`Phantom' stock shares lead to civil suit(Investors - Good Naked Short read)

PasadenaStarNews.com ^ | 06/16/2006 | Wayne Jett

[devane617]

The June 20th hearings with the Senate Judiciary Committee has been canceled. I understand the hearing has been rescheduled for the 28th, however a call to Sen Hatch's office to confirm has not been returned. The hearing is not on the Senate schedule as of this time.

This is an issue that is getting to big to handle and has lots of investors scared. According to a few sources that I read, as much as 40% of Institutional trades including Hedge Funds are goinf down as "Failed to Deliver"(FTD).

[devane617]

ping to investors

[American Quilter]

"Oh, you're a hedge!"

[devane617]

NO! Please...Never. am individual investor that is getting killed by these guys.

[American Quilter]

I was being silly--quoting Dudley Moore in "Arthur". Can't seem to be serious yet today.

[stylin19a]

thanks...nice read. USXP (Universal Express) has had a lawsuit filed since forever against the SEC & The DTCC.

USXP had won about 700 million in judgments re: naked shorts, but hasn't collected much.
The SEC went forum shopping and the Feds handed them their hat.

USXP took 'em to federal court in FL. and that's where it has been languishing.

[staytrue]

It took me a while to figure out what NAKED SHORTS WERE.

So my understanding is as follows

long buying=paying cash for stocks

selling=selling stocks and getting cash

margin buying=borrowing cash to buy stock

short selling=borrowing stock to get cash

NAKED SHORT SELLING=SELLING STOCK THAT DOES NOT EXIST AND GETTING CASH

naked shorting is very close to counterfeiting/issueing your own currency.

basically, you print off currency that says "convertable to dollars" you give the currency to someone who accepts it, you get dollars to spend. Later, you get dollars from working and you pay the dollars back and get your "convertable to dollars" back.

naked shorting is where you "sell stock" get cash for it and deliver to the seller an entry in their brokerage account that says they own stock when they really own your promise that whenever they want to really own the stock, you will give it to them.

[L,TOWM]

am individual investor that is getting killed by these guys

How exactly are "these guys" killing you?
I am asking a serious question - professional curiosity.

Feel free to be a technical or arcane as you wish -- you will still probabbly be clearer than the legal types in NY and DC I am forced to deal with several times a week...

[L,TOWM]

Close, but you left out the part where the brokerage house is an active participant in the transaction and has knowledge that you are selling nothing more than a promise.

You also did'nt take into account what options writers can do; all with the knowing participation of the brokerage houses. And don't forget the role that the DTCC and OCC play in the game, either.

[Calvin Locke]

Back during the 19th Century, the robberbarons were great at this. One managed to buy up all the stock so his
competitor couldn't cover the short position.

Can't remember the details, but the book said "couldn't happen today because of the liquidity of markets". That was in
a book I read early 1980s.

I guess the economics have changed.

[devane617]

Hedge funds and unscrupulous large investors use a different means of clearing a stock trade that an individual investor. They are borrowing stock from brokerage firms that are part of "margin" accounts. However, as much of 40%(not confirmed) of the trades are not being filled, or Failed to Deliver(FTD) trades via the DTCC company. In effect a massive dilution of a companies value happens with FTD trades, IE a single share of stock may be held(or they think they hold) by several investors.

Hedge funds and large investors have been known to hire firms to bash stocks and put out news that is not always factual. Also, they have the ability to manipulate a stock in order to fill a short position.

Small investors in emerging companies, small to mid cap stocks, are along for the ride. Lately, or at least for the past couple of years you will see wild fluctuations in pps for no apparent reason, and a pattern will emerge that makes it appear to be manipulation. Naked Short selling is just one of many items that needs to be addressed in order to protect the interest of the company and small investor.

[Attention Surplus Disorder]

You're right, with the addition of one more clarifying snippet. Companies who issue shares have a precise number of shares that exist. Each and every one of those shares is owned by someone---either the co in the form of treasury stock, an investor large or small, or the market maker who is the middleman in essentially all extra-company stock transactions. (The co itself can grant shs to an officer, say, without the services of a market maker) Some of these naked shorts are promising to deliver shares that do not exist. So it's perfectly true that it is counterfeiting, not "like" counterfeiting, it's c-feit plain and simple. In some cases, the shares MIGHT be found somewhere given some time...but if they cannot be delivered it's a stark indictment of the shorting entity.

[palmer]

NAKED SHORT SELLING=SELLING STOCK THAT DOES NOT EXIST AND GETTING CASH

I think naked is just a derogatory term for ordinary short selling. When I short, I "borrow" shares from an stock owner who doesn't even know they are being borrowed. It's the same bookkeeping that you describe as being naked.

[devane617]

Short selling is a legitimate investment strategy IF you hold the stock in your account and want to hedge your long position.

[gcruse]

"stark indictment of the shorting entity."

So, you might say we've moved from naked shorts to stark naked shorts.

[waverna]

But its the brokerage firm, not the hedge fund, that is responsible for lending the shares to the short-seller to sell. If there are no shares to lend they have defrauded the hedge fund, unless there is collusion.

[palmer]

Short selling is a legitimate investment strategy IF you hold the stock in your account and want to hedge your long position.

LoL. Been there, had that argument. 1) small time shorts like myself dump more money into the market then we take out. 2) shorting smooths market peaks and troughs. In short, it is a fully legitimate way to prevent overvaluation and undervaluation. OTOH, from bitter experience, it is also a good way to lose lots of money.

[staytrue]

naked shorting is the same as regular shorting except in naked shorting you borrow the same stock more than once or you just dispense with the formality and borrow stock that simply does not exist.

[palmer]

I guess I was wrong. Then there is a difference and in naked shorting there would be no bookkeeping entry for borrowed shares. When I short, I presume my brokerage borrows real shares electronically from another account or another brokerage or somewhere.

[gcruse]

As you are perfectly aware, but I'll state it for anyone contemplating shorting on a lark, the difference between long and short selling is in the limits of what you can lose.

You can lose no more than all of the money you invest long.

When going short, you are committed to buy back and the amount you must pay if the stock shoots the moon is theoretically unlimited. There is no limit to what you can lose going short.