paranoia about things people don't undertand alert.
all shorts are pond scum
For a minute there, I thought you were going to tell us that Global Crossing had made it to the indictment stage.
Traders and market makers do this all the time when they think a stock is headed down - and they get clobbered when it goes up in spite of their best efforts to drive it south!
invisible I don't think you understand, the markets have 18% of all shares as FTD daily..."Failed To Delivers" so the counterfeiting is rampant, seems the only people that don't believe there is a problem work for the brokerages, we need to go totally electronic.
Watch the Congress get involved soon because there is one company that has legally proved there are over one trillion shares of it's stock floating around as markers in accounts in 64 countries....Yea that's One Trillion with 15 zeros...
abletruth
My first thought is that if the buyer knows that he's not getting the stock, then who cares whether the shares actually exist?
All they are doing is placing a bet on where the price is headed.
Of course, if the buyer doesn't know that the shares don't exist, then that's another matter.
What a b.s. article. There is nothing inherently immoral in uncovered short sales by third party investors. The concerns are simply first, suitability and second, credit. Brokers already have a legal obligation to ensure that unsophisticated customers are not making trades that are unsuitable for them, which may well include short selling, depending on the circumstances. And institutions are required by margin regulations and their own prudent self-interest to make sure investors have enough assets to cough up their losses on short-selling, if they guess wrong, because the exposure in theory is limitless.
This is Naked Shorting not Shorting, now it is just referred to as counterfeiting because that is what it is. The DTCC allows he stock borrow program but doesn't enforce the shares to be returned?
Ask some companies like Delta Airlines, Krispy Kreme, Onmi Media, Casavant Diamonds. 85% of all hedge funds are located in the Caymans...it is not for the sun and fun.
able
invisible...I am not talking about legal short selling. I am talking about naked short selling...as you say two diffewrent animals. The proof is abundant and about to be made public.
A Statement by Bear Stearns' General Counsel Bill Philek -
By DP
On the December 13, 2004 Conference Call regarding regulation SHO, with Peter Murphy, senior managing director of the Bear Stearns Clearing Division in attendance as part of the panel (as recorded and available as audio here - requires Windows Media Player):
"To give you that brief introduction in Reg SHO, the history (of) 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."
Here it is, in black and white. Proof positive that the regulators are aware of violations, are concerned about the increase of violations, and know the cause, and the culprits.
This implicates the entire broker/clearing house/hedge fund network in securities violations, without enforcement actions by Regulators, who instead looked the other way. Exactly what these high level of fails and illegal short sales did to the markets will be determined in State and Federal courts across America. This also implicates the Regulators in aiding and abetting the fraud.
So for any elected officials who doubt that the NCANS take on the problem is, if anything, less alarmist than the situation deserves, I would direct you to the above statement and caution you to think long and hard as to the chronicle of abuses it confirms.
And then decide whether you are part of the problem, or part of the solution.
The source of the info below is www.ncans.net
Short sales are nothing new. Where's the fire?
I worked at a medium sized brokerage in Seattle in 96. One of the reps created 2 large short positons, pending delivery. Well, the client never delivered and the stocks, went up. The firm lost 15 million, fired the broker.
Story was in the papers, and in the WSJ too, if I'm not mistaken. The client was illegally selling short, but since the stock went up, didn't cover. Not sure what happened to the client, but the broker got a job at another firm, saw him recently.
I Believe it = If you have a real time trade screen watch MRKL trade 10-20 million shares in a day (90 Mill) float day after day.
If you are tuned in to how stocks trade you will see a manipulated stock after watching the trades for 5 min. It trades like there is 10 billion shares float.
Short Selling is legal and useful. But this is Naked Short Selling, the naked comes from the brokeragess that borrows the stock from an MM "market maker" they get the stock via the DTCC "Deposit Trust Clearing Corp" the DTCC is owned by the SEC and makes a very small percentage on each trade legal or illegal "That was a question William Donaldson" couldn't answer when being asked by Senator Bennett.
The problem is the stock is to be returned in 13 days...the SEC has not enforced this 13 day rule for about 6-7 years. This is getting ready to be a major problem because it used to be just small cap stocks, now it is a problem on all exchanges. Go to ncans.net or investigatethesec.com both of these sites have excellent article about what could destroy our markets if not stopped immediately.
Senator Shelby and 5 other Senators are from the senate banking committee that have expressed serious concern but one Senator Collins is the chair to Homeland Security so it is possible there is a link to terror funding as I have read in some articles. The RICO statues have been mentioned as well.
able
I can't believe I just wasted 5 minutes of my time reading "Dr Byrne's" explanation of "naked short selling" at ncan.net
Look, the first point to understand is that the consensus of economists for a long time has been that short selling, in principle, is not an evil thing. The SEC has said as much each time it adopted or amended the "uptick rule."
Secondly, the far narrower allegation that some folks may not properly be enforcing the delivery-versus-payment rules in the margin regulations against their hedge fund customers is a matter for the SRO and SEC enforcement divisions - send them the evidence and if it holds up in enforcement proceedings, hang 'em by the yard arm, I say. Its certainly not something to gets your shorts in a knot over, if you'll pardon my pun.
Wow!! I don't know how serious of a problem naked short selling is, but the large number of exclamation points in this article causes me to question how seriously I should take it!!!! The alarmist tone reminds me of articles found in Weekly World News!!!
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?
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
Thanks, abletruth. Naked Shorting is theft, period.