Aaron Morgan Group Blog

Number of Securities on Threshold SHO List Decreases: The Real Reason

            Last week we published “Selective Transparency:  Who is the SEC Really Protecting” which included the following chart correlating the date and number of securities remaining on the Threshold SHO List with recent market closing prices for the DJIA and NSDQ.[1]

Date		SHO		DJIA		NSDQ
9/18/08		428		11,019.69		2,199.10
9/19/08		441		11,388.44		2,273.90
9/22/08		443		11,015.69		2,178.98
9/23/08		437		10,854.17		2,153.34
9/24/08		432		10,825.17		2,155.68
9/25/08		436		11,022.06		2,186.57
9/26/08		431		11,143.13		2,183.34
9/29/08		414		10,365.45		1,983.73
9/30/08		392		10,371.58		2,091.88
10/1/08		367		10,831.07		2,069.40
10/2/08		343		10,482.85		1,976.72
10/3/08		323		10,325.38		1,947.39
10/6/08		298		9,955.50		1,862.96
10/7/08		267		9,391.67		1,754.88
10/8/08		243		9,042.97		1,740.33
10/9/08		230		8,523.27		1,645.12
10/10/08		227		8,451.19		1,649.51
10/13/08		237		9,387.61		1,844.25
10/14/08		237		9,310.99		1,779.01
10/15/08		209		8,577.91		1,628.33
10/16/08		202		8,979.26		1,717.71
10/17/08		198		8,852.22		1,711.29

            We theorized that something more than naked short sellers securing valid “locates” was behind the decline in the number of securities on the Threshold SHO List but the information necessary to verify our opinion was not available.  The information, the “short interest” report for October 15, 2008 was released on Friday, October 24^th and like others, we were waiting for it.  Before presenting and discussing our findings and analysis let’s first dissect the requirement of how a security qualifies for inclusion on the infamous Threshold SHO List.

           Rather than try to paraphrase the SEC, the following information was found in their website in a 2007 release entitled “SEC Votes on Regulation SHO Amendments and Proposals; Also Votes to Eliminate “Tick” Test. 

“A threshold security means an equity security registered or required to file reports with the Commission for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and that is equal to at least 0.5% of the issue's total shares outstanding.”

http://www.sec.gov/news/press/2007/2007-114.htm

            So that is how a security gets on the list, interesting.  That means that this illegal action had to be going on for more than five consecutive settlement days at a “registered clearing agency” where the aggregate size was “10,000 shares or more” which had equal to no less than “0.5%” of the outstanding shares. 

            Now I know why they call it the “Threshold SHO List” and not the “Naked Shorted List”, “Failed to Find a Locate List” or “Who Gives a Damn About the Rules List”.  You have to pass a “threshold” test to get on this list.  If less than 10,000 shares of your stock is naked shorted you never make the list.  If the total number of illegally naked shorted shares is less than ½ of 1% of the outstanding shares you never make the list.  Think about that one for a second.  The threshold for a company with 50 million shares outstanding is 250,000 shares; that’s enough for a dishonest trader to make money from forever, especially if the stock is closely held and thinly traded.  If the clearing firm is not registered you can never make the list and unless the naked position existed for at least five consecutive settlement days, your stock is not included.  I have to think about that one a little longer and determine how the “T+3” requirement affects the five day period.

In any case, these rules augment the abuses we have been subjected to. Honey, get me out the keys to the “eighteen wheeler” as this Threshold SHO List has loopholes big enough to drive our Mack Truck through . . . and every participant in this illegal scheme knows it and takes advantage of it.

            The size of the Threshold SHO List, without these restrictions and conditions, would basically be every single security that is traded on any public exchange that is cleared by the DTCC.  It is not the miniscule number of securities that comprise the Threshold SHO List that we should be concerned about although they are certainly the most worthy because they passed the “test”.  We should be worried about the exclusionary manner in which the rules have been established.  By creating and implementing threshold levels, the SEC has in essence given its consent to illegally naked short sell equity securities in our markets that do not rise to the level of what is an exclusionary test.  The failure to universally enforce and police the inherently illegal practices of naked short selling amounts to a breach of duty and responsibility.  In essence, the SEC has turned its head with respect to the issue that has turned out exchanges from being the engines that drive capital formation into templates and tools of capital destruction There is absolutely no excuse for this and more reason than not to expose all who disregard or fail to enforce the law.

            Folks at the SEC, if you are reading this, and I know you are, I’ve got a way that you can do even less work for the amount of money you are paid.  I’ve figured out a way that you would never have to publish the Threshold SHO List again; require a firm “locate” number before being able to enter a short sale transaction.  And now that our diatribe is complete, we return you to our regularly scheduled article that illustrates what really caused securities to fall off the Threshold SHO List over the recent period.

            The last article published, “Selective Transparency:  Who is the SEC Really Protecting” contained the following paragraph:

“Now ask yourself a question; why did the number of securities drop precipitously during this period?  Was it because the entities that were naked short securities located bona fide shares to meet the T+3 requirements of their open transactions?  I don’t think so.  Do you think perhaps, since the stock market and the securities that comprise it essentially crashed, that the entities that employed the illegal manipulative techniques of naked short selling just covered their shares at a huge profit?  Yes I think that is exactly what happened.” 

            That was my hypothesis but the information to prove or disprove my theory was not available until Friday, October 24^th.  Well, here’s the proof.

Stock		Days on		Short Interest		Short Interest		Short Interest		Percentage
Symbol		List		9/15/2008		9/30/2008		10/15/2008		Decrease
PII		188		13,565,700		12,370,000		10,900,900		19.64%
CWCO		170		1,399,600		1,321,200		1,117,100		20.18%
GHL		163		8,257,700		7,665,300		6,922,300		16.17%
SPWRA		145		18,335,400		13,775,600		12,224,400		33.33%
UCBI		133		9,960,200		8,627,900		7,849,700		21.19%
NFP		103		7,648,800		5,715,200		5,284,600		30.91%
WBMD		102		4,769,100		4,044,300		3,689,200		22.64%
AMWD		74		3,054,200		2,242,000		2,177,500		28.70%
FR		68		13,260,400		13,409,500		8,041,900		39.35%
NGPC		64		2,148,700		1,998,000		1,332,400		37.99%
PNRA		64		10,394,000		9,211,700		8,953,300		13.86%
DDS		63		11,888,100		13,035,500		15,623,000		-31.42%
IRBT		55		3,851,500		2,693,100		3,231,900		16.09%
ATLO		50		288,100		271,100		192,600		33.15%
GLAD		50		1,650,500		1,539,700		1,139,700		30.95%
CTCT		50		6,502,400		5,663,600		5,393,500		17.05%

            Of these sixteen securities that prior to September 17^th were on the Threshold SHO List, but subsequent to October 17^th were no longer on the list, fifteen showed average decreases in their short interest reports of 21.23%.  The reason these securities were removed from the list is simple to determine; the shares that were naked short sold were covered in the open market.

            Just for fun, we took a look at what happened to the price of the shares of these securities from the time they first respectively entered the Threshold SHO List through October 17^th.  Of the sixteen securities, fifteen decreased in price and one increased, Greenhill & Co., Inc., but only by a little more than a percent.  The others decreased in value by an average of 31.00%.

Stock		Days on		Price / Share		Price / Share		Price / Share		Percentage
Symbol		List		9/17/2008		10/17/2008		1st Day on List		Decrease
PII		188		$              30.03		$              30.65		$              43.92		30.21%
CWCO		170		$              12.01		$              12.75		$              22.75		43.96%
GHL		163		$              65.34		$              63.12		$              62.28		-1.35%
SPWRA		145		$              60.75		$              44.68		$              76.87		41.88%
UCBI		133		$              14.78		$              15.35		$              16.11		4.72%
NFP		103		$                8.20		$                8.73		$              24.42		64.25%
WBMD		102		$              18.52		$              14.00		$              31.04		54.90%
AMWD		74		$              17.45		$              18.42		$              20.97		12.16%
FR		68		$              11.46		$                6.85		$              28.41		75.89%
NGPC		64		$              12.03		$              12.43		$              15.70		20.83%
PNRA		64		$              41.09		$              39.25		$              46.15		14.95%
DDS		63		$                6.17		$                6.30		$              10.42		39.54%
IRBT		55		$              12.42		$              12.02		$              14.43		16.70%
ATLO		50		$              26.82		$              22.16		$              24.91		11.04%
GLAD		50		$              11.60		$              12.50		$              15.47		19.20%
CTCT		50		$              13.63		$              14.82		$              17.97		17.53%

            By the way, as of Friday October 24^th only 112 securities remained on the Threshold SHO List, a little more than 25% of the number that comprised the list as of September 17^th.  I guess, through the auspices of the SEC, the DTCC and who comprise the membership of the exchanges and their intertwined regulatory and prime broker client base, dishonesty pays, and quite well.

Note:  We started Citizens for Wall Street Reform (“CFWSR”), a non-profit Social Welfare Organization formed and registered under §501(c)(4) of the IRS Code.  CFWSR was established to consolidate the efforts of shareholders and executives of publicly traded companies whose securities have been affected by the illegal practice of naked short selling and related trading practices.

For more information go to:

http://aaronmorgangroup.typepad.com/citizens_for_wall_street_/

The website www.cfwsr.org will be available shortly so stay tuned.

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[1]  Please note, the number of securities on the SHO List for 10/17/08 was originally reported to be 72.  This number was revised after the publication of our article.  The above chart represents the change as reported.

Selective Transparency: Who is the SEC Really Protecting?

            In deference to SEC Chairman Christopher Cox, his October 19, 2008 “Swapping Secrecy for Transparency” Op-Ed opinion does address issues of concern as they relate to the credit-default-swap markets.  Let’s hope he is a little more successful with this initial statement of intent than he was with respect to the public dissemination of short positions of larger hedge fund and investment concerns.  A portion of his most recent editorial statement follows:

“Congress needs to fill this regulatory hole by passing legislation that would not only make credit-default swaps more transparent but also give regulators the power to rein in fraudulent or manipulative trading practices and help everyone better assess the risks involved.

Congress could require that dealers in over-the-counter credit-default swaps publicly report both their trades and the value of those trades. This would make the market more transparent, and make it easier for everyone engaged in credit-default swaps to assess their value. It would also provide regulators with the information they need to uncover unfair or fraudulent practices and to monitor risk.

Then, the Securities and Exchange Commission should be given explicit authority to issue rules against fraudulent, deceptive or manipulative acts and practices in credit-default swaps.

Finally, Congress could provide support for federal regulators to mandate the use of one or more central counterparties — financially stable clearance and settlement organizations — and exchange-like trading platforms for the credit-default swaps market. As it is now, it is often impossible even to know who stands on the other side of a swap contract, and this increases the risk involved. We at the S.E.C. are already working with the Federal Reserve, the Commodity Futures Trading Commission and industry participants to accomplish these goals on a voluntary basis, using the authority we currently have.

Because of the truly global nature of the over-the-counter derivatives market, we will need to work closely with governments in other major markets. The climate for such cooperation is good, because the cross-border impacts of the current market problems are obvious to all.

Transparency is a powerful antidote for what ails our capital markets. When investors have clear and accurate information, and when they can make informed decisions about where to put their resources, money and credit will begin to flow again. By giving regulators the authority they need to bring the credit derivatives market into the sunshine, we can take a giant step forward in protecting our financial system and the well-being of every American.”

            Cox recently had the opportunity to bring the issue of “naked short selling” out of the “darkness” and into the “sunshine” but the opaque curtains that enshroud this illegal practice remain.  Selective transparency does not work and suggests that Wall Street brokerages, the DTCC and hedge fund behemoths still call the shots regardless of the initial intentions of the SEC.  Like the E.F. Hutton commercial of years gone by, “when the hedge fund consortium talks, the SEC listens.”

On or about the middle of September of 2008 it appeared that Cox was heading in the right direction with his statement suggesting the direct dissemination of information that would reveal short positions at large investment concerns but something got in his way.  A review of SEC press releases and statements made over the last month coupled with a correlative analysis of the number of securities on the SHO List and respective closing prices of the DJIA and NSDQ tells the story better than words ever could.

http://www.sec.gov/news/press/2008/2008-209.htm

            Chairman Cox’s diatribe began in earnest on September 17, 2008 when, in addition to announcing initiatives to investigate fraud and manipulations in the nation’s securities markets, he included the following paragraphs:

"In order to ensure that hidden manipulation, illegal naked short selling, or illegitimate trading tactics do not drive market behavior and undermine confidence, the SEC today took several actions to address short selling abuses," Chairman Cox continued. "In addition to these initiatives, which will take effect at 12:01 a.m. ET on Thursday, I am asking the Commission to consider on an emergency basis a new disclosure rule that will require hedge funds and other large investors to disclose their short positions. Prepared by the staffs of the Division of Investment Management and the Division of Corporation Finance, the new rule will be designed to ensure transparency in short selling. Managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. The managers currently report their long positions to the SEC."

Chairman Cox continued, "Director Thomsen and the Division of Enforcement will also expand their ongoing investigations by undertaking a series of additional enforcement measures against market manipulation. The Enforcement Division will obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all of their communication records in anticipation of subpoenas for these records."

            Like many others, we thought this was a promising development that would clearly identify those who perpetrated these frauds bringing transparency to the system for all who were subjected to the naked short selling manipulation.  It almost seemed too good to be true and unfortunately, within a short period of time, it was. 

http://www.sec.gov/news/press/2008/2008-210.htm

            

            The very next day Cox made another statement, the most important sentence of this release is as follows:

“We announced emergency plans for a rule to ensure public disclosure of short selling positions of hedge funds and other institutional money managers.”

            I could not believe what I was reading.  The SEC was following through with its recent pronouncement and was going to make “public” the short selling positions of hedge funds and other institutional money managers.  Unfortunately, my rekindled enthusiasm and reaffirmation of good versus evil as to who the SEC really protected was to be short lived.  Before the markets opened on Monday, September 22^nd the investment and hedge fund managers, after what must have been one hell of a weekend country club bridge tournament, regained control of the process as exhibited in a rare Sunday, September 21^st press release from the SEC.

http://www.sec.gov/news/press/2008/2008-217.htm

            The cracks in the intentions of the SEC armor began to appear as stated:

“In addition to making technical amendments, the revised order also provides that the information disclosed by investment managers on new Form SH will be nonpublic initially, but will be made available to the public via the Commission’s EDGAR website two weeks after it is electronically filed with the Commission.

The amended order will take effect at 12:01 a.m. EDT on Monday, Sept. 22, 2008.

Under the order, covered institutional money managers will be required to report any new short selling in all equity securities, except options, that are admitted for trading on a national securities exchange or quoted on the automated quotation system of a registered securities association. If any new short sales are effected on September 22 through September 27, the managers are required to submit a report on new Form SH to the Commission on Sept. 29, 2008. These managers are already required to report their long positions in these securities on Form 13F.

The Commission may extend the emergency order beyond its current effective period of 10 business days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration.”

http://www.sec.gov/news/press/2008/2008-235.htm

            The winds of change stopped blowing in the direction of public disclosure in early October.  The SEC continually modified its language and subsequently the public’s ability to review the required Form SH filings with language as follows:

“The Commission notes that short selling plays an important role in the market for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities, and importantly, limiting upward market manipulations. In addition, there are circumstances in which short selling can be used as a tool to mislead the market. For example, short selling can be used in a downward manipulation whereby a manipulator sells the shares of a company short and then spreads lies about a company's negative prospects. This harms issuers and investors as well as the integrity of the market. This kind of manipulative activity is particularly problematic in the midst of a loss in market confidence.

Specifically, the emergency orders cover the following:

      Temporary requirement that institutional money managers report to the SEC their new short sales of certain publicly traded securities. This order will also be extended, to 11:59 p.m. ET on Oct. 17, 2008, but the Commission intends that the order will continue in effect beyond that date without interruption in the form of an interim final rule. The Commission will seek comments on all aspects of the anticipated rulemaking. Disclosure under the emergency order will be made only to the SEC.”
 

http://www.sec.gov/rules/other/2008/34-58724.pdf

            The nails in the coffin of the Form SH disclosure to the public were firmly hammered in on October 2^nd with the following language:

“The Commission believes that the nonpublic submission of Form SH may help prevent artificial volatility in securities as well as further downward swings that are caused by short selling, while at the same time providing the Commission with useful information to combat market manipulation that threatens investors and capital markets.  Also, the Commission has considered further reasons to maintain the information as nonpublic in the current market environment, and is concerned that publicly available Form SH data could give rise to additional, imitative short selling that was not intended by the Commission’s Order.  Accordingly, the Commission has determined that Forms SH filed under the Order, including those that were due on September 29, 2008 will remain nonpublic to the extent permitted by law without the filer needing to submit a confidential treatment request.” 

            This Order, pursuant to Section 12(k)(2)(C) of the Exchange Act, terminated at 11:59 PM on Friday, October 17, 2008.

            The title of this article, “Selective Transparency:  Who is the SEC Really Protecting” relates to the action, or inaction as it may be, as it relates to providing critical information to the public.  Before concluding with opinion as to why Forms SH remained in the control of the SEC and were never disclosed to the public, take a look at the following chart which illustrates the date and number of securities remaining on the SHO List with recent correlative market closing prices for the DJIA and NSDQ.

Date		SHO		DJIA		NSDQ
9/18/08		428		11,019.69		2,199.10
9/19/08		441		11,388.44		2,273.90
9/22/08		443		11,015.69		2,178.98
9/23/08		437		10,854.17		2,153.34
9/24/08		432		10,825.17		2,155.68
9/25/08		436		11,022.06		2,186.57
9/26/08		431		11,143.13		2,183.34
9/29/08		414		10,365.45		1,983.73
9/30/08		392		10,371.58		2,091.88
10/1/08		367		10,831.07		2,069.40
10/2/08		343		10,482.85		1,976.72
10/3/08		323		10,325.38		1,947.39
10/6/08		298		9,955.50		1,862.96
10/7/08		267		9,391.67		1,754.88
10/8/08		243		9,042.97		1,740.33
10/9/08		230		8,523.27		1,645.12
10/10/08		227		8,451.19		1,649.51
10/13/08		237		9,387.61		1,844.25
10/14/08		237		9,310.99		1,779.01
10/15/08		209		8,577.91		1,628.33
10/16/08		202		8,979.26		1,717.71
10/17/08		74		8,852.22		1,711.29

            

            It does not take a rocket scientist to see what transpired between September 17, 2008 and October 17, 2008.  Christopher Cox had a pretty good idea when he suggested public disclosure of both the short positions and the entities that controlled those positions that were of a certain size or investment management structure.  His proclamation never made it through the weekend before the real powers that be, major Wall Street firms, the DTCC, prime brokers, major hedge funds and institutions, and possibly the investment clients they represent came knocking on his door requesting the public window be closed.

            Step back and take a look at the chart.  The number of securities on the SHO List has declined dramatically, from a high of 443 on September 22, 2008 to only 74 on October 17, 2008.  The DJIA and NSDQ dropped by approximately 20% during this period as well. 

Now ask yourself a question; why did the number of securities drop precipitously during this period?  Was it because the entities that were naked short securities located bona fide shares to meet the T+3 requirements of their open transactions?  I don’t think so.  Do you think perhaps, since the stock market and the securities that comprise it essentially crashed, that the entities that employed the illegal manipulative techniques of naked short selling just covered their shares at a huge profit?  Yes I think that is exactly what happened. 

 

Remember, this all took place under the watchful eye of the SEC and they knew which hedge fund and investment entities were short which securities.  The SEC would have known which hedge fund and investment entities were able to secure legal “locate” numbers versus those that simply closed out their naked shorts in the marketplace.  The initial Form SH order was due prior to the markets opening on September 29, 2008.  More than 431 securities remained on the SHO List at that time and the markets had not yet begun to crash.  Was there coincidence in all that transpired in the markets or was there something more?  We have a couple theories that need a few more weeks of development to be completed but it is apparent that someone did not want the public to know the cards they were holding.  Thus, transparency was available to privileged few who again, prospered while the public-at-large remained susceptible to their manipulations.  In any case, it is obvious that the information that would answer these questions is available and it is time the public was able to access it.

            The last thing any of these hedge fund and investment entities wanted, especially at this most critical time, was transparency.  The dissemination of this information would have etched a more negative image of this illegal practice of these hedge fund moneyed market participants.  It also would have provided a direct conduit for civil legal action against the perpetrators of naked short selling resulting in the DTCC, the prime brokers and other responsible parties being subject to subpoenas that would open up their transaction books to the public.  There actually might have been viable platforms created that “redistributed” the privatized wealth, the absolute last thing these Robber Barons of today’s financial markets would ever want to happen.  Quite frankly, it is time that it happens.  The information is there and it is time to storm the gates of the SEC and get the transparency we all deserve.

            There is much more to this story but only so much that anyone reading a blog of this nature has the time to take in and understand.  As you have come to know this site, we dig a little deeper than just reporting the news as it relates to the problem.  We “connect the dots” and will continue to do so.  It was never the fact that securities appeared on the SHO List that created the problem.  It was the fact that naked short selling of securities was ever allowed to take place, despite the rules and regulations that prohibited this action that give rise to the list becoming a necessity.

            The solution to preventing naked short selling is simple; require a firm “locate” number before being able to enter a short sale.  While this may solve the naked short selling problem more issues remain.  For example, the exploitation of naked short selling has created a plethora of “phantom” shares that grossly overstate the actual number of shares in existence.  How the number of shares in existence is reduced and again accurately relate to the actual number of shares issued and outstanding will be addressed in subsequent articles.

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Commentary on SEC Short Selling Antifraud Rule 10b-21

            Although not defined in the federal securities law, naked short selling occurs when a seller misrepresents its short sale locate source or ownership of shares resulting in the failure to deliver securities at time of settlement.

            Finding its teeth in Rule 203 of Regulation SHO, the locate requirement provides that “[a] a broker or dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account unless the broker or dealer has: (i) Borrowed the security, or entered into a bona-fide arrangement to borrow the security; or (ii) Reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due; and (iii) Documented compliance with this paragraph (b)(1).”

            Rule 10b-21 is narrowly tailored to specify that it is unlawful for any person to submit an order to sell a security if such person deceives a broker-dealer, participant of a registered clearing agency, or purchaser regarding its intention or ability to deliver the security on the date delivery is due, and such person fails to deliver the security on or before the date delivery is due. Scienter is a necessary element for violation of the rule.  Violation of the rule will occur only if a fail to deliver results from the relevant transaction.

            If the seller deceives a broker-dealer about the validity of its locate source, the seller will be liable under Rule 10b-21 if the seller also fails to deliver securities by the date delivery is due.  The broker-dealer will be responsible for its own account should it effect a short sale but not for the client seller for whom a trade is transacted.  A problem remains as the seller’s clearing broker has a responsibility to meet the firm’s Continuous Net Settlement (“CNS”) delivery requirement.  It is difficult for a broker-dealer to determine which customer transactions or accounts give rise to a fail to deliver in the CNS system.  Because fails to deliver in the CNS system are netted with pending deliveries, some sellers may be able to postpone delivery is another customer’s purchase is received the same day. Although this rule seeks to close that loophole, it is unlikely that will be the result.

            Rule 10b-21 does eliminate the options market maker exception but bona fide market makers remain exempt from the locate requirement.  Broker-dealers (and market makers) acting for their own accounts are however subject to the new rule.

            I can still drive a truck through remaining loopholes.  No one has addressed the issues of parking or freeriding shares.  It will not be that difficult for illegal naked short sellers to continue to flip positions from one account to another, controlled by the same or another entity, within the T+3 settlement period. Offshore accounts will continue to serve as “parking” places for shares as well since restrictions in the operation of these entities are basically non-existent.

            There is a simple rule than can be employed with respect to eliminating this problem.  In as much as when a “normal” customer of a brokerage firm wants to buy stock they need to have money in the account.  If they want to sell stock, they need to have the shares in the account.  There is no reason for anyone to be able to sell a stock short without first securing a “locate” number.  Eliminate any probability that a locate will not be found and you take a major step forward in stopping the practice of illegal naked short selling.  The reason this is not being done, coupled with the reason that broker-dealers are not being held liable for the actions of their clients under this new Rule10b-21 is simple.  Broker-dealers and even the entities that clear their trades make money on volume.  Cut down the number of illegal naked short sales, the parking trades associated with how the T+3 deadline is avoided and the freeriding trades that are opened then closed intraday and Wall Street makes less money.

            So again, I have to ask myself, who is the SEC really protecting?

http://www.sec.gov/rules/final/2008/34-58774.pdf

Where One Plus One Equals More Than Two

          When working with financial statements, I learned some time ago that issued shares was the number of shares a company had made available to the investment world.  I also learned that the float was the number of shares that were actually available to trade, so to speak.  We added the number of shares owned by insiders and together with the number of shares owned by institutions, subtracted the sum from the number of shares issued and that was another way to get the approximate float.  As a dear old professor of mine, Dr. Allen Meltzer would say when a student came up with an absolutely ridiculous answer, "what a fool I have been."

          Well from the looks of this chart we have all been fools, or perhaps better put suckers.  For the purposes of this chart, let's assume that the entire number of shares issued equals the float versus the real world analysis given above.  There are 39 equities listed below, all of which, at some time or another have been on the SHO List we have all come to know because these stocks are the victims of illegal forces.  We could not resist this exercise and took the time to assemble the latest information from www.j3sg.com and www.finance.yahoo.com as it relates to the companys' financials and put together this little demonstration.  You see, when a stock is attacked by the forces of naked shorting something very strange often happens.  Sometimes the number of shares owned by insiders and institutions equals more than 100% of the total stock issued or as we call it in this chart, the float.  Either way, as shown here for these 39 stocks, on average the Total % of the Float Outstanding is 129.49%.

          Amazing right, but there is something more amazing; the fact that there has not been a greater incidence of corporate shareholder votes where the number of votes cast is not greater than the total number issued.  Could it be that the DTC is actually aware of the number of "real" shares on the books and only those "real" shares are the ones that are voted.

          Professor Allen Meltzer could be known to many of you as for years, he was the Chair of the Shadow Open Market Committee from 1973 to 1999, the group that essentially shadowed the Federal Reserve.  Great teacher, tremendously logical individual and his use in this example gives rise to what is needed, a watchdog group of people, perhaps called the Shadow DTC/SEC Committee to make sure those in power, who may be a little too intertwined have a solid, fundamental oversight group to kind of "look over their shoulder."  Might be worth a shot . . . but then again what do I know, quite often Meltzer was talking about me when I asked a question that did not always make sense . . . but then again, I remember a few remarks that changed the way he thought, like this one.

 

Symbol	Price	Capitalization	Avg. Volume	% Float	% Float	Total % Float	% of Total
		(In Billions)	(In Millions)	Insider Owned	Instit. Owned	Outstanding	Cap Traded
HANS	$24.82	2.29	3.332	3.38%	96.84%	100.22%	3.61%
UCBH	$5.19	0.573	3.332	1.58%	99.72%	101.30%	3.02%
MTH	$14.00	0.43	1.282	6.71%	94.90%	101.61%	4.17%
MTN	$26.15	0.966	0.557	0.81%	101.37%	102.18%	1.51%
CREE	$20.93	1.84	1.38	2.18%	101.10%	103.28%	1.57%
GM	$4.89	2.77	27.855	0.14%	103.84%	103.98%	4.92%
COLM	$35.72	1.24	0.373	59.96%	44.76%	104.72%	1.07%
EMKR	$3.61	0.28	1.922	12.35%	92.95%	105.30%	2.48%
PII	$35.11	1.14	0.645	2.08%	103.53%	105.61%	1.99%
FTK	$3.76	0.087	0.414	10.18%	96.44%	106.62%	1.79%
SPWRA	$43.01	3.66	2.877	51.77%	56.72%	108.49%	3.38%
USNA	$41.89	0.683	0.259	67.33%	41.59%	108.92%	1.59%
RWT	$15.33	0.514	0.701	0.77%	110.13%	110.90%	2.09%
KMX	$10.33	2.25	3.265	1.31%	109.66%	110.97%	1.50%
HOV	$5.20	0.399	3.766	18.10%	93.49%	111.59%	4.91%
LULU	$19.56	1.33	1.143	0.00%	112.97%	112.97%	1.68%
EWBC	$13.59	0.863	1.864	1.98%	112.13%	114.11%	2.94%
MEG	$11.50	0.263	0.267	20.79%	96.66%	117.45%	1.17%
TLB	$9.00	0.498	1.289	58.04%	60.23%	118.27%	2.33%
LZB	$7.41	0.381	0.373	2.99%	117.08%	120.07%	0.73%
AMWD	$18.02	0.253	0.088	38.78%	81.68%	120.46%	0.63%
CCC	$16.70	0.688	0.768	8.44%	112.42%	120.86%	1.86%
SHLD	$70.92	8.97	3.124	11.25%	112.82%	124.07%	2.47%
PNRA	$39.24	1.2	1.093	3.73%	120.84%	124.57%	3.57%
LFG	$12.40	0.192	0.628	3.29%	121.75%	125.04%	4.06%
TRLG	$16.90	0.412	0.902	7.62%	119.29%	126.91%	3.70%
PFCB	$24.24	0.576	0.356	0.89%	131.95%	132.84%	1.50%
PRAA	$34.19	0.525	0.173	24.47%	108.90%	133.37%	1.13%
NFP	$10.76	0.427	0.637	25.47%	110.96%	136.43%	1.61%
CALM	$24.32	3.98	1.089	38.61%	102.39%	141.00%	0.67%
ITMN	$14.33	0.563	0.512	32.61%	116.52%	149.13%	1.30%
LTM	$17.90	0.709	1.088	14.16%	135.44%	149.60%	2.75%
VPRT	$26.00	1.15	0.935	4.53%	154.79%	159.32%	2.11%
NTRI	$15.09	0.446	1.006	41.63%	120.11%	161.74%	3.40%
NILE	$41.96	0.611	0.35	14.49%	151.28%	165.77%	2.40%
ZLC	$20.00	0.638	1.059	1.88%	168.88%	170.76%	3.32%
JOSB	$27.66	0.503	1.693	2.95%	185.60%	188.55%	9.31%
ARTC	$24.18	0.644	1.186	1.30%	199.36%	200.66%	4.45%
AGO	$10.25	0.932	2.775	113.99%	136.48%	250.47%	3.05%
Average		1.176	1.958	18.27%	111.22%	129.49%	2.61%

Omgeo: Turning Transparency into Opaqueness

            Omgeo, DTXX’s joint venture with Thomson Financial, is the leading provider of post-trade, pre-settlement institutional trade management solutions, processing over one million trades per day and serving 6,000 investment managers, broker/dealers and custodians in more than 40 countries.  Take the time to get a little more familiar with Omgeo before you read further.

http://www.dtcc.com/products/omgeo/

http://www.thomsonreuters.com/products_services/financial/omgeo

http://www.thomsonreuters.com/business_units/financial/

            Now that you are back, perhaps you were able to observe a few “overlaps” in structure as Omgeo relates to its parent company Thomson Reuters and its partner the DTCC.  Let’s see if we can attach the moving parts.  Omgeo, the trade management solutions provider, the company that streamlines everything from order entry to custodial updates, is associated with Reuters; that’s right, the company that brings you the news. 

            Marianne Brown, President and CEO of Omgeo, recently opined that “penetration in the hedge fund marketplace has been phenomenal.”  The products offered by Omgeo allow for hedge funds to utilize multi-prime-broker relationships.  She was not kidding as evidenced by a recent press release that takes any remaining transparency and turns it into darkness:

DTCC Launches New ID Net Service to Streamline Clearance and Settlement of Affirmed Institutional Equity Trades         

New York, August 11, 2008 – By combining and netting the broker side of affirmed institutional equity trades, ID Net, a new joint service offering of The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC), streamlines clearance and settlement, cuts customer costs and reduces fails associated with affirmed institutional equity trades. The U.S. Securities and Exchange Commission recently approved rule changes from DTC and NSCC allowing them to launch ID Net.

Institutional Transactions and Eligible Trades

Unlike exchange trades and most prime broker trades, institutional delivery transactions do not currently flow through NSCC’s Continuous Net Settlement (CNS) automated book-entry accounting system; rather, these institutional transactions usually settle at DTC. The new ID Net service leverages the efficient netting and settlement capabilities of NSCC with the existing processing of DTC, allowing broker/dealer customers to net all eligible affirmed ID transactions against their other CNS transactions, if any, reducing the movements to and from a firm’s account.

With the new ID Net screens made available for customers in early June, the first trades eligible to settle via the service were on the settlement date of Monday, June 16.

Initially, only equity CUSIPs eligible for CNS — which have also been affirmed before 9 p.m. on T+1 — will be combined in the ID Net service. Corporate and municipal bonds and unit investment trust (UIT) issues will be excluded. Also excluded are transactions settling on the distribution day of a new issue, and transactions in issues undergoing a mandatory or voluntary reorganization, in CUSIPs with a CNS buy-in, and in securities appearing on one of the exchanges’ lists of “threshold” securities under Reg SHO. However, even leaving out these trades, it is estimated that more than 250,000 trades a day could be eligible for the ID Net service.

Collaborative Offering

A voluntary service, ID Net will be offered jointly by DTCC’s NSCC and DTC subsidiaries: broker/dealers must be participants of both NSCC and DTC, and banks must be DTC participants. All ID Net customers will be required to enter into separate "ID Net Subscriber" agreements with NSCC and/or DTC, as applicable, governing their use of the service.

            Then, on September 18, 2008 the push to sell the service cross sector and industry takes flight.  Omgeo recently announced that John Burchenal, formerly director of STP services at Thomson Financial TradeWeb, a person who has held position prior at Citibank, DLJ and Lehman Brothers, is on the trail.  Entitled “Hedge Funds Newest Constituency to Embrace Electronic Trade Processing” his executive blog reads more like a sales pitch.

http://www.omgeo.com/resources/byline.php?a=7&p=PXSKUN2LZA

            

            So let’s see, what we have here is a further intertwining of not just the financial players of the industry entrenched in the DTCC web, we have Thomson Reuters riding “shotgun” as Omgeo takes the reins and gives every institution, from hedge funds to prime brokers, a platform that essentially allows them to self-clear any and all transactions.  I am starting to see why the percentage of “IntraMarketSwap” trades is increasing.

            You would think with all of the rhetoric surrounding the issue of naked shorting the DTCC, NSCC, Omgeo or any associated entity, up to and including the SEC would “invent” a way to control this problem.  The answer why is obvious, they do not want to.

When Exceptions Create the Rules

            When you have the opportunity review The Depository Trust & Clearing Corporation (“DTCC”) website found at www.dtcc.com.  There is a plethora of information, most of which is very interesting.  Excerpts of selected articles pertaining to how the DTCC handled short sale exceptions and an annual operational review letter are discussed below.  To add a little levity test our intelligence on the DTCC Matching Quiz following this discussion and discover just how intertwined the securities industry is.

            The first article, one submitted in early 2003, addresses the “alleged short selling” of issuer’s shares.  Relating to companies who sought to remove themselves from being held hostage to the policies of The Depository Trust Company (“DTC”), a subsidiary of the DTCC, the following statements were released:

·         The rules governing short selling are the same in a physical environment as they are in a book-entry environment.  Moving to physical securities does not inhibit short selling in any way.  The rules governing short selling are the same, and are made and enforced by the SEC and major markets.  Those are Rule 3370 for NASD members and Rule 440B for New York Stock Exchange members.

·         DTC rules do not allow its participants to be short in deliveries to other participant firms.  While a brokerage firm can lend shares to an investor, the brokerage firm cannot be short in delivering shares to another brokerage firm through DTC.  If necessary, a firm can and must borrow shares from one or more brokerage firms that currently have enough shares in inventory to lend.  Brokers who fail to deliver shares owed at DTCC are subject to penalties.

In a following footnote, the DTCC goes on to state that, “an investor borrows stock certificates for delivery at the time of short sale.  If the seller can buy that stock back later at a lower price a profit results; if the price rises, however, a loss results.”  In continuing to describe the interaction, the DTCC in the next paragraph continues with:

Loans of shares can be made by a broker from his own inventory, from the margin account of another customer, or shares borrowed from another broker.  These shares are used to make settlement with the buying broker within three days of the short sale transaction, and the proceeds are used to secure the loan.  “Naked short selling” is alleged when securities are sold short but neither borrowed nor never delivered.

This article was written in 2003.  Not once did the article address the naked shorting issue other than to call it an “allegation”.  Never once did the term “locate” come into play nor did an explanation of what the “penalties” would be for a failure to deliver. I guess they could have added the statement “if your broker or another brokerage firm through the DTC is unable to lend shares have no fear, we’ll just print more.”   As noted by the date of the article, problems were known to exist as early as this period in time, more than five years ago.

See: http://www.dtcc.com/news/press/releases/2003/nakedshorts.php#1

In a second article, the DTCC discusses its Continuous Net Settlement (“CNS”) System.  The CNS is an automated book-entry accounting system that centralizes the settlement of compared security transactions and maintains an orderly flow of security and money balances.  Later in the article, it addresses short transactions with two separate sentences:

·         While deliveries between CNS and users’ depository positions are made automatically, participants can exempt certain short positions (or portions thereof) to avoid segregation violations and effectively meet other delivery needs.

·         CNS short positions, which represent securities owed by participants to NSCC, are compared against their DTC accounts to determine issue availability.  If shares are available, they are transferred from the member’s account at DTC to NSCC’s account at DTC to cover participant’s short obligations to CNS.  To control the automatic delivery of securities from their DTC accounts, participants can use CNS exemption procedures (partial settlements are permissible).

·         The Stock Borrow Program enables participants to lend excess securities in their DTC accounts to CNS so that NSCC can satisfy delivery obligations not filled via normal deliveries.

            Not once in this article did the DTCC address or imply that there could be failures or exceptions made on the long side of the transaction.  It seems that every opportunity to exempt or alleviate difficulties associated with short sales is available throughout the clearing system but not to the counter side of the transaction.  In addition, no effort to define the term “temporary” is even attempted.

See: http://www.dtcc.com/products/cs/equities_clearance/cns.php

            

             In a third article, the DTCC discusses its Stock Borrow Program which allows participants to lend NSCC available stocks from their account at the DTC to cover temporary shortfalls in NSCC’s CNS System spoken of in the last paragraphs.  This article addresses the function of the Stock Borrow Program the operation of which, in and of itself is an exception.  An understanding of the process is therefore important.

The Stock Borrow Program enables participants to earn interest on the full current market value of their excess DTC positions borrowed by NSCC, while lending securities in the safety of a controlled environment.

·         In the Stock Borrow Program, participants' NSCC money settlement accounts are credited on the day of the loan with the full market value of any securities borrowed by NSCC. This allows members to invest the funds to earn interest overnight on the value received from the loans.

·         Securities on loan to NSCC are recorded as long positions in a special CNS account set up specifically for the participant's Stock Borrow activity. This enables the member to benefit from lending securities within the safe, controlled CNS processing environment

After NSCC borrows securities the transactions are recorded as long positions in the participant's Stock Borrow sub-account, a special account in the CNS System. The total current market value of the borrowed securities is credited in the participant's CNS account. These funds are available to the participant overnight. This process is reversed when NSCC returns the borrowed securities. No rebates are charged and the entire transaction occurs in the controlled CNS processing environment.

NSCC distributes reports to participants each morning, reflecting Stock Borrow activity. In reviewing the report, participants sometimes discover that the securities lent to NSCC are needed for customer securities segregation requirements.  In such cases, at the request of the participant, the long position in the Stock Borrow account is moved into a long position in the Fully-Paid-For (E) account.  This results in the member not being credited the current market value of the securities position. The Securities & Exchange Commission treats this "E" position as a good control location for customer securities under Commission rule 15c3-3.

            Again, let’s take care of “shortie” seems to be the overriding emphasis of the article.  You have to start to wonder why they complicate the obvious; obtain a firm “locate” before shorting a security, instead of making up rules to complicate what would be a simple transaction.  They have rules to cover rules when it comes to the “dark side” of the trade.  They know they have a problem, one that has essentially taken on a life of its own, due in part to the manner in which the DTCC addressed, or failed to address it.  Remove the opaque disguise, illuminate the problem and let the markets function fairly.  Oops, I forgot, that would cost every participant on all side of the trade money, how silly of me.

See:  http://www.dtcc.com/products/cs/equities_clearance/sbp.php

            As expected from any organization audits complete with cover letters and opinion statements relating to them are commonplace.  On December 31, 2007, the DTCC issued “Management’s Statement Regarding Internal Control Over Trade Comparison, Netting and Settlement of Products Services by NSCC”.  Signed by DTCC Chairman Donahue and President Aimetti, the letter discusses the responsibilities of the NSCC as they pertain to effective trade clearing with averments to the following qualification:

“Even effective internal control, no matter how well designed, has inherent limitations – including the possibility of the circumvention or overriding of controls – and therefore can provide only reasonable assurance with respect to trade comparisons, netting and settlement.  Further, because of changes in conditions, the effectiveness of internal control may vary over time.”

As is also standard, these letters are accompanied by a statement letter of the auditing firm.  In the PriceWaterhouseCoopers letter, signed by the auditing firm, the following is found:

“Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected.  Also, projections of any evaluation of internal control over trade comparison, netting and settlement of product services by NSCC to future periods are subject to the risk that the internal control may become inadequate because of changing conditions, or that the degree of compliance with the policies or procedures may deteriorate.”

The DTCC is admitting that there are problems that are simply “out of their control” which could lead to the effectiveness of their clearing functions being compromised.  In case you wondered, a recent new addition to the Board of Directors comes to the DTCC directly from the PriceWaterhouseCoopers.  I guess they liked the disclaimer.

See: http://www.dtcc.com/legal/internal/2007_nscc.pdf

       

         

            Here is a little fun for you in the format of a matching quiz.  The purpose of the quiz is to enlighten you about the intertwined structure of those who benefit from the services provided by the DTCC and those who sit on its Board of Directors.  The Board of Directors is made up of 21 directors (only 19 are named), serving one-year terms. Seventeen directors are representatives of clearing agency participants, including international broker/dealers, correspondent and clearing banks, mutual fund companies and investment banks. Two directors are designated by the preferred shareholders, NYSE Euronext and FINRA, and the remaining two are the chairman and chief executive officer and the president of DTCC. All of the Board members except those designated by the preferred shareholders are elected annually.  Nowhere is there an independent outside influence on decision making. 

                 Name                                                                      Company

___  William B. Aimetti                                       A.   Bank of New York

___ Mark Alexander                                            B.   National Financial Services, LLC

___  Gerald A. Beeson                                          C.   J.P. Morgan Chase & Company

___  J. Charles Cardona                                        D.   Francis Trees & Watts, Inc.

___  Stephen P. Casper                                         E.   Nomura Holdings

___  Art Certosimo                                                 F.   Citi-Markets & Banking

___  Randolph L. Cowen                                       G.   Barclays Capital

___  Donald F. Donahue                                        H.   Edward Jones

___  Norman Eaker                                                I.   Barr Brothers & Co., Inc.

___  Robert Kaplan                                                J.   Merrill Lynch

___  Gerard LaRocca                                             K.   Citadel Investment Group, LLC

___  Ian Lowitt                                                       L.   Dreyfus Corporation

___  Norman Malo                                                 M.   UBS

___ Louis G. Pastina                                             N.   Lehman Brothers Holdings, Inc.

___  Ronald A. Purpora                                          O.   Goldman Sachs

___  Neeraj Sahai                                                    P.   NYSE Euronext

___  Timothy J. Theriault                                       Q.   State Street Global

___  Michele Trogni                                                R.   ICAP Securities USA, LLC

___   David A. Weisbrod                                         S.   Northern Trust

         No answers provided.  Go to the site and start reading.  If you are going to be part of this battle you best understand who and what you are dealing with.

AMG

Honor Among Thieves

            For years many people, from industry to academia, have identified problems inherent in our securities industry.  Patrick Byrne, CEO of Overstock.com, together with Judd Bagley and Mark Mitchell through the Deep Capture website (www.deepcapture.com) has provided a template.  But the problem is much larger, inherently entrenched within the intertwined operating segments of the networked system that clears each and every trade, the Depository Trust & Clearing Corporation (“DTCC”).  The system is flawed as it is essentially controlled by those who utilize its functionality obtaining anything other than rudimentary forensic information and data remains futile.  Using an article published in the Houston Law Review in November of 2006 as a template, this article will provide an overview of the current operations of the DTCC prior to discussing techniques employed by naked short sellers, their counterparties and partners in the furtherance of perpetuating their dishonest deeds.

            The DTCC, a holding company comprising “the largest financial services post-trade infrastructure organization in the world,” consists of two main subsidiaries, the Depository Trust Company (“DTC”) and the National Securities Clearing Corporation (“NSCC”).  On the surface the DTCC functions innoxiously in providing clearance and settlement services for equities, debt, government securities and more.  The problems inherent in the DTCC however are encompassed in the composition of its senior management team and board of directors.  The same customers the DTCC serves, the street’s investment banks, prime brokerage and related securities houses and the stock exchanges that transact their business, comprise the senior management team and board of directors of the DTCC.  The DTCC, although chartered to run as a non-profit entity, is far from that.  Not only does it operate profitably, the DTCC distributes a portion of its revenues back to its brokerage industry client owner operators.

            One of the original mandates of the DTCC in the 1970s was to facilitate the exchange of cash and the physical stock certificates held by investors.  The establishment of the DTC accomplished this giving rise to the DTC essentially holding the majority of these certificates, under the name of its nominee, Cede & Co., in its vaults.  This enabled what we have come to know as “electronic trading” as the exchange of cash for stock certificates was essentially extinguished.  It also facilitated the illegal naked short selling so prevalent in today’s markets.

            Also in the 1970s the NYSE, AMEX and NASDAQ exchanges, entities that prior performed their own stock clearing function, merged to form the NSCC, with other regional exchanges joining in shortly thereafter.  The NSCC provides clearance and settlement services through a system called multilateral netting, a process that reduces paperwork within the securities industry.  The NSCC also nets trades through a more complex process called Continuous Net Settlement (“CNS”).  Through this system, the NSCC is able to calculate daily net long and net short positions for its client owner operators.  It is within this process that the problems directly related to naked short selling arise.  Once this net number is calculated, if there is a short fall in the delivery obligations of a client owner operator’s net short position as reported to the DTC, the NSCC looks to borrow shares internally within its matrix of client owned operators through the Stock Borrow Program to cover the shortfall.  It is within this Stock Borrow Program, among other illegal trading operations, that naked short sellers are able to hide long term Failures to Deliver (“FTD”).  Needless to say, the NSCC is a profit generating arm of the DTCC. 

            If the DTCC was a privately operated entity, subject to external oversight controls of those not directly affiliated with the companies it provide services for, the remaining paragraphs of this article might never have been written.  Then again, the problems inherent with naked short selling would probably not exist either.  The fact is that the DTCC is again, a client owned and essentially controlled operation, run by those who benefit from the services it provides.  This structure maximizes profits of the DTCC as well as the companies comprising its ownership.  With no true oversight, the client owner operators hold the key to the vault while simultaneously enabling their largest hedge funds clients transacting business with them to not only avoid the rules but create new ones as the playing field changes.  Something is really wrong here.

            There are no controls within the DTCC that work to extinguish what has developed in our securities markets, the creations of mountains of phantom shares.  If you take a look at many of the names, both those currently on the SHO List as well as others who frequented the list in days, months and years gone by, the problem is unveiled.  In several instances, the total number of shares in existence far exceeds the number of shares authorized by the issuer.  This may come as a surprise for many readers but our research suggests this to be the case with amounts exceeding 150% of the issued float of some securities.

            The lending pool as run by the DTCC is essentially boundless and illegitimate.  There are simply more shares available in that trust pool than should naturally exist but that is just part of the problem that encompasses the lack of enforcement and oversight in our system.  There are other illegal forms of trading that further exacerbate the problem.  “Parking” and “freeriding” are trading tools that enable the naked short seller to avoid the requirements in place to locate shares of its target company so that they are legally located and borrowed.

            Parking, as defined, is comprised of (1) a pre-arrangement to transact securities; (2) on the same or substantially the same terms; and (3) for a bad faith purpose.  The rules pertaining to naked short selling require an effective locate to be obtained within a three day period (“T+3”).  By essentially parking, or moving shares between accounts of the same hedge fund, between accounts of different hedge funds and between industry participants and market makers, the requirement to locate shares can be precluded indefinitely.  In recent weeks, due in part to the growing pressure on the securities industry to rein in the illegal operations of the naked short sellers several stocks that have regularly appeared on the SHO List are no longer on the list.  This is due in part to the fact that the illegal activity has again, figured out a way around the rules, parking being but one of the tools implemented.

            Freeriding has often been defined as the purchase and sale of a security in a short period of time without putting up any money.  In the case of the naked short sellers, in essence the direction of the purchase and sale has been reversed.  If a naked short seller opens a transaction in the morning and closes the transaction out before the end of the day, under the current systems in place at the DTCC, there would be no net effect.  Freeriding, at least in the retail brokerage side of the industry, is controlled by the introducing or clearing broker.  If a client engages in the practice of freeriding inevitably their account would be frozen and their ability to transact future business extinguished.  Such is not the case with respect to the prime brokerage industry.  It would be difficult to envision a prime broker telling one of its larger hedge fund clients to take their business elsewhere because they are breaking the rules.

            Many of the practices that encompass naked short selling are illegal.  The information and data to prove the crime, to establish culpability that, if discerned and reconstructed properly could lead to bona fide RICO indictments, exists.  Therein again is where the problem remains as the information necessary to expose these crimes is controlled by, you guessed it, the DTCC.  It was the perfect crime and the client owner operators of the DTCC in their own and to the benefit of their clientele have made billions.

            Patrick Byrne and his associates have been speaking about issues of this nature and more over the recent years.  In joining the fight we seek to establish, cross security and sector, patterns illustrating that the illegal techniques employed by the client owner operators of the DTCC, and their respective larger hedge fund clients, have turned what was once a capital formation system one of capital destruction.  Through a consortium matrix of publicly listed companies, it is our intention to expose the methods and transactions facilitated by the overt criminal client owner operators’ actions, or inactions as it may be, such that the level of culpability reaches a level where the information and data we seek will speak for itself.  It is time for the public to step up and we, along with others look to be one of their many voices of action.