STOCKGATE, the biggest scandal to hit the markets yet!

You can keep your pretentious platitudes and save them for some 20 year old, son.

OK, dad.

Something about your vitriol and stubborness on this issue makes me thing I had this debate with you years ago.

I'm sorry for the pretentious plattitudes. I'll be more plain: what you say about short selling is thoughtless, childish and irrational.

There, is that better?

G'nite, end of our little tet a tet.

SAJ---I have read that during the month long Congress break 135 supoenas have been served at some of the major brokerages in the stock borrow departments, so have said they are getting ready or "conditioning the industry" for when Congress returns on 9/6.

When you have both parties chairs involved Shelby and Bennett and now the curious one that joined late is Senator Collins chair of Homeland Security, we know the terrorists legally shorted airline stocks but this is totally different and you would have to be a whale and in the Cayman or another foreigh country. The problem is they are using our trading platforms to do the counterfeiting.
What do say when an attorney named William Frizzle in Tyler, TX proves his client has over a trillion shares counterfeited...that is a trillion not billion.

As I said use the archives at ncans.net or investigatethesec.com or americaneedstoknow.com these sites keep verifiable article. Google Dr Byrne of overstock.com he has been on several shows, he is represented by John O'Quin who was the attorney that settled the tobacco lawsuits for billions...he is prepared to spend 100 million to bring this to the public's attention.

A lot of people just can't believe this is going on and always revert back to short selling, the stunning thing is the DTCC is making money on these trades 1.1B last years but for some reason co-mingled the funds or that is what Donaldson said to Senator Bennett weeks before he resign after about 2 yrs on the job. The next big issue will be the out lawing of paper certificates called decertification 48 states have signed this bill...it is not good.
able

The mere fact that there is a finite number of shares of a particular compay outstanding is not, in my view, a valid economic argument against short-selling.

You and I could agree that I will sell you a mint-condition '71 Buick GS Skylark delivered on a certain day for a certain price. I do not own such a car (I wish I did). I did not consult any of the real owners of the cars when I made my contract with you.

However, if I fail to deliver that car to you, perhaps because I tried to obtain one and found it was in too short a supply, and end up breaching my contractual obligation, there is an adequate remedy in the legal system - I owe you money equal to the benefit of your bargain.

The principle is the same with a finite number of shares of stock - if I sell shares I don't own, and fail to deliver, I owe my counterpart money damages.

So in my opinion we should move beyond the question of "is short-selling shares that have a finite number something bad in principle", and on to the real question, which is one of credit exposure. I think the SEC has added to the confusion by buying into the term "naked short selling" instead of focusing on the "fail to deliver" terminology.

The institutions who are exposed to hedge funds who have failed to deliver promptly have a self-interest in managing their credit exposure. So the starting point should be to investigate the situation and monitor it, and not immediately adopt some radical rule change based on faulty economic thinking. I think the SEC Market Reg is about right in how they are approaching this.

And if anyone doesn't think people in the SEC Enforcement Div do not love to nail some wall street skins on the wall if they can find anyone breaking the rules, well I guess I just disagree.

Incredible how hostile people get when they don't know what they are talking about "20 yr old son...give me a break" you need to get out more often.

Kevin Kelleher
Naked Before Byrne
By Kevin Kelleher
TheStreet.com Senior Writer
8/18/2005 9:42 AM EDT
URL: http://www.thestreet.com/tech/kevinkelleher/10238633.html

Naked shorts. There's something about those two words that begs for sensational coverage. But 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.

Since TheStreet.com ran a story questioning whether a new law aimed at curbing naked short-selling was being enforced, the topic has become something of a media phenomenon. Not really because of TheStreet.com, but because of Overstock.com (OSTK:Nasdaq) CEO Patrick Byrne, who is like watching Lost -- always entertaining if sometimes a little hard to follow.

In what will surely go down as one of the least orthodox investor calls ever, Byrne set out to explain a lawsuit his company filed against Rocker Partners, a high-profile hedge fund.

Along the way, he described what he called a "Miscreants Ball," where hedge funds like Rocker waltzed with regulators, research firms and journalists at Barron's, The Wall Street Journal and, yes, TheStreet.com. Byrne also made shoutouts to fictional characters like Lord Sith as well as Wayne and Garth. If you're weary from chewing over dry SEC filings, this transcript is a real palate cleanser.

The issue got a further hearing Wednesday on CNBC when Byrne appeared opposite hedge fund manager Jeff Matthews, who was highly critical of Byrne but denied being part of any cabal against Overstock.

(Rocker Partners owns about an 8% stake in TheStreet.com (TSCM:Nasdaq) , and the site's star columnist, Jim Cramer, as well as two former writers, were named by Byrne as guests at the Miscreants Ball. Rocker Partners said today that it plans to countersue Overstock, alleging that Byrne's recent media appearances hurt the firm's reputation.)

Byrne's call pushed the topic of naked short-selling into heavy rotation at CNBC and gave it a wider airing. In so doing, it revived the question of how serious of a threat naked short-selling really is. Some, especially those working at hedge funds, say it's a straw man -- 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.

First, a little background. Shorting stocks, or selling shares you borrowed from another shareholder, isn't illegal. Abusive shorting, done to manipulate a stock price, is. And selling the stock of a badly managed company to a less-thoughtful investor is fair -- if brutal -- game in a market where stupidity is a sin. Over the past two decades, shorting has gone from a controversial strategy to an accepted practice that, nearly everyone agrees, weeds weak and fraudulent companies from the field.

More recently, the controversy has moved to naked short-selling. 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.

As is often the case, stock newsletters were among the first to suspect a problem. The straw-man theory argues that critics of naked shorting are burned investors or corrupt executives who blame hedge funds the way failed businessmen blame the government for their own failures. But 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," says 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. 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."

So how extensive is the naked shorting? According to Larry Thompson, the First Deputy General Counsel at the Depository Trust and Clearing Corporation, a central clearinghouse for trade settlement, 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, 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 (NFLX:Nasdaq) , Netease (NTES:Nasdaq) , Shanda Interactive (SNDA:Nasdaq) and Taser International (TASR:Nasdaq) .

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, 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.

And 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," the proposal read. "Further, significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends."

So the hedge funds may be right in that many of the companies suffering from short-selling are badly run or on the path to insolvency anyway. And it may be that none of them are engaging in naked shorting in the era of Regulation SHO.

But if they are, it raises a serious question: Isn't there a better way to pursue their noble ends?

I don't doubt you for a moment on most of this.

The solution, in my view, is really quite straightforward though. By rule or law, makes little difference, do two things:

1) Simply void any transaction that is not properly settled, and freeze that account's assets AND prohibit said account from trading for scalable periods,
2) Fine the crap out of the brokerage that attempted to execute the order. No appeals. Sliding scale upward for repeat offenses.

Overseas accounts? No problem. Insist that, before the order can be entered, the SEC and NASD receive proof that shares have been actually borrowed, the counterparty and the number of shares, and their present physical location.

Decertification as national policy, although companies have been doing so for years, is indeed a dreadful idea...the e-exchanges are little if any less vulnerable to fraud than a server farm.

SirJohn -- I make no argument whatever against short selling. Naked short selling, however, is fraud pure and simple.

I'm not fond of the term either, and would prefer ''willful failure to deliver'', but I daresay that's not nearly so sexy, eh? In any case, I'd really rather have this matter dealt with administratively and by rule, rather than dump it into already overburdened courts, enriching lawyers thereby.

FReegards!

Well, I'll certainly lobby for the "willful failure to deliver" terminology.

The point though, is that if the margin regulations are in fact properly followed, these don't end up in the courts. For investors selling out of a margin account, the margin is there to be liquidated, no court action needed. And for investors selling DVP, the instutions do need to enforce the prompt delivery rules, or fines/firings need to happen. And institutions are perfectly capable of requiring additional collateral from their hedge fund customers if they feel insecure at any point in time.

However, I am generally against rushed wholesale rule changes in the securities markets, as we have seen time and time again the Law of Unintended Consequences making an appearance.

Freegards.

STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud

A Birds Eye View of Regulation SHO – September 2, 2005

David Patch

I must initiate this column with a caveat, I am biased, I never believed that Regulation SHO had any teeth so my perceptions may be skewed to that direction. With that being said I will attempt to present evidence for review regarding Regulation SHO.

Problem Statement:

Naked Short Selling (NSS), and the resultant increase in the level of trade settlement failures in the marketplace, has destroyed the growth of entrepreneurial companies and their investors and has left Wall Street with tremendous financial liability that, if called upon, could result in a breakdown of the overall stability of the markets.

Naked Short Selling has become so pervasive, according to one former SEC Attorney that it borders on a systemic breakdown in the Industry.

SEC Reaction to Naked Short Selling

In June 2004 the SEC approved a reform package called Regulation SHO with an effectivity date of January 3, 2005. In this reform the SEC has created a “threshold list” of securities, those companies with 10,000 shares and greater than 0.5% of the shares outstanding recorded as failures within the NSCC’s Continuous Net Settlement (CNS) system.

Within this reform the SEC also created what it called the “grandfather clause” which pardons all prior settlement failures from mandatory buy-in provisions prior to an issuer being published on the “threshold list”. The SEC’s rationalization for this was that there was concern over the liability of large pre-existing fails and the impact to the market of mandatory buy-ins for settlement.

SEC Published Statements on Naked Short Selling

The SEC has been extremely contradictory in their public statements regarding naked short selling. These contradictions, along with actual CNS Settlement data and other Industry professional comments tend to lead to a conclusion that the SEC is possibly downplaying this issue due to the out of control nature of what has taken place.

1. In the SEC proposal of Reg. SHO published for comment in October 2003:

“Naked short selling can have a negative number of negative effects on the market, particularly when the fails to deliver persist for an extended period of time and result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled….More significantly, naked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable time period, and they use this additional leverage to engage in trading activities that deliberately depress the price of a security”

2. In a published SEC Q&A on Regulation SHO in April 2005

“The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions. The Commission will continue to monitor whether grandfathered open fail positions are being cleaned up under existing delivery and settlement guidelines or whether further action is warranted.

It is important to note that the "grandfathering" clause of the Regulation does not affect the Commission's ability to prosecute violations of law that may involve such securities or violations that may have occurred before the adoption of Regulation SHO or that occurred before the security became a threshold security.”

The contradiction in these two public statements pertains to the issue of the impact that large pre-existing open positions have to the marketplace. On one point the SEC claims these have a negative effect on the markets and provide leverage used to engage in manipulative activities. And then on the other hand the SEC is “grandfathering” these fails because there is too many of them to deal with on certain “selected companies” as listed on the “threshold list”.

3. In a recorded Bear Stearns Conference Call on December 13, 2004 regarding Regulation SHO the General Counsel of Bear Stearns stated:

"To give you that brief introduction in Reg SHO the history how we got to where we are today. For the past few years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients were not following already established rules."

This statement, taken in the context of how the SEC released Regulation SHO with the “grandfather clause” challenges the true nature of the pre-existing fails now pardoned from mandatory buy-in closeouts. It appears that the regulators are identifying that the large pre-existing fails accumulated due to illegal trading taking place within the marketplace. If they are illegal, they have no rights to the protection of the grandfather clause. Future threats of regulatory enforcement pales to the destruction caused by the indefinite extension to closeout. In fact, the SEC has administered merely one enforcement action to date pertaining to naked shorting abuses yet the GC of Bear Stearns is admitting they have known of the abuses for years.

Analysis of System Fails

Several different attempts have been taken to box-in the magnitude of the problem faced with naked shorting.

1. Visiting Economic Scholar – Professor Leslie Boni.

In November 2004 a former visiting economic scholar to the SEC published her working paper on a study conducted for the SEC on the issue of settlement failures. The study “Strategic Delivery Failures in U.S. Equity Markets” by Professor Leslie Boni concludes that many failures in the system are conducted strategically due to the high cost of borrowing shares. The study also concluded that nearly 4% of all publicly eligible companies would qualify for the SEC’s proposed “threshold list” with accumulated fails greater than 0.5% of their shares outstanding. http://www.unm.edu/~boni/Fails_paper_Nov2004.doc

2. Continuous Net Settlement (CNS) Data Gathered under FOIA.

Recently, under Freedom of Information Act (FOIA) requests the SEC complied by providing CNS fail data on the NYSE/NASDAQ listed securities for the time period of April 2004 – April 2005. Additional data is being sought for the other markets. The data highlights that prior to the release of Regulation SHO the NYSE/NASDAQ listed securities were averaging approx. 160 Million shares daily as settlement failures in the CNS system. After June 2004 but before January 2005 the number of fails on the NYSE/NASDAQ rose steadily to a peak of nearly 200 Million fails daily on average for the month of December. This represents a 35% rise in system fails during a “period of opportunity” to slowly clean up the large pre-existing fails.

Since SHO was incorporated in January, the fails in the exchanges have begun to fall back from the December highs but have reductions have tapered off recently. Of note, the fails provided are only fails that take place at the NSCC. An analysis of Total Reported Trade Volume vs. DTCC Share Settlements for Overstock.com highlight that less than 50% of the total trade volume is presently being cleared through the DTCC. The remainder of clearance is taking place at the ex-clearing levels: in house settling. This percentage appears to be much higher than previously recorded data prior to Regulation SHO.

If this were in fact the case across the board on the issuers who are heavily oversold, overstock.com is a threshold-listed security; the Industry would have simply pulled a bait and switch on the market’s transparency. The SEC’s proposal to publish abused stocks would be hidden once again as the trades that became abusive were merely hidden from the database that tracks the failures.

3. NASDAQ SHO List Performance to Date

The first publication of Regulation SHO came out on January 7, 2005.

The NASDAQ and NASDAQ Small cap companies listed equalled a total of 101 Companies. Today, August 27, 2005, the list is comprised of 97 Companies representing a reduction of only 4 companies between these two snapshots in time [nearly 9 months apart].
Of the 97 companies on today’s list 18 companies were listed on January 7, 2005. Most but not all have been there the entire 8+ months.
Of the 18 companies defined above, 11 have Lost Market Value, 4 have gained in market value, and the rest have been flat over this period in time.
Of the 18 Companies, 8 of the 11 companies that lost Market Cap saw reductions in short positions between January and August.
Of the 18 Companies, 3 of the 4 companies that gained Market Cap saw reductions in short positions between January and August.
Of the 18 Companies, 4 companies had their minimum level to qualify for the threshold list [0.5% of Shares outstanding] represents greater than 10% of the reported short positions in the security. In two cases the minimum threshold level represented greater than 40% of the reported short position [69% and 45%].

Conclusions [my personal opinion]:

The very existence of a grandfather clause is evidence that the settlement failures are a concern to the marketplace. Under Securities Law [Section 17A, Rules 15c3-3, 15c6-1 of the Securities Exchange Act of 1934], failures are intended to be an exception and not the rule. As seen by the evidence now provided, that is in fact not the case.

The SEC has wilfully jeopardized many companies and investors to protect the liabilities presently resting within the Wall Street institutions. The existence of such destruction was never more clearly stated than in a recent theStreet.com article.

August 28, 2005 theStreet.com….The only clear-cut information on naked short-selling as an abusive practice has come from trials where such evidence was made public -- but often years after the fact. Ken Breen, an attorney in the Justice Department during the Anthony Elgindy case, says the prosecution presented evidence that naked short-selling was active in stocks between late 2000 and early 2002.

"There was a significant amount of naked short-selling in the Elgindy case," says Breen, now a partner at Fulbright and Jaworsky. "We presented evidence on nearly 40 stocks where there was manipulative short-selling, and in nearly all of those cases, there was naked short-selling."

Of the 40 Companies involved, most if not all are no longer in business. Forty separate companies, employees, technologies, and investors all lost to the abuses of naked shorting and settlement failures. When these companies closed the doors and ceased to trade in the public markets the profits from the illegal short sale became 100%. Investors paid for and lost their investment in shares they never actually owned. The SEC is fully aware of those past events and aware that present markets exist today with this type of abuse.

Remember, Elgindy did not work in isolation to manipulate these companies; he was a client to Wall Street who aided in the orchestration of the fraud. The SEC has never taken any regulatory enforcement on the firms representing Elgindy or the firms representing the buyers of the illegal shares Elgindy sold and never delivered on.

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

Copyright 2005

The investors lose all their money while the short sellers can raclaim the shares for probably tenths of pennies on the dollar.

Actually the scam is better than that. You never buy them back, thus you have no taxable gain.

Requiring additional collateral is a perfectly valid idea, but big players (Merrill, Goldman, DeutscheBank, Credit Suisse, Paribas, etc) have historically been WAY behind the curve in doing so, lest they lose business to other less prudent institutions. The archetypical example of this imprudent delaying was, of course, LTCM.

I'm more concerned with the fraud aspect. The only effective counter that I know for fraudsters is to make it very, very painful --financially-- for them. I don't know that this even requires any major changes in regulations, merely in enforcement. SEC could adopt a ''guilty until proven innocent'' stance, for example, which policy would surely curb instantly some of the more egregious abuses.

Presumably that is the best you can do to answer the points I raised about this rape of the investor. Typical.

Yes.

And another red flag that this issue is being hyped is the singling out and attack on individual staffers at the SEC instead of focusing on policy arguments - "tax paid government employee Annette Nazareth." While I certainly haven't agreed with every idea that comes out of the SEC staff, the senior people are by and large excellent people that work very hard in good faith to serve the public interest, and people like Ms. Nazareth could have left years ago to make multiples of her salary at a private law firm.

And if the same plaintiff lawyers who brought us the wonderful Tobacco settlement are pushing these "naked short" cases, one should be on guard for an enormous amount of hype as these vultures look for their next deep pocket to soak.

Presumably that is the best you can do to answer the points I raised about this rape of the investor. Typical.

Right. I'm not going to attempt to do your thinking for you. And you don't strike me as the open minded type, so I'm content to drop it.

Good points. Not everyone understands that this really is a "people" business. I remember the whole street slobbering all over themselves to get in bed with John Meriwether, and throwing sound credit analysis out the window. On the other hand, a lot of people don't realize that there in fact was no government bailout of LTCM.

However, suppose Willie Green comes along after getting off a train

LOL!

Just popped into m'head...

;^)

More crooks on wall street what a suprise.

Thanks, abletruth. Naked Shorting is theft, period.

>> What a b.s. article. There is nothing inherently immoral in uncovered short sales by third party investors.

I noticed you are new to Free Republic. Could you please be more honest in the future? The purpose of naked short-selling, a techinique used by hedge funds, is to cheat the unsophisticated investors out of their money. It is fraud.

Please explain to me why being short an equity is worse than being long an equity, and not part of an efficient free market? If some investor looked at Enron's sheets and sais that their practices, while not violating GAAP, were troubling, why shouldn't they have been able to short it?