Posted on 10/17/2008 4:04:29 AM PDT by StatenIsland
Since 2004 and before, the SEC has permitted investment banks and hedge funds to sell short and fail-to-deliver (FTD) the shares to buyers. In 2005, with Regulation SHO, the SEC "grandfathered" all existing FTDs, meaning tens of millions of shares sold short could remain undelivered indefinitely. Regulation SHO itself was riddled with provisions enabling new FTDs to be created. Only last month, effective Sept. 18, the SEC after long delay slightly tightened delivery requirements. But short-sellers and their prime brokers still find plenty of wiggle-room to move FTDs among accounts so as to avoid delivering shares to buyers who have paid for them.
Explaining its dilatory conduct, the SEC considers only the interests of Wall Street's traders - never the interests of millions of investors whose accounts contain only "entitlements" to shares for which they paid in full. A year ago, SEC's director of market regulation, Eric Sirri, conceded to a New York audience that investors would be "surprised" to learn their accounts really do not hold shares.
(Excerpt) Read more at washtimes.com ...
This story will probably be lost in light of the political and economic turmoil of these days, but until this situation is rectified the small investor is exposed to great financial harm at the hands of predatory hedge funds and complicit brokers.
Make no mistake - this is a scandal. The SEC is in the pocket of Wall Street and is derelict in its duty to the American people and the average investor. This screams of corruption, and cannot be allowed to continue...
I urge anybody with any interest to link to the article.
This is the cause of destruction in recent months of the private mortgage sector, the investment banking sector and significant firms in the banking sector, not to mention many other companies in all sectors. The SEC must require sold-but-undelivered shares to be delivered without further delay.
By its actions to date, the SEC has chosen short sellers, particularly naked short sellers, to be winners in the markets by permitting extraordinary capabilities to sell shares without delivering them. SEC has justified its actions as necessary to prevent short-sellers here from suffering the fates of those who sold VW short. By statute, the SEC is supposed to protect interests of average investors. SEC has failed in that duty by permitting hedge funds and others to fail in delivering shares sold short. If U.S. financial markets are to recover, and the credit seizure relieved, the SEC (or Congress) must require all sold but undelivered shares to be delivered without further delay.
If true, McCain is right, Cox SHOULD be keelhauled.
Absolutely. This has gone on far too long - heads should roll. The average American investors is being raped by these financial thugs while the SEC looks the other way.
Maybe I should try to get a FTD for my Federal Income Taxes and move it to 0be’s account with the IRS.
More and more people are aware of it but until it can be described for what it is, a crime of counterfeiting, people will have a tough time understanding what it is and why it is harmful to their lives.
Also there is an effort to obscure the crime of naked shorting (which is left UNDEFINED in the actual regulation) with the practice of not locating by market makers. One SEC hack came out in 2006 and wrote a commentary (still on the SEC website last I checked) about how some naked shorting is legal and necessary to make a market, etc. This hack attempted to equate the practice of naked shorting with the convenience of not having to locate shares before selling them.
We know this SEC hack commentary was aimed at shifting the view of naked shorting as somehow natural to not locating stock as a necessary convenience but still the actual legal regulations mention ‘naked shorting’ but acknowledge it as undefined. And there is good reason that it is left undefined in the regulations. Because to define ‘naked shorting’ in a legal document would mean either allowing the practice to go unchecked or compelling prosecution of those suspected of committing it.
NAKED SHORTING IS THE PRACTICE OF SELLING STOCK SHORT WITH THE KNOWLEDGE THAT THE STOCK DOES NOT EXIST OR MAY NOT EXIST WITH HIGH LIKELIHOOD.
Naked shorting is the counterfeiting of shares. There are documented abuses of selling more stock than a company has ever issued. Naked shorting is used to drive a stock price so low that it never recovers and the company is denied the means to access the capital markets. It can drive companies to bankruptcy at worst. It allows naked short sellers to profit wildly at the expense of the shareholders.
Analogies that everyday persons can understand:
1. You play cards such as poker or blackjack at a table where one of the players has access to any card they want and therefore can always win. That player is the naked short seller.
2. You own real estate and you want to sell it. A seller in your neighborhood sells other people’s real estate without their knowledge to drive down prices in your neighborhood leaving your real estate at a lower value, perhaps nearly worthless. You may ask how can someone sell another property without the person on title having knowledge? And the answer would be that the system allows it to happen. You would say that is preposterous and you would be right with respect to real estate, but it happens that way in the stock market.
So people that have lost huge amounts in their retirement portfolios have had their investments sold out from underneath them without their knowledge. And they wonder why their investments are doing so poorly. Some conclude that the stock market, or any market where the exchange rules allow for naked shorting, is rigged. And they would be right.
I don’t understand? If you fail to deliver your shorts, then that should be the last time you ever trade because ever last dime you have should go to buy the shares you shorted to deliver.
I have long suspected that Wall Street plays the biweekly paycheck contributing 401K investor for a fool.
If you “sell” something you do not have, with the expectation of the buyer that he will receive the real item and not a promise or substitute, you have committed fraud.
Plain and simple.
It’s fraud.
I guess this saying no longer applies:
“He who sells what isn’t his’n, must buy it back or go to prison.”
THis is going on massively on the COMEX with gold prices. While the demand for real, physical gold is soaring, the paper COMEX price is beaten down by large institutional naked short sellers. This is making the COMEX a joke, and at some point there will be a tectonic rupture, when prices will gap up toward reality.
That’s why it is a crime. But the SEC will try to confuse people that it is a necessary convenience that occasionally can be abused, and they will ‘work to curb the abuses’.
What the SEC hacks (meaning employees of the SEC and their directors) are doing is covering up the fraud. The reason they are in this bind is because they did not watch for it for many many years when the exchanges went electronic. Finally when it came up for discussion in public letters and hearings, the SEC created the REGSHO regulation AND THEY GRANDFATHERED IN ALL PREVIOUS ABUSES. Because they knew if they were to prosecute the fraud, they would bring down Wall St.
If you want to talk about it with your relatives, neighbors and friends, and not confuse them, then use the analogies in Post #6 or come up with your own. You will have to explain it in terms that people can understand.
Spot on. The real crime, in my view, is the blame that Congress is avoiding in this mess. Hello Nancy Pelosi?
There's more than enough regulation-- there's too much.
The problem is that the regulators are corrupt.
It’s more than that. Naked short sellers often do buy it back.
Say there are 10 million shares of stock at a value of 10 dollar per share. A naked short seller can sell all ten million shares and can even sell more than that. Perhaps the naked short seller sells 20 million shares or 30 million. The price of the stock falls to a penny because the naked short seller drives it down with an unlimited number of shares to sell. The naked short seller can buy back all the stock for a penny if they choose after having sold the stock for much more.
Think of the naked short seller as a smirking crook who smiles at you and says “Thank you for being so stupid, I just sold your ten dollar shares and bought them back for a penny and returned them to you at a value of a penny. Good Day! Oh, and don’t worry little fella, who knows? Maybe your stock will regain its value one day! Heh Heh Heh!”. And maybe it will regain some value until the next naked short seller comes along and repeats the action.
So the naked short seller often buys shares back but they can wait years before buying back, after the stock is destroyed. Many young and innovative startup companies have been destroyed this way.
There is a rule in the SEC REGSHO regulation that shares must be delivered (bought back and returned) with 13 days. But the SEC never enforces it. So you can see shares not returned on the REGSHO list that have been unreturned for months and months and even years.
For analogies that everyday folks can understand see the analogies in Post #6. You will need to explain it so that people can understand it.
Good post, thanks.
What would make prices gap up in a ‘rupture’? I mean if naked short sellers can sell all the false paper they want, what will drive prices to gap up?
When you think about it, you will realize this problem will fall into the ‘too big to stop’ category.
Ben Bernanke (I think he is honest) just said yesterday that his actions were driven by a ‘too big to fail’ situation. He said it was a real problem and that reforms must address this ‘too big to fail’ problem. He said reforms must be made so that no company is ever ‘too big to fail’.
By way of analogy to COMEX, reforms must be made so that practices can never lead to ‘markets too big to fail’.
Can you explain to me how exactly can someone buy 10 million shares without the price rising?
I don't dispute that restriction of this practice should be energetically enforced, but your explanation is full of holes. It doesn't actually work the way you say.
They can do it slowly. And if it rises too much, they just dump shares again.
They demoralize shareholders who figure the stock is worthless.
The naked short seller can hold the stock price down for so long that people give up.
They also coordinate (meaning bribe or conspire) with complicit persons in the financial news media to put out hit stories about the company being ‘poorly managed’ and so on. Shareholders then sell what they think is a bad investment.
And here’s another little secret. They can force margin calls, meaning they can force liquidations.
In Post #6, I made some analogies. Those might be easier to understand.
The naked short practice occurs and shouldn't, but if you think things like you describe really happen then you're quite simply delusional. This is probably why all the high chair banging about naked shorts is never taken all that seriously.
Professional investing is not the same as "managing your own money only bigger".
“Can you explain to me how exactly can someone buy 10 million shares without the price rising?”
Because there are so many willing sellers.
Here is a simplistic slide show presentation that will help you to understand it:
“The naked short practice occurs and shouldn’t, but if you think things like you describe really happen then you’re quite simply delusional.”
What about overstock.com?
www.deepcapture.com
Naked Shorts Frolic While Financial System Fries
October 10th, 2008 by Mark Mitchell
“Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings, prospects are sound.”
- Fox-Pitt analyst David Trone in a research note, today
Here we go again. A giant bank has some weaknesses, but it is, in all respects, a going concern — except that short sellers are peddling rumors and phantom stock, so the share price is plummeting. With the share price in peril, the rating agencies (perhaps over vigilant after taking so much criticism from short sellers and the media) put the bank’s debt ratings on review for a downgrade.
Meanwhile, short sellers corner the market for the bank’s credit default swaps, and point to the value of the CDS as evidence that the bank is doomed. They feed the media with analyses and bogus indexes that mark the bank’s assets to nothing. They spread the news that the bank’s counterparties and trading partners could bail.
The clients and partners stay with the bank. Up until now they have no reason not to.
But then, there’s more naked short selling, the hedge funds flooding the market with stock they do not possess – phantom stock. Maybe the hedge funds send a fax to CNBC with one last rumor. Over the course of a day or two, the stock price is slashed in half.
Then, suddenly, the stock is in the single digits.
As a result of the low stock price – not as result of the balance sheet – the bank’s partners and clients freak out. This time, they really do pull their money.
End of bank.
And if there are one or two more like this — end of story. The financial system will be fried.
We’ve seen precisely the same scenario with Bear Stearns, Lehman, Merrill Lynch, Washington Mutual, and IndyMac. A variant of this scenario took down AIG, Fannie Mae, Freddie Mac, and perhaps 200 other companies before them.
Morgan Stanley could be gone by next week.
We have new data for September that shows that there was plenty of short selling of Morgan Stanley (and other companies) even during the SEC’s ban on short selling, which ended Wednesday at midnight. Some hedge funds ignored the ban, and the SEC did nothing.
Worse, in place of the ban, the SEC has offered only tepid new rules (cheered by the short seller lobby) that do little to prevent the sale of phantom stock. Under these rules, short sellers do not have to borrow real stock before they sell it. They merely have to “locate” the stock. The SEC doesn’t say how it’s supposed to know whether a short seller has actually located real stock as opposed to telling his broker, “yeah, I located it, it’s in your mother’s wig” (which is pretty much how these conversations go).
Furthermore, the SEC gives hedge funds three days to deliver the stock they sell. This would be fine if they were required to possess real stock before selling. But since they are not, a hedge fund can offload a large block of phantom stock and let it eat away at the financial system for at least three days.
Sometimes, the hedge funds settle the trade with another block of phantom stock, transferred to them by a friendly broker. But even if they fail to deliver the stock, the SEC stipulates no serious penalties. Meanwhile, it shows no inclination to actually prosecute anyone for the jailable crime of short-side market manipulation.
I’m willing to bet anybody a sizeable amount of money that when the SEC releases its “failures to deliver” numbers for October, they will suggest unbridled illegal naked short selling of Morgan Stanley during this past week, even on days when the ban on all short selling was in place. The data will show that naked short selling rose to unprecedented levels just before somebody floated Wednesday’s false rumor that Morgan Stanley was going to lose its $9 billion deal with Mitsubishi.
And the data will show that after the ban was lifted, the law-breaking shorts went nuclear – with failures to deliver of well over a million shares every day. Ultimately, many millions of Morgan Stanley’s shares will be sold and never delivered, just as hedge funds have yet to deliver more than 10 million shares of Bear Stearns that they sold during that bank’s final days last March.
As I write this, Morgan’s stock price is in the single digits, trading around 7 bucks, down an astounding 70% in the 36 hours since the short selling ban was lifted. A death spiral like that does not happen naturally. Because of the short-battered stock price – and only the stock price (again, this has nothing to do with the balance sheet) — Moody’s today put Morgan’s long-term debt ratings on review for a downgrade.
I suspect another 15% off the stock price, and one more well-placed rumor, will do the trick. There will be a run on the bank. Morgan will be gone. And the global financial fire will blaze still hotter.
It is beyond surreal that our most prestigious financial media continue to allow this to happen. It is beyond comprehension that journalists – in possession of the evidence, and presumably in possession of their faculties – continue to spout the line, originally formulated by short-sellers and now woven into conventional wisdom – that this crisis is only about bad mortgages and bad managers and bad balance sheets.
One can argue that, in the long run, the world is better off without half of Wall Street – without its ponzi schemes and paper profits, the sickening salaries and arrogance. Certainly, anyone with a Shakespearean state of mind will appreciate the fates of Morgan Stanley, Lehman, and Bear – all of which eagerly pimped their dodgy prime brokerage services to the very short sellers who destroyed them.
But it does not require Shakespearean nuance to see that this crisis is not just about scandalous banks. It is about criminals destroying banks that are tawdry, yes, but possessing of some virtue, and capable, if left unmolested, of carrying on and contributing to society – perhaps even staving off a global calamity.
Moreover, these same criminals are destroying many other companies, most of which are run by honest people who labor far from the insalubrious alleyways of southern Manhattan. The SEC maintains a list of companies whose stock has failed to deliver in excessive quantities. As I explained in an earlier dispatch, many victims of naked short selling (including some of the big banks) do not appear on that list. But surely it is a scandal that more than 300 companies, many of them financial firms that have nothing to do with Wall Street, do appear on the list.
Surely, it is an even bigger scandal that around 100 of those companies have appeared on the list chronically, day after day, for months on end, and though the sheriff posts the names of these rape victims on its wall, it has yet to prosecute a single rapist. The SEC tells us that a billion shares remain undelivered on any given day — and yet it doesn’t bother to find out which hedge funds sold the phantom stock.
It might be too late, but if Washington and the financial media really want to save the world, they ought to start by demanding that hedge funds borrow real stock before they sell it. And what the heck: Maybe some newspaper could offer the radical suggestion that the SEC should tell hedge funds that they can either go to jail or close out all unsettled trades – today.
If one hedge fund manager were to get cuffed, all the others with outstanding “failures to deliver” might scramble to buy real stock so they can settle. The markets might soar. The innocent victims might get some relief. And the delinquents on Wall Street would get some time to clean up their acts.
Meanwhile, would anyone care to guess which company the naked short sellers will take down after Morgan Stanley?
And would anyone like to share a bunker with canned goods and weapons?
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