenda for SME'S in this country .As the markets rapidly consolidate, attention to SMEs and bd's is important whether it results in more or less regulation or more reasonable regulation," the former SEC attorney concluded.

A controversial audio of a purported conference call conducted by officials of Bear Stearns (NYSE: BSC) contains allegations that the SEC had shared with Bear Stearns the names of hundreds of companies that it had said would be on the threshold lists but which were not on the official lists published, and that regulators had confided to Bear Stearns and others that the regulators are selectively enforcing provisions against "fails to deliver" securities according to a kind of floating set of "interpretations" rather than strictly according to the law.

The blockbuster audio is posted at http://www.investigatethesec.com/Bear080705.wma .

U.S. Senator Elizabeth Dole (R-SC) recently joined U.S. Senators James Talent (R-MO), Richard Shelby (D-AL), Susan Collins (R-ME), Robert Bennett (R-UT) and Richard Durbin (D-IL) in questioning U.S. Securities and Exchange Commission about what they call the "failure" of Regulation SHO to curtail unlawful, predatory securities trading.

The current Senate line-up carries significant heft. Senator Collins is chair of the Homeland Security and Governmental Affairs committee, Senator Shelby is chair of the Senate Banking Committee, Senator Durbin is Assistant Democratic Leader and Senator Bennett is Republican Whip. The Senators' letters are posted at http://www.americaneedstoknow.com

"Stockgate Today" publisher David Patch said that the Senators have 23 good reasons, citing that many companies, including Martha Stewart Living Omnimedia (NYSE: MSO), Delta Air Lines (NYSE: DAL), Krispy Kreme (NYSE: KKD) and Netflix (NASDAQ: NFLX), that remain "not settled" on the official threshold lists maintained by the New York Stock Exchange and Nasdaq five months later.

"Stockgate Today" is published at http://www.investigatethesec.com . The Senators' letters to shareholders and the SEC are posted at http://www.americaneedstoknow.com

Patch said that most of the 23 companies hardest-hit by unlawful stock manipulations in full sight of market regulators, including those at the SEC, such as Annette Nazareth, head of market regulation, who belittles complaints as coming from those who "want to see their stock go up," have had double-digit declines in stock valuations over the 94 days they have been on the highly-public list.

He also noted that in the March, 2005 Euromoney Magazine article on illegal naked short selling, Head of Market Regulation Annette Nazareth's assistant, James Brigagliano said 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."

This disputed "grandfathering" has not yet been taken up by Congress, but the 23 companies on the threshhold list for over days are new transgressions, and presumably they can't be dealt with either because Nazareth and Brigagliano are concerned about "generating volatility."

Also, in a blockbuster event almost equal to the mysterious "postponement" of "Dateline NBC," the U.S. Securities and Exchange Commission has inexplicably given the DTC's National Securities Clearing Corp. "immunity" in the form of limited liability for willful misconduct or violations of Federal securities laws.

The Notice regarding the SEC's action is at http://www.nscc.com/impnot/notices/notice2005/a6029.pdf

Some legal experts are questioning whether the SEC, without the approval of Congress, has the authority to limit the NSCC's liability. There have been similar questions about the SEC's authority to unilaterally "grandfather" securities violations prior to Regulation SHO.

The new regulation is sure to be litigated since the DTCC and the NSCC were the subject of lawsuits claiming their "stock borrow program" is illegal counterfeiting, prior to the rule approval by the SEC.

Also, recently a stock transfer agent, Transfer Online Inc., had asked then-SEC Chair William Donaldson to put a stop to the control the Depository Trust & Clearing Corp. and Automatic Data Processing (NYSE: ADP) are fast gaining over the transfer business, and to demand DTCC transparency.

Excerpts from the letter, posted at http://www.faulkingtruth.com/Articles/LettersToEditor/1012.html , states: "Over the years as the amount of shares held at DTC has increased it has become more and more difficult to determine who owns the shares, who is trading them and if the trading is proper. This trend, and the resulting problems I will detail below, continues to increase because a minority of the total number of shareholders are reflected on the books and records of the corporation, most activity takes place behind the wall of ownership that is designated as Cede & Co. and neither the company nor the transfer agent has any access to the underlying information.

"Furthermore, DTC recently managed to put through a rule change (Release No. 34-50758A; File No.S7-24-04) that prohibits a transfer agent from representing any company who seeks to withdraw from the DTC system. This change effectively leaves companies with no voice or choice in the management of their stock and their ability to have any transparency as to what is actually taking place in the market in regard to their stock.

"I receive calls from companies seeking information as they watch millions of shares trade in a single day, who watch their share price decrease in value and who have no access to information regarding who is behind the trading of these shares, or if in fact the trades are at all legitimate. As the system now operates, most companies have a large percentage of shares on their books registered to Cede & Co.

"Given the importance of shareholder voting and communication one would assume that the same requirements placed on transfer agents as to accuracy and reporting would be placed on ADP and Cede & Co. as they usually hold or service the majority of the shares owned in any given company.

"I have found; however, that when presented with the tabulation reports from ADP the share totals they report sometimes exceed the total number of shares outstanding for the company. Let me restate this because it is a very important part of my concern about a system that is more and more headed in the direction of increased control by DTC. The shares presented by ADP, that are the shares voted by the brokers on behalf of the shareholders for whom they hold accounts, EXCEED when added to the shareholders of record the total number of shares outstanding.

"Where are these extra shares coming from? Why are there no controls on the number of shares held in the nominee name Cede & Co. vs. the ownership on the books and records of the brokers and why is the company not privy to any information unless it pays whatever fees it is told it must pay by the organizations that control the data?

"In fact, as the system is evolving, DTC is de facto becoming the largest transfer agent in the industry even though it is an organization formed by and working for the interests of the brokerage community. If, ultimately, the S.E.C. is in place to protect investors then this issue can not be ignored because in the end when the market is completely under the control of the brokers and the organizations that represent them then the market can neither be transparent nor fair."

The "Important Notice" from the DTCC regarding the NSCC demonstrates that the entities are a "self-regulatory organization" under the auspices of the SEC, which ramps up the media interference to First Amendment violations.

The DTCC said that the "approved changes create a uniform standard limiting NSCC's liability to direct losses caused by the NSCC's gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action."

In addition, the organization stated, "the changes memorialize an appropriate commercial standard of care that will protect NSCC for undue liability, permit the resources of NSCC to be appropriately utilized for promoting the accurate clearance and settlement of securities, and are consistent with similar rules adopted by other self-regulatory organizations and approved by the Commission."

The DTCC had asked for the rule December 8, 2004. It is not known how the proposed rule slipped through the cracks on the public and Congressional levels prior to the approval.

The National Coalition Against Naked Shorting stated that the action was sought and approved hastily because "they have been willfully violating securities laws for years, know that it will come out in court, and want to have a piece of paper to fall back on," adding that it corroborates "the theory that the stock borrow program violates a host of securities laws, that the NSCC knows it, and that they have been counterfeiting stock for years and just now are starting to catch on to the idea that they will get caught."

In his communication to then-SEC Chair William Donaldson, Sen. Durbin also contested the claim by the Depository Trust and Clearing Corp., a unit ot the New York Stock Exchange and NASD, that it has no responsibilities under Regulation SHO.

Senator Durbin's letter to Donaldson appears to sharply contest the Depository Trust & Clearing Corp.'s contention that it has no role in Regulation SHO.

"I am writing to request information regarding the August 25, 2004 Securities and Exchange Commission (SEC) short sale regulation, designated Regulation SHO. On March 9, 2005, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Regulation SHO, in which Chairman Bennett spoke with you about the regulation's effects on the illegal practice of naked short selling. I thank you for your testimony and I hope that you can follow up on some of my concerns not fully addressed by the Banking Committee hearings.

"I appreciate the efforts of the Securities and Exchange Commission (SEC) to control abusive short selling practices. As a result of Regulation SHO, the names of firms with large amounts of unsettled shares are published on the Threshold Security List daily. This list assists individual investors in making informed decisions about potential manipulation of the market, and gives regulators and investigators a centralized list of firms with significant numbers of undelivered shares. However, it has come to my attention that Regulation SHO may not be curtailing abusive naked short selling practices.

"Several of my constituents have contacted me since the SEC introduces Regulation SHO. They have raised concerns about potential loopholes in settlement regulations. During your recent testimony before the Banking Committee, Chairman Bennett asked you about the ability of brokerage houses to shuttle unsettled shares every 13 days in order to avoid settling the borrowed shorted shares. Due to time constraints at the hearing, the committee did not receive a complete answer. This issue is worthy of a full response.

"Additionally, my constituents have expressed concern about SEC enforcement of Regulation SHO. While the Threshold Security List publicizes securities that might have been manipulated, I am concerned that some securities repeatedly appear on the list. What steps is the SEC taking to investigate trading practices that result in vast quantities of unsettled shares, and to punish those people who violate SEC naked short selling regulations? What is the SEC doing to ensure that the Depository Trust & Clearing Corporation (DTCC) is complying with Regulation SHO, and what actions does the SEC undertake when the DTCC identifies large quantities of shares that have not been delivered?

"It is important that the SEC identify abuses and prevent manipulative naked short selling practices that undermine faith in the market. Thank you for your attention to this matter. I look forward to your timely response," Senator Durbin concluded.

Pink Sheets head Cromwell Coulson has asked the SEC to publish short positions on all over the counter and bulletin board stocks, and that request is currently in a comment period.

The request for rulemaking, which Coulson has told companies traded on the Pink Sheets, is needed "to make regulators turn on the lights and protect investors from the menance of hidden short selling in the OTC market," is at http://sec.gov/rules/petitions.shtml

In an email to Donaldson, Coulson had said "I believe that it is very important to require the disclosure of short positions because the lack of transparency is allowing promoters to defraud investors by blaming all selling on naked market maker short selling. Disclosure and transparency can easily remedy the issue."

In other news on the naked short-selling front known as "StockGate," adding to what TheStreet.com founder James Cramer calls the "Hedge Fund Relief Act," the termination of the Uptick Rule, is the fact that those using illegal naked short selling in the past have been granted a kind of amnesty for acts before the first of 2005. The SEC just "grandfathered" those illegally-begotten gains and resultant counterfeit shares into the system, so these windfall gains are now available to downtick with reckless abandon on downticks.

The "grandfathering" admission is at http://www.sec.gov/spotlight/keyregshoissues.htm

In the same document, the SEC has inexplicably stated that not all forms of illegal naked short selling, the equivalent of counterfeiting shares in public companies, are actually "illegal."

The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in its media censorship.

In a recent editorial, Investrend Information head Gayle Essary questioned whether the board and principal shareholders would "be party to shenanigans that lead to the censorship or disabling of any media" that he says is "un-American activity."

Essary said that the arrogance the DTCC expressed in its censorship efforts shows that the entity has "become too large, too encompassing, too powerful, too unresponsive to those it serves, primarily the investing public, and too unresponsive to the Congress under whose auspices it should be operating.

"First, it is time to unconflict it, with real public representations on its board," he said, and second, "it is time to break it up, with its various duties provided by smaller agencies under separate unconflicted boards."

DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);

Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).

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Okay Toddster ... looks to me like folks were selling something they didn't have and failed to go into the market to obtain?

Yes.

Please break it down in bite sized pieces for us simple folks. Thanks

The clearing firms I used to work for would get bought in if their fail-to-delivers were too old. I don't know what would have changed in the last 6 years where this is suddenly such a huge problem.

The only people who should be able to legally go naked short and fail-to-deliver are specialists.

First, you have to understand what a selling short is:

You (individual trader) borrow EXISTING stock from someone else and sell it for price A. An entry is made in your account. You later buy the stock back at price B to cover your "shortage" entry in your account (you buy to give back the shares you borrowed). If the price went down (price A greater than price B) you made money, the difference A-B. if the price went up ($A < $B), you lost money. So, you sell short a stock that you think will go down.

This is a very simplified example. Notice the word EXISTING. Now, for a very good description of what goes wrong with the process, see the following link:

http://www.ncans.net/intro%20to%20naked%20short%20selling.htm

The deeper you dig into this, the worse it gets... This makes Enron, Worldcom, S&L debacle, etc. look like a Sunday picnic.

Forget options. That's a different topic. The only people legally allowed to sell naked short and fail to deliver are specialists in the stock and option market makers who trade options on the stock.

I don't think this is in the same league as Enron or Worldcom. If the SEC cracked down and all these FTDs had to be covered, these stocks would all rally and these short sellers would lose big money. Since there are more long shares than short shares in existence, net-net there would be more money made than lost.

Options are another matter (derivatives). Don't confuse options with short selling.

Remember, you, the short seller, are selling shares that have to be borrowed because you don't own any. The buyer (the other side of your transaction) is suppose to receive the shares you borrowed and sold to him. The broker must have or obtain those shares to lend you (and transfer to the buyer). If they don't, they have to buy real shares by the settlement date. If they never buy the real shares, then they have essentially counterfeited shares for you to borrow (and the buyer to buy). This is called failure-to-deliver. Since January there is a list of some delivery failures as a result of SEC regulation SHO. Keep reading the material on:

http://www.ncans.net/ and

http://www.ncans.net/links.htm

The bottom line is: some hedge funds and some institutional brokers are raping investors by selling nonexistent stocks (never delivering those stocks). How long would you get away with selling cars that you never deliver? This is only possible because the industry and SEC do not disclose the computer entries showing the whole failure-to-deliver problem. (And regulation SHO is not being enforced either).

these stocks would all rally and these short sellers

In order to 'rally', you need buyers with real money. If all the FTD's were forced to cover or return, the money to buy would have to come from somewhere?

If they don't have the cash to cover, then they are going to sell somthing...and if that is a security you now have downward pressure on the markets. And of course there is the possiblity that they would just liquidate and run...

Needless to say, investor confidence would plummet, adding further downside pressure..

Obviously the SEC needs to do somthing...

In order to 'rally', you need buyers with real money. If all the FTD's were forced to cover or return, the money to buy would have to come from somewhere?

Remember the proceeds of the naked sales that are sitting in limbo?

And of course there is the possiblity that they would just liquidate and run...

Yes, if they liquidate their shorts, they'd be buying. Prices would rise.

Needless to say, investor confidence would plummet, adding further downside pressure..

You lost me again. Why would rising prices cause investor confidence to plummet?

"So what happens to those investors when the hedge funds have to cover?"

They don't have to. No one is forcing them to. Some stocks have been on the fail-to-deliver list every day since it was started last January. They are supposed to be forced to "buy-in", but they don't; and the SEC is doing absolutely nothing about it (funny, they are called SROs; self regulating organizations). And besides that, many hedge funds are moving off-shore so that U.S. laws cannot touch them. Do they know the party will eventually end?

Now, to make matters worse, there is another class of settlement between brokers called "Ex-clearing" that doesn't even go through the DTCC or show up on the SHO list. The fraud here is estimated to be 4-5 times as bad as the SHO list. This is where the picture gets ugly huge. This may be the house-of-cards that the SEC wants to ignore. But the crooks just continue to say it is not happening when there is proof that it is. But they won't show the "ex-clearing" fail-to-deliver data because they know how bad it is. Where do you think all those $500K+ bonuses are coming from this year? (avg. Goldman bonus)

How many pension funds and 401Ks, etc. would be much larger now if these scumbags weren't selling down the value of their holdings with fake shares?

Where is that scummy NYT, or the Washington Post, or Forbes, Time, Newsweek? Or Drudge, even? Investigative reporter is something kids read about in history books now.

Do they know the party will eventually end?

Well, if they want to realize a profit they'll have to buy.

How many pension funds and 401Ks, etc. would be much larger now if these scumbags weren't selling down the value of their holdings with fake shares?

That depends. Are there any S&P 500 stocks on the SHO list? How about Google?

Well, if they want to realize a profit they'll have to buy.

Not true. If the stock falls to zero, they win. Or, if it falls enough, no one wants it and legitimate owners sell it to them real cheap, so they cover by buying the mass exodus that they have, in fact, caused (nullifying their buying pressure while covering). Think someone gets the interest on that bogus bookkeeping entry?

That depends. Are there any S&P 500 stocks on the SHO list? How about Google?

Ah, since when do 401Ks only have SP500 stocks? And yes, sometimes they are on it, and sometimes ETFs. The Russell 2000 was on it not long ago. AND, the SHO list is only the tip of the iceberg. Ex-clearing failure-to-deliver lists never see the light of day.

One other thing, about your tag, Alan Greenspan was not on the grassy knoll, but he was a consultant for Keating's Lincoln Savings & Loan, and he denounced any regulatory attempts to stem the theft. Might want to look into that. Looks a little embarassing for you in light of this discussion.

If the stock falls to zero, they win.

You have any examples where this occurred?

Think someone gets the interest on that bogus bookkeeping entry?

You tell me. How does someone get interest on undelivered stock?

Ah, since when do 401Ks only have SP500 stocks?

Since when did I say they did? So what's your theory? How much higher would 401Ks be if these FTDs were closed?

One other thing, about your tag, Alan Greenspan was not on the grassy knoll, but he was a consultant for Keating's Lincoln Savings & Loan, and he denounced any regulatory attempts to stem the theft.

Please explain further about the theft.

Looks a little embarassing for you in light of this discussion.

Why would Greenspan's past or future employment cause me any embarrassment?

This article led me down a trail and I did some research on NSS and ended up being led to the CEO of OSTK(overstock.com).

After reading all of that I called a friend of mine who is a very wealthy retired at 33yo hedge fund manager who controlled a fund in excess of 1.5 Billion...

I explained to him what I had read and what he thought and what insight he had into NSS...and in particular this fellow who is the CEO of OSTK and is demanding physicals on big blocks.

First off the CEO has been buying in to his own stock in 50k blocks for the last year or two...and he is demanding physical delivery of the shares.

Here is what my friend JT said in a nutshell:

The reason the ceo is doing this is to force out the naked shorts and put a squeeze on the play to reap big profits himself. The ceo knows that the open shorts far exceed the dissolved number of shares, and by playing the game against the MM's and HF's he is trying to shake them out.

JT said its obvious the ceo is taking the whole security game personally and wants to drive away the shorts from his company's stock.

JT also said seeing as you cant actually find the physical stock to take possession of, that this looks like a ripe play on options on the long side by both writing and buying a bracket out of the market.

If the ceo succeeds in forcing the physical delivery, and the shorts get hammered, the options are net neutral in terms of risk, but have the possibility of returning big on the squeeze.

FWIW

If the ceo succeeds in forcing the physical delivery, and the shorts get hammered, the options are net neutral in terms of risk, but have the possibility of returning big on the squeeze.

Good for him. I hope he wins.

that this looks like a ripe play on options on the long side by both writing and buying a bracket out of the market.

Huh? Again in English.

One way to protect yourself from this type of funny business is to only trade stocks that are too big for this type of manipulation. Don't trade OTC stocks that have such small market caps.

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