Microcap & Penny Stocks | Naked Shorting-Hedge Fund & Market Maker manipulation?

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To: sixty2nds who wrote (548)11/29/2005 8:11:26 AM
From: rrufff
   of 4972
Wow that is a great find 62nds. I've often commented that my favorite legal scam areas are class actions and bankruptcy. Where securities scammers can use bankruptcy courts, that could be a real bonus for these crooks.

Bankruptcy is typically a club of local lawyers where they switch around roles in easy cases and wipe out any remaining assets.

It is brilliant for hedge funds to use this scammy environment to get inside info.

It's hard for me to imagine how brilliant these hedge fund scammers are, but every time I think "that's it," there are more articles that show how they have come to control our markets.

Now you see why so many Viewers here live to defend these scams.

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To: sixty2nds who wrote (548)11/29/2005 8:40:19 AM
From: rrufff
   of 4972
Not sure if this is accurate or how it relates but for archive purposes here. 

Over one trillion dollars worth of Treasury bond and Treasury bills have been removed from the securities lending program since the meeting at the New York Fed in September.

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To: rrufff who wrote (550)11/29/2005 10:10:28 AM
From: sixty2nds
   of 4972
Rrufff, that Financial Sense website and $$ TRILLION article are really finds. A $$$TRILLION$$$ ?? If anybody sees anything related to this please post it.

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To: rrufff who wrote (547)11/30/2005 3:18:40 PM
From: tracor
   of 4972
NASSA conference. VERY interesting!!! Thanks for helping to keep this issue in focus.

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To: tracor who wrote (552)11/30/2005 5:50:58 PM
From: kknightmcc
   of 4972
NASD is proposing to amend Rule 3360 to expand the short interest reporting requirements to over-the-counter (“OTC”) equity securities.

NASD is proposing to amend Rule 3360, Short-Interest Reporting, to require that members maintain and report on a monthly basis total short positions in OTC equity securities in
all customer and proprietary firm accounts.3 Currently, Rule 3360(a) requires members to maintain a record of total short positions 4 in all customer 5 and proprietary firm accounts in
Nasdaq securities (and listed securities if not reported to another self-regulatory organization (“SRO”)) and requires members to report such information to NASD on a monthly basis. NASD believes that expanding the monthly short interest reporting requirements to OTC equity securities will increase the information available to public investors and other interested parties related to trading in OTC equity securities. Accordingly, NASD proposes to amend Rule 3360(a)
to require that members maintain and report to NASD short sale positions for OTC equity securities. For purposes of the proposed rule change, OTC equity securities would be defined as
any equity security that is not listed on The Nasdaq Stock Market or a national securities exchange.

Read more at: 

3210. [Reserved.]Short Sale Delivery Requirements
(a) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive
settlement days, the participant shall immediately thereafter close out the fail to deliver position by purchasing securities of like kind and quantity.
(b) The provisions of this rule shall not apply to the amount of the fail to deliver position that the participant of a registered clearing agency had at a registered clearing
agency on the settlement day immediately preceding the day that the security became a non-reporting threshold security; provided, however, that if the fail to deliver position at
the clearing agency is subsequently reduced below the fail to deliver position on the settlement day immediately preceding the day that the security became a non-reporting
threshold security, then the fail to deliver position excepted by this paragraph (b)(1) shall be the lesser amount.

(c) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive
settlement days, the participant and any broker or dealer for which it clears transactions, including any market maker that would otherwise be entitled to rely on the exception
provided in paragraph (b)(2)(iii) of SEC Rule 203 of Regulation SHO, may not accept a short sale order in the non-reporting threshold security from another person, or effect a
short sale in the non-reporting threshold security for its own account, without borrowing the security or entering into a bona-fide arrangement to borrow the security, until the
participant closes out the fail to deliver position by purchasing securities of like kind and quantity.

(d) If a participant of a registered clearing agency reasonably allocates a portion of a fail to deliver position to another registered broker or dealer for which it clears trades or for which it is responsible for settlement, based on such broker or dealer's short position, then the provisions of this rule relating to such fail to deliver position shall
apply to the portion of such registered broker or dealer that was allocated the fail to deliver position, and not to the participant.

agency on the settlement day immediately preceding the day that the security became a non-reporting threshold security; provided, however, that if the fail to deliver position at
the clearing agency is subsequently reduced below the fail to deliver position on the settlement day immediately preceding the day that the security became a non-reporting
threshold security, then the fail to deliver position excepted by this paragraph (b)(1) shall be the lesser amount.

(c) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive
settlement days, the participant and any broker or dealer for which it clears transactions, including any market maker that would otherwise be entitled to rely on the exception
provided in paragraph (b)(2)(iii) of SEC Rule 203 of Regulation SHO, may not accept a short sale order in the non-reporting threshold security from another person, or effect a
short sale in the non-reporting threshold security for its own account, without borrowing the security or entering into a bona-fide arrangement to borrow the security, until the
participant closes out the fail to deliver position by purchasing securities of like kind and quantity.

(d) If a participant of a registered clearing agency reasonably allocates a portion of a fail to deliver position to another registered broker or dealer for which it clears trades or for which it is responsible for settlement, based on such broker or dealer's short position, then the provisions of this rule relating to such fail to deliver position shall
apply to the portion of such registered broker or dealer that was allocated the fail to deliver position, and not to the participant.

Read more: 

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To: kknightmcc who wrote (553)11/30/2005 10:22:24 PM
From: sixty2nds
   of 4972
11:30 OSTK President, Patrick Byrne, issues statement regarding NASAA public forum on Naked Short Selling (38.25 +1.01)

The co and Patrick Byrne, issued the following statement today at the North American Securities Administrators Association's public forum on naked short selling: "I commend NASAA for holding this hearing. Naked short selling is a growing problem within the securities markets. The Depository Trust & Clearing Corporation (DTCC) admits that 'failures to deliver' are as high as $6 bln per day. This is an incredible number. Continued abusive short-selling practices pose strong potential for a systemic Wall Street meltdown that will undermine our capital system and our economic strength. The prosecution of Enron executives will begin in Jan 2006. On the heels of this tragedy, we are persuaded that Main Street shareholders, through their retirement and other accounts, again may be at risk because of the manipulation of the markets. Already these practices may have contributed in substantial part to the massive frauds featured in recent financial headlines involving such companies like Refco, Inc...NASAA's public forum today is another step towards bringing basic transparency and profile to this issue and Congress should seriously consider hearings and legislation to remedy the obvious shortcomings of Regulation SHO."

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To: sixty2nds who wrote (554)12/1/2005 3:53:19 AM
From: rrufff
   of 4972
I've asked Telephonics to post notes as he went in person. He has published some on IHub. 

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To: sixty2nds who wrote (554)12/1/2005 3:55:30 AM
From: rrufff
1 Recommendation   of 4972
Thanks to Art2Gecko on IHub

Wow, Great Comment to the SEC here by Dr. Jim DeCosta 


Comments on NASD Rulemaking
Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to Amendments to Rule 3360 to Expand Short Interest Reporting to OTC Equity Securities
(Release No. 34-52679; File No. SR-NASD-2005-112)


Nov. 24, 2005 Dr. Jim DeCosta, Tualatin, Oregon
Nov. 22, 2005 Paul Vuksich
Nov. 17, 2005 David Patch
Nov. 10, 2005 Daniel Opdyke
Nov. 01, 2005 Chris Meredith, Watertown, MA 

To: Jonathan G. Katz, Secretary, Securities and Exchange Commission
Subject: NASD-2005-112
Re: Release No. 34-52679
Dear Sir,

I thank you for this opportunity to comment on the proposed changes to NASD Rule
3360 in order to expand the short interest reporting requirements to all OTC securities. In
a nutshell, I highly recommend this proposal and its implementation as soon as possible.
I have been fortunate enough to devote the last 24 and one half years of my life to a very
thorough study of the phenomenon known as naked short selling. During that timeframe
I have written 2 unpublished textbooks on the subject, the most recent being an
approximately 800-page analysis of naked short selling and the role of unethical DTCC
participating market makers and clearing firms and their interrelationships with primarily
unregulated hedge funds.

As you at the SEC have no doubt realized by now, the wording used in Reg SHO has left
a glaring loophole that any DTCC participants wishing to circumvent the spirit of this
new Federal Law can easily access. Although the “Forced” federally-mandated buy-ins
for certain threshold securities are clearly outlined, somebody at the SEC unfortunately
inserted the verbiage, “If the participant does not take action to close out the open fail to
deliver position (AS MANDATED BY THIS NEW FEDERAL LAW), the participant is
prohibited from making further short sales in that security without first borrowing or
arranging to borrow the security”. Unfortunately, no clarification of what constitutes a
legitimate reason for being unable to execute a mandated buy-in was included except that
the reason cannot be of a financial nature.
In other words, if you refuse to obey this new
Federal Law mandating “Forced” buy-ins which is now part of the 1934 Securities
Exchange Act, your punishment is nonexistent but you’re reminded to obey the law in the
future. I don’t know if this was inadvertent or just more “Deterrence-SEC style”.

In a recent “self-interview” published by the DTCC, the DTCC made it crystal clear that
they intend to utilize this loophole graciously provided by the SEC. In this interview, the
interviewer asks the Deputy General Counsel of the DTCC the following: @ DTCC (the
interviewer): “So Reg SHO doesn’t force them to close out the position, even market
makers are not exempt from this requirement, but if they don’t, they are prohibited from
making any additional short sales without borrowing the shares first”?

Thompson (the DTCC Deputy General Counsel): “That’s right.”
What’s interesting is that in the answer to the previous question this same Deputy
General Counsel states: “The “Close-out” requirement FORCES (emphasis added) a
participant of a registered clearing agency to close out any “fail to deliver” position in a
threshold security that has remained for 13 consecutive days by purchasing securities of
like kind and quality”. This verbiage is consistent with the exact phrasing of the law.

My question to you at the SEC is, “Which is it”? Are these DTCC participants
“FORCED” to do these “Mandated” buy-ins as outlined in the text of the law or not? My
second question would be can the DTCC’s actions be interpreted as recommending to its
participants the breaking of the new Federal Law (Reg SHO) because the punishment,
irresponsibly advertised by somebody at the SEC as being nonexistent, really is
nonexistent? People can and do break Federal Laws all the time. My third question is
why advertise the loopholes accessible for breaking these new Federal Laws with no
recourse within the text of these new Federal Laws unless, of course, somebody at the
SEC’s heart wasn’t quite in the right place all along but wanted the SEC to be
PERCEIVED anyways as acting as a shareholder advocate that is following its mission
statement of providing “Investor protection and market integrity”?

I think that you at the SEC can now get a pretty good idea of why the shareholder
advocacy groups are critiquing the effectiveness of the new Reg SHO “Threshold Lists”.
One fact that “pre-doomed” the bulk of Reg SHO’s honorable intentions is the rule on the
books of the DTC and the NSCC that states that mandated buy-ins need not be executed
if their effect might be “Disruptive” to the markets. In layman’s terms this means that
mandated buy-ins in the shares of an issuer that fell victim to a “Bear raid” that resulted
in its share price falling from $5 to 2-cents need not be done because these buy-ins might
result in a “Market Disruption” involving the share price skyrocketing to 4-cents, an
enormous 100% gain. As you at the SEC are painfully aware, Section 19 C of the ’34
Exchange Act disallows the SEC from amending the rules and regulations of any
“Registered Clearing Agency” like the DTCC. A quick review of some facts regarding
naked short selling might help you to coordinate your battle plan against naked short

1) There are currently approximately 8,200 hedge funds managing approximately
$1.05 trillion. About half of these fly under the regulatory radar due to some
loopholes in the 1940 Investment Company Act.

2) In the post-decimalization era, market maker “Spreads” are now razor thin and
many securities scholars contend that ethical market making firms cannot make
an honest living in this environment. The downside of that notion is the resultant
“Survival of the corruptest” form of natural selection we are now witnessing in
regards to the naked short selling pandemic.

3) Unethical market makers will bend or break any rule to attract the business of
these hedge funds. They have to in order to survive. The money from primarily
unregulated hedge funds drives this entire naked short selling “Industry within an

4) In-house proprietary trading activity has skyrocketed recently among market
making firms.

5) Our OTC markets are trying to “Evolve” and eliminate human intermediaries
(market makers) subject to human greed and in possession of a vastly superior
“KAV” factor (Knowledge of, Access to and Visibility of the clearing and
settlement system run by the DTCC) and replace them with unbiased computers
(ECNs) to match up buyers and sellers. The current Wall Street power and
influence structure will not allow this evolution to occur.

6) Unethical hedge funds will feed their massive order and commission flow
generating abilities to any market making and clearing firm that prove to be the
most “Accommodative” to these behemoths and their desires. They expect rules
to be bent and broken on their behalf. Access to illegally working out of a MM’s
“in-house proprietary account” is especially deserving of certain “Concessions” as
we have seen in several recent cases involving certain hedge funds and certain
market makers.

7) Hedge fund managers are under a lot of pressure to perform or their wealthy
clients will move their money elsewhere. These clients expect their hedge fund
managers to seek out “Accommodative” market making and clearing firms even if
there is criminal risk incurred by the hedge fund manager.

8) Bona fide market makers are legally allowed to naked short sell securities but
only while acting in the capacity of a “Bona fide” market maker.

9) A bona fide market maker is expected to naked short sell nonexistent “shares” at
the $5 level when an imbalance of buy orders over sell orders is present at that
level and he has no inventory at the time.

10) Should the share price drop to perhaps $4.80 then a bona fide market maker uses
the proceeds from the sale of the nonexistent shares he legally naked short sold at
$5 to buy back these shares and pocket this 20-cent “Spread”. A bona fide MM is
happy making “The spread”.

11) A bona fide market maker injects liquidity by buying shares when sell orders
outnumber buy orders with the same zeal that he shows while selling shares
when buy orders outnumber sell orders. The problem is that buying shares
consumes money while selling shares, even if you don’t own nor intend to ever
purchase shares, makes money because of how the DTCC is “Wired”.

12) A bona fide market maker does not direct or restrict share price movement; he
buffers the intensity of the swings in share price. The two main roles for short
selling in general are to inject liquidity and to create “Pricing efficiency”. To
create “Pricing efficiency” all negative votes (short sales) as well as positive votes
(buy orders) need to be tallied as long as the short sales were preceded by a
legitimate “borrow” i.e. not a “Borrow” from a “Self-replenishing” source like the
DTCC’s “Automated Stock Borrow Program” or “SBP”. Legal short selling is a
very good thing that is crucial to the markets. Abusive naked short selling is a
form of market manipulation which is a 10b-5 securities fraud usually involving
criminal enterprises.

13) A bona fide MM, when faced with a large amount of buy-side activity, will allow
the share price to find an equilibrium level above the current price after selling a
MODERATE amount of shares at the lower price.

14) A bona fide MM would rather sell nonexistent shares at a higher level than at a

15) Bona fide market makers don’t get caught in this trap as they are more than
willing to increase the price level of their offers if the buy-side pressure remains.
This is referred to as “Averaging up”. Not so bona fide market makers don’t have
this luxury if they were guilty of greedily selling nonexistent shares in a non-stop
fashion just to get their hands on the buyer’s money before a competing MM was
able to.

16) The ability TO APPEAR to be legally naked short selling securities while acting
in a bona fide market making capacity is something the unethical hedge funds
desire very badly but cannot legally attain.

17) There are many unethical market makers that have been so decimated by
decimalization that they allow unethical hedge funds space under their “Umbrella
of immunity” from borrowing before short selling which is supposed to be only
accorded to bona fide MMs acting in a bona fide market making capacity at the
time. The rental fees for this “Space” is paid in fees and commissions via order

18) There are very few regulatory policemen monitoring market making activity in
regards to whether naked short selling is truly “bona fide” or not.

19) When presented with trading evidence in a court of law, it would be extremely
difficult for an unethical MM to claim that he was indeed acting in a bona fide
market making capacity while constantly naked short selling into buy orders that
dwarfed sell orders as a stock’s share price plummets from $5 to 2-cents. When
buy orders overwhelm sell orders for prolonged periods of time share prices go up
not down. Naked short selling by theoretically bona fide MMs is only legal when
buy orders overwhelm sell orders.

20) The supporting bids of unethical MMs taking part in “Predatory trading
strategies” are conspicuously absent as share prices fall despite their having the
money from investors buying at higher levels in their coffers. THE SEC, NASD,

21) The “Continuous Net Settlement” system (CNS) in use at the DTCC “Nets out”
on a daily basis buy and sell orders which is extremely efficient BUT has a
“Masking” effect on delivery failures which is an unwanted side-effect UNLESS

22) At the DTCC, it is extremely easy for fraudsters to illegally sell nonexistent
shares and actually get their hands on the proceeds without ever covering.
ONLY HEINOUS BUT UNCONSCIONABLE. All these fraudsters need to do
is to collateralize the naked short position in a “Marked to market” manner on a
daily basis such that the depressant effect on the share price from yet further
naked short selling allows the proceeds from previous naked short sales to fall
into the lap of the perpetrators of these frauds. The key is to never stop naked
short selling which might have the untoward effect of allowing the share price to
increase to find its own unmanipulated equilibrium level. The current clearance
and settlement system in use at the DTCC allows naked short positions to be run
up so rapidly that if the victimized issuer fails to die on cue then the perpetrators
of this fraud cannot only not cover these positions without financial collapse but
they can’t even stop the daily onslaught without risking the share price going up.
The allure of free investor money is so overwhelming that prudent short selling
practices fall by the wayside.

23) For the most part, naked short sellers don’t ever cover; they don’t have to. They
can always fall back on their ace in the hole as a “Participant” of the DTCC by
refusing to execute even buy-ins mandated by the old NASD Rule 11830 as well
as the new Reg SHO because of possible market “Disruptions”. The financial
critical mass of these hedge funds and co-conspiring Wall Street behemoths will
outmuscle even the most formidable preyed upon targets. If they meet resistance
then there are available “Internet bashers” to employ and financial “Journalists”
for hire to produce “Hatchet jobs” to propagate any negative stories whether of
merit or not. First Amendment freedom of speech issues as well as Internet
anonymity are utilized to delivery any unfavorable opinions.

24) The key to naked short selling fraudsters is to get these trades involving the sale
of nonexistent shares to “Clear” even though “Settlement” (Which involves the
“delivery” of that which was thought to be being bought i.e. genuine “shares” or
“packages of rights” attached to a specific U.S. Corporation) may never occur.
The “Automated Stock Borrow Program” at the DTCC allows shares held in
“Street name” at the DTCC to be borrowed from an anonymous “Lending Pool”
of shares. This allows the firm of the buyer of these nonexistent shares to receive
delivery of “something” that at least resembles a legitimate share at first glance.
The problem is that the buying firm is allowed to immediately place these “Shares
or share facsimiles” right back into this same anonymous “Lending pool” of

25) The “Counterfeit Electronic Book Entries” (“CEBEs”-electronic book entries at
the DTCC without a certificated share in a DTCC vault to justify its existence)
that result from the lack of buying-in these failed deliveries then appear on
investors’ monthly statements as readily-sellable “Pseudo-shares” despite the fact
that there is no paper certificate in a DTCC vault to justify its existence. Keep in
mind that the DTCC at all times has full visibility of the number of “CEBEs” as
well as genuine shares held in their vaults.

26) The “Supply” variable that interacts with the “Demand” variable to determine
share price then becomes the arithmetic sum of all genuine paper-backed
electronic book entries at the DTCC plus the number of “Counterfeit Electronic
Book Entries”. This greatly enhanced “Supply of readily-sellable shares” then
interacts with a greatly diminished “Effective Demand” for shares due to buy
orders for shares being effectively neutralized by the sale of nonexistent shares
into these buy orders resulting in the typical precipitous drop in the share price of
the preyed upon U.S. Corporation. This allows the unknowing investors’ funds to
flow into the lap of those that sold nonexistent “Entities” but still refuse to cover.

27) The 2 main repositories for these unaddressed delivery failures are the DTCC
“D” sub accounts and the “Non-CNS delivery arrangements” shunted to “Exclearing”
hiding places. The “Ex-clearing” hiding places involve DTCC
participants “Pairing off” and allegedly informally agreeing to not buy-in each
other’s failed deliveries. B/d “A” agrees to not demand delivery of the $5 billion
worth of securities owed to it by B/d “B” in exchange for B/d “B” doing likewise
with the $5 billion worth of failed deliveries owed to it. The DTCC holds that
these are “Contractual” arrangements between its participants and that it has no
business in monitoring. Victimized issuers and investors might beg to differ as
any “Self-Regulatory Organization” might be expected to do a little “Selfregulating”
of the activity of its participants which unfortunately at the DTCC
own the DTCC. The DTCC management aggressively regulating the behavior of
those that sign their paychecks is a bit of a design flaw creating yet another
conflict of interest.

28) Section 17 A of the ’34 Act set up the DTC which later merged with the NSCC
to form the DTCC. It mandated “The prompt and accurate clearance AND
SETTLEMENT of transactions involving the transference of ownership”. Even
in the Reg SHO environment the trades done by naked short selling fraudsters still
aren’t “settling”. “Settlement” mandates “Good form delivery” of that which was
intended to be purchased by the buyer-a “Package of rights” attached to a specific
U.S. corporation domiciled in a specific U.S. state. You cannot have “Good form
delivery” if that which is being “Delivered” comes from a self-replenishing
“Lending pool” of shares provided by the DTCC’s “Automated Stock Borrow
Program” (the SBP) especially when that which is delivered to the new buyers
broker/dealer can immediately be replaced right back into the same “Lending
pool” from whence it just came as if it never left at all. In order for a system like
this to have one scintilla of integrity, the “Shares/pseudo-shares” delivered to the
new buyer’s brokerage firm would be sequestered or escrowed off to the side and
not allowed to be replaced into the “Lending pool” UNTIL the original loan was

29) What our current system does is to allow trades to “Clear” at warp speed without
legally “Settling”. Dr. Boni’s research clearly showed the “Pervasiveness” and
extreme age of the failed deliveries stacking up at the DTCC. This vastly dilutes
the “Readily-sellable” share structure of targeted corporations causing their share
price to plummet which allows the proceeds from the sale of bogus shares to
actually flow into the laps of the fraudsters despite their having absolutely no
intent of ever buying or replacing that which they have already sold. Recall that
all the fraudsters have to do is to collateralize this ever-diminishing debt on a
daily “Market-to-market” basis.

30) If the SEC is sincere about addressing this problem, I would suggest they start
with legislation to rescind Section 19 C of the ’34 Act which currently forbids the
SEC from altering the rules and regulations of the DTCC. The combined 800-
pages of rules and regulations of the DTC and NSCC, in my humble opinion, is
the most conflict of interest-ridden set of rules on the planet. The lack of
necessity to execute buy-ins mandated by the old NASD Rule 11830 and the new
Federally mandated Reg SHO threshold securities buy-ins due to the pretense of
avoiding “Market disruptions” is in the opinion of most securities scholars
nothing short of criminal as by definition there has to be a “Market disruption”
involved when leveling the playing field of a victimized issuer that has lost 99%
of its market capitalization due to abusive naked short selling by DTCC
participants hiding behind their rulebook that is untouchable by the SEC.
In summary, this NASD Rule 3360 proposed rule change represents a step in the right
direction especially if made a part of a more comprehensive plan that addresses the
loopholes inadvertently left in Reg SHO. The systemic risk levels currently being
incurred by all U.S. citizens due to the greed of abusive DTCC participants and coconspiring
hedge funds and naked short selling cartels is intolerable. The inability for
Reg SHO to address the preexisting delivery failure problem hints at just how serious and
pandemic this problem is. The voluntary “Grandfathering in” of previous acts of
securities fraud sets a very scary precedent. As I see it, you at the SEC have run out of
comfortable middle ground to occupy in this dilemma. You now see the absolute
numbers of delivery failures of a given issuer on a daily basis. You either have to warn
prospective buyers, as per the ’33 “Disclosure Act”, of these levels of “Readily sellable
share facsimiles” (unaddressed delivery failures) being held at the DTCC or in “Exclearing
arrangements” IN ALL OTC SECURITIES or order their being bought-in.
There is no third choice. These prospective investors need to be warned that they’re
buying shares of corporations with astronomic levels of unaddressed delivery failures
which have basically pre-ordained their investment to an early death as statistics will
readily bear out. The 1933 Securities Act mandates that investors be made aware of all
information pertinent to the “Character” of the securities being sold in our markets. In a
prospectus you at the SEC appropriately make a new issuer reveal every possible tiny
grain of sand of risk to the investing public yet you at the SEC, the NASD, and the DTCC
possess information about a gigantic “Boulder of risk” present in investing in especially
nonreporting issuers with a plethora of unaddressed delivery failures, yet you keep silent.
Note that the Reg SHO “Threshold lists” don’t even discriminate between a corporation
with a 0.6% delivery failure rate from a corporation with a 66% delivery failure rate.
There really is no middle ground left on this landscape strewn with corporate carcasses
for the SEC to safely stand on any longer. Either tell us about these positions as the
amended 3360 would partially address or buy-in the failed deliveries. If mandated buyins
result in the weeding out of the most abusive market making and clearing firms then
so be it. This might allow our markets to evolve into more efficient computerized
markets not subject to human greed and massive conflicts of interest between DTCC
participants and the investors they owe a fiduciary duty of care to. Thank you for your
interest in this subject.

Dr. Jim DeCosta
Tualatin, Oregon

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To: rrufff who wrote (556)12/1/2005 4:34:33 AM
From: rrufff
   of 4972
The article by Jim DeCosta is one of the best summaries of the issues that I have seen. About the only thing that is not covered is the complicated process of “desking,” through overseas associates in transactions. At the very least, overseas “brokers” or something resembling them, are used to put another layer away from US regulation. The ability to hide and move manipulation from one party to another makes it much more difficult for manipulation to be discovered, let alone stopped.

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To: kknightmcc who wrote (553)12/1/2005 5:04:49 AM
From: rrufff
   of 4972
Great comment on the conference by "Bob O'Brien." 

I listened with interest to the NASAA Naked Short Selling conference/proceedings today, moderated by Ralph Lambiase, which sought to discuss, define and probe the naked short selling crisis affecting our markets. Before I offer my summary, let me state that it was gratifying to hear that the perspective that guys like Dave Patch, and Dr. Byrne, and I have - namely that this is a real, ongoing, pervasive problem in our markets, and that the regulators are asleep at the switch, or compromised, or both - validated as reality by a panel of the foremost authorities on the subject.

I hope that wasn't lost on our fine media, who seem all too ready to buy into, and parrot, the line that we are all nutty as Christmas fruitcakes.

Turns out we aren't - we simply apprehend the problem accurately, and there is an entire industry intent upon creating smokescreens, to cloud that understanding. It was pretty clear as the conference went on that Ralph Lambiase also has more than an inkling as to what is going on, and I can't help but think that this conference was groundbreaking, as the same folks that went after the analyst scandal (the NASAA) held it - there was likely a reason for that. We shall see as events develop what that reason was.

First, bravo to Ralph for introducing a sense of humor to the event, and for asking the tough questions. Here are my takeaways:

1) The federal and SRO regulators all say that they are aggressively investigating, pursuing, monitoring and regulating, and that they are upholding the rules as best they can. Richard Shapiro summed up the obvious fallacy in this position best: "Uh, OK. But where's the enforcement?" He noted that we hear all the rhetoric from these guys, but the critical data is kept secret, and there is no actual evidence that any of them are doing anything. One of the other panelists noted "there is no such thing as an innocent fail" - and I agree. There isn't. And all of these guys know it, self-serving monologues about the intensity of their efforts notwhithstanding.

Of note was that after much of the mandatory and expected bluster and sanctimonious filibustering about how hard the SEC and NASD are working, and how concerned they are about protecting investors, etc., the statement that there has been "not one reprimand or sanction or enforcement action for violation of SHO," received a shocked silence from the regulators, and from the audience - it was so clear an affront that the entire room was speechless.

2) My position on the FTD/FST (Fraudulent Stock Trades) issue was echoed by all of the academics: We need to know what the fails are in order to trust the system. We need transparency, and the reason that the DTCC tenders to us for not providing transparency is that they have passed a rule against being honest about it, and disclosing the numbers. The fail to deliver problem is of unknown size by design (not because the information is unknowable), and the consensus was that this state of affairs is deplorable - investors deserve to know how large the fraudulent stock trade problem is, by company, and in the aggregate for the market.

Huh. You mean fair markets require transparency? What a novel concept. Who knew...

3) Voting rights are destroyed by FTDs, and the process by which shareholders have lost their "one share, one vote" rights is a disgrace.

4) The agreement was that the reason that the DTCC and the SEC don't tell anyone what the size of the FTD problem is is because there would be a collapse in faith in the markets if we knew the level of crookery that was endemic to the system. This was a key observation - all of the facile excuses about the protection of trading secrets is baloney at the end of the day - protecting illegal trading secrets never rang true, and the real reason is obvious to anyone with a brain: If the SEC and the DTCC admitted how large the actual numbers are, there would be cries for their heads, and lawsuits for years, and a complete and utter loss of confidence in the system. "How could Wall Street and the SEC do this to us?" is the question they are trying to avoid.

5) The SEC's position was that they welcomed comments about SHO, and would carefully consider any they received during their next review. Presumably they would carefully discuss those comments in the same way that they did in 2004 (when abundant cautions were sounded by everyone from the NASD and NASAA to economists to ordinary citizens), and then disregard them, as they did the first time around. This was talking-head bureaucratese of the first order, IMO, and nobody was fooled.

6) A legitimately shorted share, borrowed and then delivered to the new buyer, can then be relent to another short seller by the new buyer's broker - there is no limit. Contrary to all the rhetoric from my many critics, that take on this was verified as correct. One more for the Bunny.

7) The SEC's Brigagliano said that 4% of the listed companies were SHO list candidates under the grandfathering. He wouldn't or couldn't answer the question as to how many shares were grandfathered. Nobody asked the obvious question - what was the total dollars that 4% of listed companies represented, for which no deliveries had been made, or ever would? The responses as to grandfathering were jumbled, and I'm still a bit unclear as to what the 4% meant, but the SEC did concede that it was to placate the market - read "let Wall Street off the hook and let them keep investors' money"; money we had exchanged for shares we never received. Again, not to belabor this point, but there was no coherent good reason for allowing Wall Street to keep the money we were defrauded out of, other than to protect Wall Street's interests.

8) The panel seems to get it. They were clear that the lack of transparency was the largest problem, and that secrecy benefited nobody but the manipulators. The SEC made hollow-sounding assurances of regulatory enforcement, which were handily dealt with by Shapiro's cutting statements, and Lambiase's simple, "I was under the impression that there had only been 3 actions over the last 10 years." No rebuttal was articulated. At one point, the discussion seemed, to put it politely, a wee bit strained.

9) The same, tired, "grandfathering doesn't provide amnesty from enforcement actions" dross we have heard for a year now from the SEC - nobody said it did, Jimbo - was trotted out to do service here. Jim, babe, pay attention: what we've been saying is that it does give those that sold and never delivered anything a vacation from having to cover those fraudulently transacted, non-delivered trades, and allows the short sellers to keep the profits derived from illegally driving companies into the dirt - that was grudgingly conceded by the regulators. After much dancing around, they admitted as much. That's why you don't see the DTCC or the SEC doing these discussions in open forums - it's hard to argue against the obvious truth when it is presented by knowledgeable folks who you can't snow.

Important point: the SEC conceded that short sellers get access to the proceeds from sales where they never delivered the shares, as long as they can drive the stock price low enough - obviously encouraging everyone on the bad guy side to do so in a big way, if you are going to do it at all. Not surprisingly, the DTCC was invited to have a representative on the panel, but declined. Smart move.

10) FTD'ing destroys any sense of legitimacy of voting rights associated with shares. Every equity examined in one study had overage of votes/shares. Every one. This makes a mockery of common law ownership, the right to vote, and any semblance of honest dealings W/R/T property rights. Ralph was flabbergasted over the voting rights abuse - his statement was, "we've fought wars to protect the right to vote". Correct. We have. But we can't get Wall Street to stop abusing the American public. Ironic, no? Every day more Americans die in Iraq to supposedly protect the freedom and sanctity of voting rights, but we can't get it here, at home. He was stumped as to why no media has picked this up. So am I.

11) There was much discussion over the tax implications of leaving short positions open in perpetuity, which ignores that if the shorting occurred from offshore accounts any profits are tax exempt - offshore investors don't pay capital gains tax.

12) There was also discussion about the foreign exchange listings - in which the regulators dutifully addressed their own straw man contention that naked short selling was being conducted there, and happily ignored that nobody was making that claim - it's an arbitrage game, stupid. That lame spin on it was over in February, when we figured out that the game was to claim to be a foreign market maker, or that you were holding shares in a foreign account, or that you were hedging your position "over there." No naked short selling required on the actual exchanges.

13.) Some discussion about ex-clearing shenanigans took place, but unfortunately the one big one - wherein brokers not only lend each other shares, but enter IOUs into their back office ledgers instead of demanding delivery, or buying in the fail - wasn't. That is no surprise. Anyone that thinks the $6 billion per day of FTDs is a big deal - one panelist made the deadpan comment, "$6 billion a day, and pretty soon you are talking real money" -
should run some mental numbers as to what the ex-clearing situation is like if I am correct on my take on the size of that problem. Especially in light of the newly confirmed accuracy of the information I've been disseminating thusfar about FTDs - my foreboding about ex-clearing might merit more than a shrug given that I have been dead on about the rest of this. Dunno.

14) The ECN's are hotbeds of short selling, as well as naked short selling - they are anonymous, and they don't have all the annoying rules that the mainstream exchanges do, thus they have seen a large increase as the venues of choice for this practice - which echoes the observations I've made during large short attacks on NFI and OSTK, namely that the selling ALWAYS comes out of the ECN's, in waves. Now we have academics on record describing why.

15) Owning paper shares, or using the Direct Withdrawal Custodian program is the only way to be assured that you actually own real shares, and aren't being conned by Wall Street. Period.

16) There is no mechanism for CEOs to know what their FTD levels are, even though it is an essential factor in company valuation and corporate integrity - and the DTC and the SEC aren't telling, well, just 'cause. That is also a disgrace, and should convince anyone who is unsure of how bad this is that it is as bad as the worst critics have made it out to be. Again, nobody from the SEC could explain why it was a good idea to keep the information from the CEOs - there were simply assurances that all input would be considered. Ha.

Here are my takeaways: Everything you've read here and on NCANS is solidly based in fact - it was all confirmed by the panel. The system doesn't punish those who use naked short selling as a manipulative practice; an endless supply of legitimate shorts can be created by the system via re-loaning stock from margin accounts; naked shorts are a huge problem concentrated in a relatively small number of stocks; there is no plausible reason that the FTD info shouldn't be public; the SEC and NASD and NYSE, for all their bluster, have no real impact on the problem (there was, as always, much discussion of "studying the matter further" and being "receptive to input", with the best line going to the NASD guy who pointed out that they are taking a "Giulliani approach of ticketing small infractions" - citing a meaninglessly small total number of dollars - $750K - they've levied to date); there are no meaningful penalties for FTD'ing like crazy; there are huge inequities in the reporting system which favor short sellers and market manipulators; and everyone of any substance in the business knows all of this. All of it. And nobody is doing anything - it is all being "studied" and "considered" while America's Main Street goes broke.

Surprised that the NASAA panel confirmed virtually every statement made here and at, that has been dismissed as silliness by the quisling media and the hedge fund apologists?

You shouldn't be.

I agree with Patrick Byrne, who said that when we look back at this we are going to say, "all the evidence was there, all along, and a few guys spelled it out in impossible-to-misunderstand language, and the regulators, and the government, stood by and did nothing, feigning innocence and ignorance."

One last comment: The SEC guy predictably tried to underscore what a small problem this is, purposefully ignoring the observation that the FTDs were concentrated in a very small number of companies. Just pretended he didn't hear it. Also sort of blah blah blah'd over the direct question Ralph framed over how companies could exist on the Reg SHO list for a year if any of the rules were being enforced - he committed to being willing to study it more, which by now should be well understood for SEC-speak for, "do nothing."

Ralph Lambiase deserves tremendous credit for being willing to tackle this. I have no doubt that he will be personally attacked sooner rather than later, and the panel's statements distorted, mocked, or ignored. That's how this system protects itself.

The positive is that now the problem has been validated by as august a body of academics and specialists as one could desire - it isn't all in my head, and yes, you should be worried.

The solutions for what should be done were best framed by Professor Finnerty: Tell us the size of the problem, and force settlement in a reasonable time. This isn't rocket science.

The more coherent summary is:

A) Improve the efficiency of the stock lending market.
B) Instill regulations mandating actual borrows be made before stock is sold short.
C) Don't let the short sellers have access to the cash untl the share is delivered.
D) Report short positions and FTD info, daily.
E) Eliminate the grandfathering.

And here's the short version:

Settle the trades. Tell us what's going on. And don't lie to us.

Bravo panel, and bravo Ralph Lambiase, my new favorite for regulator/lawmaker of the decade. In the 80's it was a tie between Giulliani and Ed Gray, in the 90's Giulliani had it locked, and for the millennium, we have Ralph Lambiase - Spitzer is all show, no substance, and pretends to be ignorant of what was shown today to be a pervasive fraudulent practice embraced by Wall Street.

For my money, Lambiase had it cold.

And shame on the SEC, and on Wall Street, for selling us down the river and allowing the rule of law to be a mockery outside of Main Street. What we heard today from our protectors was a hollow farce, and I hope that as Mr. Lambiase alluded to in his closing comments, that change will be a comming.

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