|To: rrufff who wrote (2259)||6/28/2006 4:24:41 PM|
|DTCC Clarification on Fails to Deliver |
June 28, 2006 02:47 PM US Eastern Timezone
DTCC Clarification on Fails to Deliver
NEW YORK--(BUSINESS WIRE)--June 28, 2006--The Depository Trust & Clearing Corporation (DTCC) today issued a clarification of a statistic it reports each year in its annual report. The clarification is intended to provide a more accurate description of a statistic on failed transactions - including "Fails To Deliver" (FTD) - that certain third parties have persistently misinterpreted or misrepresented, seeking to buttress their contention that the levels of FTDs is evidence of abusive short selling and "naked short selling." These parties cite DTCC's reported statistic as the amount of FTDs each day. Their characterizations are grossly inaccurate and paint a distorted picture of the reality of the marketplace.
National Securities Clearing Corporation (NSCC), a subsidiary of DTCC, acts as a central counterparty to virtually all broker-to-broker trades in the U.S. As such, the numbers NSCC reports relating to "failed transactions" reflect both buy and sell sides of a trade. These numbers include both fails to deliver and their offsetting fails to receive, so that the number thus doubles the amount involved (i.e., the same transaction is counted twice, once on the "deliver" side and once on the "receive" side).
In DTCC's most recent annual report indicated that as of December 31, 2005, NSCC had fails outstanding worth approximately $6 billion. This value is persistently described by third parties as the value of FTDs as of that date. Since it is actually the value of all fails - i.e., both fails to deliver and fails to receive - effectively, the $6 billion cited by third parties actually represents $3 billion in fails to deliver, or about 1.1% of the $266.5 billion in trades processed on the average day by NSCC in 2005. Moreover, the $3 billion figure also represents all fails to deliver at NSCC, including fails in fixed income trades (corporate and municipal bonds). While the number of fails and percentage of fails in fixed income trades changes each trading day, on December 31, 2005, fixed income trade fails were equal to approximately 15% of all fails. Importantly, DTCC notes that this FTD total reported is not just for equities on the "threshold list" of companies, but rather reflects fails on all equities and corporate and municipal bonds.
For over one year, DTCC's Web site has reported that the $6 billion as "fails to deliver and receive" thus enabling people interested in the topic to understand that the figure reflects both halves of a transaction. (See dtcc.com Nonetheless, third parties persist in applying the number to fails to deliver only. The DTCC Web site has also made clear that the figure is not a daily amount of fails, but a combined figure that includes both new fails on the reporting day as well as aged fails.
While DTCC does not know the reasons for a fail to deliver (this is only known by the broker-dealer and the marketplace), as the SEC has pointed out, "There are many reasons why NSCC members do not or cannot deliver securities to NSCC on the settlement date. Many times the member will experience a problem that is either unanticipated or is out of its control, such as (1) delays in customer delivery of shares to the broker-dealer; (2) an inability to borrow shares in time for settlement; (3) delays in obtaining transfer of title; (4) an inability to obtain transfer of title; and (5) deliberate failure to produce stock at settlement which may result in a broker-dealer not receiving shares it had purchased to fulfill its deliver obligations."
With information on the actual FTD situation readily available, DTCC believes the failure to use the proper number in any meaningful discussions of naked short selling reflects a conscious attempt to mislead the investing public and undermine the confidence in the workings of our capital markets.
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|To: StockDung who wrote (2261)||6/28/2006 5:12:08 PM|
|NYSE to prosecute stock loan abuses, Ketchum says |
By JED HOROWITZ
Dow Jones Newswires
June 27, 2006, 4:04 PM EDT
NEW YORK (Dow Jones/AP) _ The New York Stock Exchange is on the verge of bringing enforcement actions against some brokerage firms for stock-lending violations, an NYSE executive said Tuesday.
"You are going to see some significant cases on the stock-loan side of things in the relatively near future," NYSE Regulation Chief Executive Richard Ketchum told reporters after speaking at a securities industry risk management conference.
The violations involve improper use of "finders," people hired by brokers to help them locate securities to complete short sale and other kind of transactions. Some NYSE member firms have been using finders unnecessarily to locate readily available, liquid securities, creating higher costs for the firms' customers, Ketchum said.
He wouldn't elaborate on the timing of the cases or the companies involved.
His comments come as the NYSE regulatory unit has been expanding its staff and activities at a time when its parent, NYSE Group Inc. has become a public, for-profit company.
Last week, NYSE Regulation's enforcement head, Susan Merrill, said her unit expects to bring actions soon regarding short-sale violations by brokers. They include instances where firms lend securities designated for other uses, such as secondary market sales, a violation of what is known as Reg M.
"We've seen some things there we don't like," Ketchum said Monday.
Short sales occur when traders sell stock they don't own in the hope they can buy it at a lower price in time for delivery. Brokerage firms are prohibited from aiding short sales if they know the seller can't cover the trade.
NYSE Regulation also is working on an enforcement action against a large brokerage firm that gave preferential trading treatment to orders from its own hedge fund in which its employees had interests, an exchange official said earlier this year. Ketchum declined comment on the specific case but said his unit is exploring a number of issues involving hedge funds, including conflicts of interest.
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|To: StockDung who wrote (2261)||6/28/2006 5:18:36 PM|
|Suits Focus on Street's Role|
In 'Naked Shorting'
By RANDALL SMITH
June 28, 2006; Page C1
Wall Street's biggest securities firms face a pair of civil-antitrust lawsuits over the role they play in the practice of "naked short selling," which can drive down the price of certain stocks.
The lawsuits, brought by two trading customers, charge that the Wall Street firms' "prime" brokerage operations, which cater to hedge funds and other professional traders, often charge fees for borrowing stocks without actually borrowing them.
Defendants in the case include the 11 largest prime-brokerage operations, led by Morgan Stanley, Bear Stearns Cos., and Goldman Sachs Group Inc., which held a combined 60% share of that market at the end of 2004, according to the Lipper HedgeWorld service-provider directory.
A spokesman for Morgan Stanley said, "We think the suits are wholly without merit, and we intend to defend ourselves vigorously." Officials of Bear and Goldman declined to comment.
Short sellers, who aim to profit by selling borrowed shares and buying them back later at a lower price, routinely rely on prime brokers to locate stock available to be borrowed for such sales. The brokers offer stock lending among other services, including financing and bookkeeping.
The world of short selling will be on display today at a Senate Judiciary Committee hearing on the relationship between hedge funds and securities analysts.
In naked short selling, short sales are executed without borrowing or arranging to borrow the securities in time to deliver them to the buyer within the standard three-day settlement period after the trade. A Securities and Exchange Commission rule, Regulation SHO, curtailed naked shorting. But the lawsuits note that failures to deliver have declined only 20% since the rule's adoption in January 2005.
One of the lawsuits, by Electronic Trading Group LLC, which was filed in federal court in Manhattan, says the prime-brokerage services collusively condone "chronic failures to deliver by which clients are charged for 'borrowing' when in fact no borrowing actually takes place."
The lawsuits say the brokers charge fees of as much as 25% annually for hard-to-borrow stocks to which they mightn't be entitled. The prime-brokerage firms act reciprocally to avoid forcing delivery for each other's trades, the lawsuits maintain, adding that the firms instead operate a system of "phantom," book-entry transactions.
The Electronic Trading Group lawsuit was filed April 12 by Entwistle & Cappucci LLP, which also represents the other plaintiff, Quark Fund LLC. Both trading firms are less active than they were previously, said Vincent Cappucci, the firm's lead partner on the case.
Some traders agree with some of the lawsuits' allegations, according to interviews with people on Wall Street. But other potential plaintiffs are "concerned" about going public with such assertions, fearing a possible loss of access to Wall Street services, Mr. Cappucci said.
The lawsuits highlight the obscure mechanics of short selling, which are under scrutiny by regulators, including the New York Stock Exchange, in the decline of Vonage Holdings Corp., an Internet telephone-service provider whose stock price has tumbled 48% since its initial public offering May 24.
Vonage's stock encountered heavy short selling on its first day of trading, and NYSE regulators have asked Wall Street brokers for records of trades including short sales, and how naked short sales were handled. Vonage shares have been listed as hard to borrow since the IPO, and its shares also have experienced high rates of delivery failures -- another sign of naked shorting.
Some short sellers say they can't knock down stock prices because of "uptick" rules limiting such sales when prices are falling. However, the SEC has a pilot program exempting about 1,000 stocks from the rules, which also don't apply to some trades off the stocks' exchanges.
Josh Galper, managing principal of Vodia Group LLC, a financial-services consultancy in Concord, Mass., says the lawsuits may threaten the profit margins of the prime-brokerage business.
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|To: rrufff who wrote (2263)||6/28/2006 5:20:46 PM|
|Senate Judiciary Meeting today and Aguirre, SEC whistleblower:|
Jun. 27, 2006 - 4:09 PM
Will the Media Blow Off a Whistleblower?
On Friday the New York Times broke a front-page story about possible insider trading at one of the country's largest hedge funds, Pequot Capital Management.
"The SEC declined to confirm or deny that it was investigating Pequot, a $7 billion fund overseen by Arthur J. Samberg, 65, a leading money manager and philanthropist," reported the Times. "But a lawyer who once led the agency's investigation has told Congress that the fund's trading had repeatedly aroused suspicion among stock exchange officials, prompting them on 18 occasions to refer cases to the SEC for further investigation, records show."
At the center of the Times' story was the aforementioned lawyer, Gary Aguirre, who had led the SEC's investigation into the hedge fund until last September, when he was fired for dubious reasons. According to the Times, at the time of his dismissal Aguirre was on the verge of deposing John Mack, currently chief executive of Morgan Stanley, who is also a former chairman of Pequot and a big-time fund-raiser for President Bush.
If true, that is a scandal of gargantuan proportions. Equally noteworthy are the various other allegations that Aguirre eloquently presented in a letter to the Senate Subcommittee on Securities and Investment. The 18-page document, which was leaked to the Times and prompted Friday's story, is a shocking compendium of hedge fund malfeasance, negligent enforcement and system rot.
Wednesday Aguirre will give what should be explosive testimony at a U.S. Senate Judiciary Committee hearing on hedge fund tactics. Yet some of the reporters assigned to cover this issue have questioned the necessity of the hearings, and most have ignored Aguirre's broader allegations, focusing their stories on the spot-news of the Pequot investigation.
"Prominent hedge fund faces insider trading probe," read a headline from the Boston Globe.
"Further probe into Pequot Capital," announced the Financial Times.
"Hedge fund under investigation," proclaimed Saturday's St. Petersburg Times.
Perhaps the best follow-up article we've read so far appeared in Sunday's New York Post, which noted that the former SEC investigator's concerns about hedge funds extend well beyond Pequot to the entire industry and the system it supports.
"Ex-SEC lawyer Gary Aguirre's 18-page stinging letter details numerous examples of what he alleged is the SEC's inability -- or unwillingness -- to investigate alleged fraud perpetrated by hedge funds," reported Roddy Boyd.
"Aguirre, in the letter, levels broadside after broadside against the SEC, arguing that it has consistently failed to detect or even act as hedge funds engage in a variety of unfair or illegal trading practices," added Boyd "His charges that certain stocks were being 'naked-shorted to zero' are certain to find a supportive audience among Overstock.com chief executive Patrick Byrne and his supporters, who have launched a bitter crusade centered on eliminating naked short-selling."
On Saturday, the Financial Times also filed a story taking a look at some of the broader issues raised in Aguirre's letter.
"To politicians looking for evidence to justify further scrutiny of hedge funds, Gary Aguirre's letter to Senators Chuck Hagel and Christopher Dodd appears to provide welcome ammunition," reported the paper. "In the letter sent three weeks ago, the former SEC lawyer accused the agency of failing to protect US capital markets from 'the risk of manipulation and fraud by hedge funds.'"
But for anyone interested in ongoing debate over the need for hedge fund regulation, we suggest visiting www.TheSanityCheck.com , a blog that contains a link to Aguirre's letter in its glorious entirety.
"I believe our capital markets face growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money-then called syndicates, trusts or pools," writes Aguirre. "Those unregulated pools were instrumental in delivering the 1929 Crash....There is growing evidence that today's pools -- hedge funds -- have advanced and refined the practice of manipulating and cheating other market participants."
"Fixing the SEC so it can protect investors and capital markets from hedge fund abuse will not be an easy task," writes Aguirre. "Powerful interests want the SEC to stay just the way it is or, better yet, to become even weaker. Those interests are not just the hedge funds. They include the financial industries that are receiving tens of billions of dollars in revenues from helping hedge funds cheat other market participants or close their eyes to the carnage."
Let's hope that members of the nation's financial press are among those keeping their eyes wide open.
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|From: rrufff||6/28/2006 7:29:53 PM|
|The Honorable Richard Blumenthal |
Attorney General , State of Connecticut
Office of The Attorney General
State of Connecticut
ATTORNEY GENERAL RICHARD BL.UMENTHAL
BEFORE THE SENATE COMMITTEE ON THE JUDICIARY
I appreciate the opportunity to speak on the subject of short selling activities by hedge funds and the independence of stock analysts After the court of appeals decision in Goldstein v SEC, USDC (DC Cir 6/23/06) last week, hedge funds are a regulatory black hole -- lacking even minimal disclosure and accountability required of mutual funds and other similar institutions The number and financial power of hedge funds -- now reportedly more than 13,000 with assets exceeding $24 trillion --provide fertile opportunity for potential fraud based on false or deliberately misleading stock analyst reports Either Congress or the SEC must act quickly to fill the void and assure confidence in the integrity of the markets and the hedge fund industry, Federal action is profoundly preferable --maximizing uniformity, expertise and resources -- but the states must fill the void if Congress fails to act States must consider their own regulatory standards -- perhaps modeled on the SEC rules-- achieving the same goals of disclosure and accountability Federal resources and authority are clearly important to effective scrutiny Federal inaction or inertia are a powerful impetus --indeed an open invitation -- to state intervention States must be proactive to require greater disclosure and accountability If federal agencies abandon the field, we will join forces, as we have done before in joint legal action, or act separately to proactively protect our citizens No one seeks regulation for its own sake, but if some measure of regulation or scrutiny is appropriate, it need not be the exclusive province or purview of the federal government Disclosure and accountability, not interference or intrusion, should be guiding principles Hedge hnds and short selling play important, legitimate roles in the financial markets but these financial tools may also be susceptible to invest01 fraud and abuse -- preventable harms which may be forestalled through specific measures.
First, Congress should even -- if not level -- the regulatory playing field between mutual funds and hedge funds by extending appropriate applicable rules to hedge funds.
Congressional action is particularly critical after the ruling in Goldstern v SEC, invalidating the minimal hedge fund SEC measures Congress must now impose standards of disclosure and accountability on the hedge fund industry enabling some regulatory scrutiny Responsible hedge fund managers should welcome increased regulation Greater transparency will help enhance investor confidence in this increasingly important and influential part of the market.
Congress should also extend the 2003 Securities Exchange Commission (SEC), National Association of Securities Dealers (NASD) and New York Stock Exchange (NYSE) rules to socalled "independent research companies" whose independence and objectivity may be compromised by clients that provide a significant amount of business
Further, Congress should toughen federal criminal, civil and administrative penalties to deter and punish fraudulent hedge fund and short selling practices Such penalties should include treble damages and forfeiture of all profits by all parties who participate in the issuance of a false stock analysis
Finally, Congress should provide incentives to encourage the Securities Exchange Commission and state banking regulatory agencies to intensify and enhance enforcement actions Lack of aggressive enforcement can make any law meaningless, leaving investors and markets unprotected.
Several years ago, Wall Street was rocked by revelations involving mutual funds and investment bankers who were pressuring their in-house stock researchers to issue positive stock outlooks that facilitated their investments or pleased their clients.
Firms engaged in a pattern or practice of influencing their research reports on corporations that were clients of their own investment bankers With huge revenues from their investment banking divisions at stake, some firms sought to cater to their clients by issuing positive stock analyses The stock analysts publicly issuing positive reports were at the same time privately expressing their concerns about negative developments.
Joint SEC and state actions produced hundreds of millions of dollars in fines and consumer restitution In response, Congress required the SEC, the NYSE and NASD to develop new regulations to protect the integrity and independence of in-house stock analysts These rules prohibit (1) investment banking supervision over their firm's stock analysts, (2) investment banking department review or comment on a stock analysis; and (3) stock analysts attending investment banking solicitations of new clients In addition, the rules require stock researchers to disclose any direct or indirect compensation they receive for issuing stock analyses.
As welcome as these regulations are, they do not apply effectively to situations -- common with hedge funds -- where the stock analyst is separate from an investment banking firm but is compensated by clients for supposedly independent stock analysis In this situation, if the paying client represents a significant amount of the stock analyst's business -- commissioning frequent, repeated research reports -- the analysis may be compromised by the client's preferences or positions Independence may he a mirage -- reports "independent" in name only -- and the analysis shaped to suit the client hedge fund's interests.
Such problems may he the aberrant exception, a small proportion, not the rule. But this committee's interest is well-founded The Committee is justifiably concerned about hedge funds that "short and distort", or take a short position on a stock and then use supposedly independent investment analysts to purposefully and misleadingly malign the company Analysts dependent on the hedge fund's business may skew their stock analysis to enable the hedge fund to successfully short the stock, and profit at the expense of unsuspecting investors
The concern about deceptive claims of independence and conflicts of interest, and possible collusion between financial institutions and supposedly objective analysts, really extends beyond hedge funds to other financial entities -- and not just to short selling but long positions as well Undisclosed relationships or financial dependence involving research analysts -- touted as independent -- may not only distort the results and sabotage objectivity, but also mislead the public and enable the investment entity to manipulate the market Whether the client is a hedge fund or another entity, supposedly independent research may be skewed to benefit the client's short or long position in the stock.
The danger is perhaps heightened with hedge funds because they have amassed so much financial power -- in the markets and elsewhere -- with so little transparency or accountability Indeed, after the court of appeals ruling, they will be subject to virtually no required disclosure or other regulatory regimen Shielded fIom many reporting mandates, and empowered by flexible missions and charters, they can be nimble, powerful and secret in investment strategy and tactics.
My concern about hedge funds also relates to their phenomenal growth expanding beyond sophisticated wealthy individual investors to include pension fimds, charitable organizations and middle income individuals Hedge funds have been exempt fiom regulation since the 1930's because they have been viewed as solely private investment vehicles for individuals with significant financial resources and presumed knowledge The conventional wisdom was that these individuals, by virtue of their financial means, were so sophisticated and knowledgeable that they did not need federal regulations to protect them from fraud or abuse
The growth of hedge funds and their broader reach compel a new approach. What is different now is the realization that hedge funds are more and more the same as many other financial investments -- in the type and number of their investors, their strategy, and their problems Connecticut is home to many of the largest hedge funds I have consulted directly with managers, investors and others in the hedge fund industry to determine how best to protect investors while preserving and respecting the important contribution that hedge funds make I am not yet prepared to make a final or definitive or comprehensive recommendation One consistently expressed view is that independent stock analysis has a key role in protecting investors fiom stock price manipulation by hedge funds or anyone else.
In various instances, companies have alleged illegal collusion between hedge funds and stock analysts Overstock com has claimed that a hedge fund paid an investment advisor to issue false, negative repoxts on the company, thereby enabling successful hedge fund short-selling Biovail Corporation has sued some of the same analysts alleging that they aided hedge fund short selling These allegations are only claims in court, unproved and unsubstantiated by public evidence They are a long way from trial, let alone verdicts,
Even if these lawsuits lack any shred of truth, as may be shown, there remains the specter of fraudulent stock analysis used to artificially deflate a stock price in order to benefit hedge fund officials.
I urge the committee to extend the SEC, NYSE, and NASD stock analyst rules to independent research firms and their clients For example, current rules prohibit investment banking divisions fiom directing or reviewing stock analyses by in-house analysts These rules should similarly prohibit clients fiom directing or reviewing stock analyses of an independent research firm. Also, by act of Congress, the committee should toughen existing penalties for fraudulent stock analysis Federal law prohibits any person "to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser " Section 17(b) of the Securities Act Second, regulations have been adopted to address "conflicts of interest that can arise when securities analysts recommend equity securities in research reports and public appearances, in order to improve the objectivity of research and provide investors with more useful and reliable information " Section 15D of the Exchange Act Third, stock brokers are prohibited from inducing "the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance" Section 15 of the Exchange Act
There are significant civil penalties for any violation of these provisions For any violation of the securities law, the maximum fine is $5,000 for an individual or $50,000 for a company per violation For any fraud or manipulation, the maximum fine is $50,000 for an individual and $250,000 for a company per violation If the fraud or manipulation poses a significant risk of substantial losses to other persons, the maximum fine is $100,000 for an individual and $500,000 for a company per violation. I urge the committee to consider adding a civil fine of treble damages Treble damages are a significant deterrent in antitrust law Similar to antitrust cases, a staggering amount of complex evidence is necessary to prove violations of federal laws prohibiting stock manipulation Significant civil penalties would help to ensure substantial deterrence
In addition, the law should prohibit stock analysts fiom hiding assets behind the cloak of limited liability companies Fraudulent analysts and others who engage in such schemes often take profits from one scheme and hide or launder them through other corporations Those illegal profits, like racketeering profits, should be disgorged wherever they are concealed
Finally, SEC and state enforcement agencies should be given the tools and resources to ensure aggressive investigation and enforcement One possible measure is allowing agencies to etai in some civil fines for their enforcement divisions Fraud and stock manipulation cases require significant resources Most cases lack a single star witness or document, e-mail or memo Rather, most fraud and manipulation must be proven by developing a complex set of facts and evidence Complexity and cost are significant obstacles to enforcement actions Enhanced civil penalties, combined with a federal-state partnership in enforcing the securities laws, will help deter fraudulent stock analysis I look forward to working with the committee in this effort
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|From: rrufff||6/28/2006 7:52:47 PM|
|UNITED STATES SENATE |
COMMITTEE ON THE JUDICIARY
Hedge Funds and Independent Analysts:
How Independent are Their Relationships?-
JUNE 28, 2006
TESTIMONY OF MARC E. KASOWITZ
My name is Marc Kasowitz. I would like to thank the
Committee for inviting me to testify this morning concerning the
relationship between certain hedge funds and supposedly
independent securities analysts.
I am the senior partner of Kasowitz, Benson, Torres &
Friedman LLP, a 180-lawyer firm based in New York City with
offices around the country.
Our firm has developed considerable expertise and
experience in the subject this Committee is considering today.
We represent a number of clients who have been severely harmed
by the market manipulation activities of, and collusion among,
certain extremely powerful hedge funds and supposedly
independent securities analysts and research firms.
We already have filed a lawsuit, oil behalf of one of our
clients, against some of those hedge funds and analysts. We are
currently investigating and analyzing claims on behalf of other
clients. While the lawsuit we filed and the other
investigations are addressing the illegal activities of certain
hedge funds, I want to make clear that this is in no way a
vendetta against hedge funds generally. In fact, our firm
represents many hedge funds in a variety of matters. The
concerns raised by our investigations have nothing to do with
those and many other hedge funds, which engage in perfectly
legal and legitimate investment and market activities, and have
nothing to do with truly independent securities analysts.
However, what a number of our clients and other companies
have experienced is truly shocking. Those companies have been
targets of a pattern of egregious collusion between certain
influential hedge funds and supposedly independent analysts --
whose research, in effect, was bought and paid for by the hedge
funds -- in order to further illegal market manipulation
schemes, typically involving short-selling.
Short-sellers are investors who take positions in stocks on
the expectation that the stock price will decline. Here we are
not talking about short-sellers who trade legally based on
honestly-held and reasonably-based opinions derived from the
public record. Instead, we are talking about short-sellers who
engage in schemes to manipulate the market and drive the price
of those stocks down through, among other things, the
dissemination of unfounded or grossly exaggerated negative
research reports and other disinformation.
One particularly effective illegal strategy involves the
following scenario: the short-selling hedge fund selects a
target company; the hedge fund then colludes with a so-called
independent stock analyst firm to prepare a false and negative
"research report" on the target; the analyst firm agrees not to
release the report to the public until the hedge fund
accumulates a significant short position in the target's stock;
once the hedge fund has accumulated that large short position,
the report is disseminated widely, causing the intended decline
in the price of the target company's stock. The report that is
disseminated contains no disclosure that the analyst was paid to
prepare the report, or that the hedge fund dictated its
contents, or that the hedge fund had a substantial short
position in the target's stock. Once the false and negative
research report -- misrepresented as "independent" -- has had
its intended effect, the hedge fund then closes its position and
makes an enormous profit, at the expense of the proper
functioning of the markets, harming innocent investors who were
unaware that the game was rigged, and damaging the target
company itself and its employees.
There are a number of other ways that certain short-sellers
and their analyst co-conspirators proactively manipulate the
market to bring about the very stock price declines from which
they reap huge, illegal profits. We have seen, in increasing
frequency, orchestrated efforts by short-selling hedge funds to
drive down stock prices through surreptitious campaigns aimed at
disseminating unfounded or grossly exaggerated disinformation.
Such disinformation is spread in the financial press or internet
chat boards, in investor conference calls, at analyst
presentations, and at industry conferences. There are organized
campaigns to communicate egregiously false information to a
target company's key board members, largest shareholders,
principal banks and outside auditors. We are aware of instances
in which the perpetrators of such campaigns have sought to
instigate regulatory investigations based on disinformation, in
order to cause more adverse publicity about the targeted
The effects of these orchestrated campaigns can be
devastating. They severely erode investor confidence in the
target companies. That erosion in turn artificially depresses
stock prices, exaggerates market reactions to bad company news,
and suppresses market reactions to positive company news.
Moreover, even the mere existence of such disinformation in the
marketplace invariably leads the media and regulators to
investigate the rumors, and the resulting publicity and
investigations exponentially aggravate the severity and duration
of the negative effect. What results is a self-sustaining
downward pressure on a stock that is extremely difficult -- if
not impossible -- to reverse. And although this pressure is
artificial, the devastating impact on the company and its
shareholders can be and often is enormous.
These attacks consume massive amounts of corporate time,
attention, and resources that would otherwise be devoted to
running the business. The cloud under which companies targeted
by these attacks must operate frequently impairs or destroys
critical business relationships, including relationships with
major customers and other companies, lenders, banks and the
capital markets. The damage to the targeted companies as a
result of these attacks provides huge profits to the shortselling
perpetrators of the disinformation campaigns, to the
great detriment of honest investors.
Those who would prefer to avoid scrutiny of these
aggressive and illegal short-selling market manipulation
practices -- including the role of analysts in these practices
-- seek to obscure the real issue. The real issue is not
whether a robust exchange of investment ideas or legal shortselling should be permitted or enhances market efficiency, and it is not whether truly independent capital market research is
desirable. There is no question that a robust exchange of
information is critical to the capital markets. There is no
question that unbiased and uncorrupted market research is
desirable. There is no question that legal short-selling is an
appropriate and even desirable market activity.
Nor am I suggesting that there is anything wrong with
someone sharing their opinions -- whether positive or critical
concerning a company or investment -- on the internet, at
investor conferences, with journalists, or otherwise.
That is not our position at all. Our position simply is
that all such activities must be done within the law. Just as a
public company or its investors are not permitted to make
material misstatements and omissions for the purpose of
increasing the price of the stock, likewise short-sellers and
their analyst co-conspirators may not spread false, misleading,
unfounded, or exaggerated information for the purpose of
creating or accelerating a decline in stock price.
The problem of corrupted and co-opted securities research
is not a new one, and it has, in recent years, been a major
focus of regulatory attention to the securities markets. In the
late 1990's and early 2000fs, for example, analysts employed by
major investment banks were found to have adjusted their
purportedly "independent" securities research in order to
accommodate companies with which their associated investment
banking operations did -- or sought to do -- business. As a
result of the scandals arising out of these conflicts-ofinterest,
Congress, as part of the Sarbanes-Oxley legislation,
mandated that the Securities and Exchange Commission address
The rules promulgated under Sarbanes-Oxley thus sought to
insulate analysts from the influence of their firmsf investment
banking business. However, an unintended consequence of those
rules was a large increase in the number of purportedly
independent research firms, certain ones of which tout their
purportedly conflict-free "unbiased" analysis, but which provide
anything but. Instead, certain of these firms provide
supposedly independent analyses, which are bought and paid for
-- and even ghost-written -- by the short-selling hedge funds.
If anything, this has made the problem worse. Whereas,
formerly, investors at least knew (or were on notice) that stock
analysts had potential conflicts because of their disclosed
employment by investment banking firms, now these analysts claim
-- falsely -- that their disengagement from those firms has
rendered them "independent." Nothing could be further from the
truth. Instead, these analysts provide custom-made research
designed to further the goals of the short-selling market
manipulators who pay them.
Prior legislation also failed to anticipate the development
of a potentially even more serious conflict arising from the
exploding growth in the hedge fund industry and in the amount of
commission revenues that industry generates for Wall Street
firms providing brokerage services. Hedge funds now control
well over a trillion dollars in capital, and their highly active
trading strategies generate huge trading commissions for Wall
Street's largest firms. As Wall Street's largest customers,
hedge funds exercise enormous power on Wall Street, which
certain hedge funds use to influence in-house analyst
recommendations and to secure privileged access to non-public
information, for the purpose of trading on that information
before it becomes available to the market.
The conduct of certain hedge funds, in collusion with
various analysts, has developed into a pervasive pattern of
market manipulation that is insidious, egregious and widespread.
While civil remedies exist to address the damage caused by such
misconduct on an individual basis, and there is a statutory
basis for prosecuting criminal collusion between hedge funds and
analysts,' this Committee should consider whether further steps
are necessary and appropriate to address and remedy this serious
and growing problem.
1 Sarbanes-Oxley included a broad and clear new securities fraud
provision, 18 U.S.C. § 1348, introduced by this Committee, which provides the Department of Justice with the authority to prosecute securities fraud involving corrupt analysts and those, including hedge funds, that work with them. Under that provision, for example, the United States Attorney in Missouri recently prosecuted a securities analyst who was attempting to extort money from a company he covered in exchange for his agreement to stop issuing negative research reports on the company. The U.S. Attorney in that case correctly observed that "[a] corrupt financial analyst can affect millions of dollars worth of investments and individuals' life savings and retirement plans" and is "intolerable."
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|To: bullNbear who wrote (2067)||6/30/2006 11:25:01 AM|
is it too late to get my certs from td ameritrade? i guess i've been out of the loop and didn't realize in my inexperience that ameritrade would not automatically issue the certs.
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|To: rrufff who wrote (2266)||6/30/2006 1:35:53 PM|
|24 Counts of Hedge Fund Fraud |
June 30 2006
WEST PALM BEACH, FL (HEDGECO.NET) - A hedge fund manager who disappeared three months ago with millions of dollars belonging to at least 500 investors now has 24 additional counts in his federal fraud case.
Kirk Wright, formerly of supposed hedge fund, International Management Associates, skipped town after it became clear to many of his clients, which include several prominent National Football League players, that something was amiss with Interntaional Management’s “management” of their money.
Wright and his company were accused of collecting between $115 million and $185 million from at least 500 investors since 1997 and misleading some of them through false statements and documents, to believe the value of those investments was increasing.
He now also faces 21 counts of mail fraud and three counts of securities fraud. Additionally, Wright and his company face a federal lawsuit from the Securities and Exchange Commission filed Feb. 27 and a civil complaint filed in Georgia state court on Feb. 17. He was arrested May 17 in Miami after three months as a fugitive.
According to company website, Wright received his master’s degree from Harvard University and is an established financial adviser and former vice president of the global consulting practice at Kaiser Associates, an international consulting firm.
Examples of Wright’s alleged duplicity are listed in court documents. When several investors demanded to see brokerage account statements from hedge funds in October, Wright produced statements he said were from online brokerage Ameritrade, showing over $166.6 million in assets spread across five hedge funds. To date, authorities and creditors have located less than $200,000.
In hindsight, there were many red flags at International Management: unusually consistent high returns, vague descriptions of investment strategies, aggressive marketing, no auditing, and secretive behavior by the manager. Not to mention the lavish wedding reception at his sprawling home, the $55,000 engagement ring his bride wore, the entertainment suites at Atlanta Falcon football games, Atlanta Hawk basketball games, and concerts, the Bentley, the Jaguar, the Aston Martin, the BMW, and the Lamborghini, and as proof of his investment returns, only photocopied spreadsheets.
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