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To: StockDung who wrote (2261)6/28/2006 5:12:08 PM
From: rrufff  Respond to of 2593
NYSE to prosecute stock loan abuses, Ketchum says
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.

To: StockDung who wrote (2261)6/28/2006 5:18:36 PM
From: rrufff  Read Replies (1) | Respond to of 2593
Suits Focus on Street's Role
In 'Naked Shorting'

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.