I did some DD -thought others might enjoy reading
Post# of 9903
Posted On: 03/10/2014 1:17:51 PM
I did some DD -thought others might enjoy reading I found on the net.
This is good relevant post regarding NSS/FTD.
Regulation SHO became effective on January 3, 2005 to curb illegal naked short selling. Rule 10b-21 was enacted to reduce manipulative schemes involving naked short selling. 2007 Regulation SHO Final Amendments 72 FR at 45544 - states that "among other things, Regulation SHO imposes a close-out requirement to address failures to deliver stock on trade settlement date and to target potentially abusive 'naked' short selling in certain equity securities." We know from documented past lawsuits the SEC found massive illegal naked short selling existed. See Sandell Asset Management Corp., Securities Act Release No. 8857; See also Goldman Sachs Execution and Clearing LLP., Exchange Act Release No. 55465; U.S. v. Naftalin, 441 U.S. 768 (1979)(discussing a market manipulation scheme in which brokers suffered substantial losses when they had to purchase securities to replace securities they had borrowed to make delivery on short sale orders received from an individual investor who had falsely represented to the brokers that he owned the securities being sold. See also Rhino Advisors, Inc. and Thomas Badian, Lit Rel. No. 18003 (feb. 27, 2003); See also SEC v. Rhino Advisors, Inc., and Thomas Badian, Civ. Action No. 03 civ 1310 (RO)(S.D.N.Y.)(feb. 26, 2003)(settled case in which the SEC alleged that the defendants profited from engaging in massive 'naked' short selling that flooded the market with the company's stock, and depressed its price); See also S.E.C. v. Gardiner, 48 S.E.C. Docket 811, No. 91 Civ 2091 (S.D.N.Y. 1991)(alleged manipulation by sales representative by directing or inducing customers to sell stock short in order to depress its price); U.S. v. Russo, 74 F.3d 1383, 1392 (2d Cir. 1996)(short sales were sufficiently connected to the manipulation scheme as to constitute a violation of Exchange Act Section 10(b) and Rule 10b-5).
We learned from our investigation and the lawsuits filed that the market participants quickly adapt to circumvent the law. The evidence suggests the system fails to curb illegal shorting activity by hedge funds, individuals, brokers and market makers who are able to hide, misrepresent the reasons behind the short positions, and attempt to use significant loopholes, until they are caught.
Fails-to-Deliver are, in essence, counterfeit shares because naked shorting (selling shares you don't own) creates an imbalance in the market as the sell side is artificially increased with naked short shares. Typically, a stock market investor or trader has three days (T+3) to cover. According to SEC rules, if the broker-dealer has not located a share to borrow, they are supposed to take cash in the short account and purchase a share in the open market. This is called a "buy-in," and it is supposed to maintain the total number of shares in the market place equal to the number of shares the company has issued.
"The markets check to see if the amount of fails to deliver is more than 1/2 of 1% of the total outstanding shares in that security. If it is, then it goes on a "Threshold List." If it is then on the Threshold List for 13 consecutive settlement days, restrictions on short selling then apply.The "close-out" requirement forces a participant of a registered clearing agency to close out any "fail to deliver" position in a threshold security that has remained for 13 consecutive settlement days by purchasing securities of like kind and quantity. If the participant does not take action to close out the open fail to deliver position, the participant is prohibited from making further short sales in that security without first borrowing or arranging to borrow the security. Even market makers arenot exempt from this requirement."
The problem is clearly in the loopholes, enforcement, regulation, and penalty side of the equation. Your broker dealer is responsible for enforcing Reg SHO, Rule 10b-21, and Rule 203(b)(3)(iii) of Regulation SHO. Demand it!
4. We need transparency in the Identity of Shorts Creating Counterfeit Shares:
We can limit the amount of counterfeiting by demanding that they enforce the law at the broker-dealer and market-maker level. The identity of the shorts is not known. Further, regulation needs to be adopted because current rules obscure their true identity by allowing them to hide behind the prime brokers and/or hiding behind layers of offshore domiciled shell corporations. The magnitude of the counterfeiting is locked within the prime brokers and market makers who basically use the loopholes to protect themselves and their customers.
There are three mechanisms for the creation of counterfeit shares:
1. Fails-to-Deliver.
If a short seller cannot borrow a share and deliver that share to the person who purchased the (short) share within the three days allowed for settlement of the trade, it becomes a fail-to-deliver and hence a counterfeit share; however the share is transacted by the exchanges and the DTC as if it were real. Since forced buy-ins rarely occur, the other consequences of having a fail-to-deliver are inconsequential, so it is frequently ignored. Enough fails-to-deliver in a given stock will get that stock on the SHO list, (the SEC's list of stocks that have excessive fails-to-deliver), which should (but rarely does) see increased enforcement. Penalties amount to a slap on the wrist, so large fails-to-deliver positions continue to exist for months and years. Regulation SHO, implemented in January 2005 by the SEC, was supposed to end wholesale fails-to-deliver. We need to stop the financial industry from exploiting these loopholes:
Stock sales are either a long sale or a short sale. A broker can mis-mark the trading ticket by checking the long box when it is actually a short sale. Thereby the short never shows up in the system. The position usually gets reconciled when the short covers.
Settlement of stock transactions is supposed to occur within three days. If it doesn't settle in three days a naked short should become a fail-to-deliver. SEC routinely and automatically grants a number of extensions before the naked short gets reported as a fail-to-deliver by giving brokers an opportunity and discretion to create a lie for the reason why the short shares have not been delivered or covered. Short hedge funds and broker dealers have multiple entities, many offshore, so they sell large naked short positions from entity to entity. Broker-dealer can create a phony 'easy to borrow list.' They can 'roll' their position broker-to-broker, or hedge-fund to hedge-fund, in block trades that never appear on an exchange. Each movement can reset the time clock for the naked position becoming a fail-to-deliver resulting in quickly getting a company off of the SHO threshold list.
The prime brokers can do a buy-in of a naked short position. Typically, they tell the short hedge fund when the buy-in will take place. For example, they may say at 3:30 EST on Friday, then hedge fund naked shorts into their own buy-in or has a another hedge or controlled entity do it, and then rolls its position, hence circumventing Reg SHO.
Large broker dealers typically operate internationally, and can play the shell game with regulators who come in to check compliance by taking large naked positions out of the country and returning them at a later date.
Broker-dealers make enormous profits by charging large fees for the "borrowed" shares. Shares loaned to a short are supposed to remain with the short until he covers his position by purchasing real shares. Broker-dealers do one-day lends, which enables the short to identify to the SEC the account that shares were borrowed from. As soon as the report is sent in, the shares are returned to the broker-dealer to be loaned to the next short. A daily loan can allow eight to ten shorts to borrow the same shares, resetting the SHO-fail-to-deliver clock each time, which makes all of these counterfeit stocks look like legitimate shares. The broker-dealers have an incentive to do this activity because they charge each short for lent stock.
Margin account buyers inadvertently aid the shorts. If a short-seller sells a naked short he has three days to deliver a borrowed share. If the naked stock is purchased in a margin account, it is immediately put into the stock lend cycle and, for a fee, is available as a borrowed share to the short who counterfeited it in the first place. This margin process is perpetually fluid with multiple parties, but it serves to create more counterfeit shares and is an example of how a counterfeit share can grow due to the existence of margin account activity rules.
Margin account agreements give the broker-dealers the right to lend those shares without notifying the account owner. Shares held in cash accounts, IRA accounts and any restricted account is not supposed to be loaned. Broker dealers have been known to change cash accounts to margin accounts without telling the owner the real motive behind the move, or take shares from IRA accounts, take shares from cash accounts and lend restricted shares.
Ex-clearing. This is the second tier of counterfeiting that occurs at the broker dealer level. Most of the problems here are in the magic of accounting. Strict auditing rules to audit this activity for compliance should help. The financial Accounting Standards Board issued statement No. 161, to enhance disclosure of derivatives and hedging, but does little to address naked short selling.The brokers sometimes disguise naked shorts that are fails-to-deliver as disclosed shorts. Broker-dealers essentially accounting for them as borrowed shares when they are not. This also makes naked shorts "invisible" to the system so they don't become fails-to-deliver, which is the only thing the SEC tracks.
This is just a sample of loopholes used under the guise of the discretion given brokers by the SEC. The SEC only tracks the Fails-To-Deliver and the counterfeit shares that exist at this ex-clearing tier can be ten or twenty times the number of fails-to-deliver.
5. Arena short attack play book:
Don't give up your shares to artificial manipulation. We know that abusive short selling is not random acts of some renegade hedge funds, brokers, individuals, or market makers, but rather a concerted or coordinated effort with a business plan that is carried out by a consortium of one or more of these players.
e. Paid bashers. The shorts will hire paid bashers who "invade" the message boards of the company. The bashers disguise themselves as legitimate investors and try to persuade or panic small investors into selling into the manipulation.
This does not cover every dirty little trick that the shorts use when they are manipulating the stock. But, it clearly undermines the free market system and investor confidence in it.
6. What to Do?
Call, email or fax your broker to enforce Reg SHO, Rule 10b-21, and Rule 203(b)(3) of Regulation SHO. Do not sell your shares. Don't listen to noise by paid bashers. Don't set stop losses.
This is good relevant post regarding NSS/FTD.
Regulation SHO became effective on January 3, 2005 to curb illegal naked short selling. Rule 10b-21 was enacted to reduce manipulative schemes involving naked short selling. 2007 Regulation SHO Final Amendments 72 FR at 45544 - states that "among other things, Regulation SHO imposes a close-out requirement to address failures to deliver stock on trade settlement date and to target potentially abusive 'naked' short selling in certain equity securities." We know from documented past lawsuits the SEC found massive illegal naked short selling existed. See Sandell Asset Management Corp., Securities Act Release No. 8857; See also Goldman Sachs Execution and Clearing LLP., Exchange Act Release No. 55465; U.S. v. Naftalin, 441 U.S. 768 (1979)(discussing a market manipulation scheme in which brokers suffered substantial losses when they had to purchase securities to replace securities they had borrowed to make delivery on short sale orders received from an individual investor who had falsely represented to the brokers that he owned the securities being sold. See also Rhino Advisors, Inc. and Thomas Badian, Lit Rel. No. 18003 (feb. 27, 2003); See also SEC v. Rhino Advisors, Inc., and Thomas Badian, Civ. Action No. 03 civ 1310 (RO)(S.D.N.Y.)(feb. 26, 2003)(settled case in which the SEC alleged that the defendants profited from engaging in massive 'naked' short selling that flooded the market with the company's stock, and depressed its price); See also S.E.C. v. Gardiner, 48 S.E.C. Docket 811, No. 91 Civ 2091 (S.D.N.Y. 1991)(alleged manipulation by sales representative by directing or inducing customers to sell stock short in order to depress its price); U.S. v. Russo, 74 F.3d 1383, 1392 (2d Cir. 1996)(short sales were sufficiently connected to the manipulation scheme as to constitute a violation of Exchange Act Section 10(b) and Rule 10b-5).
We learned from our investigation and the lawsuits filed that the market participants quickly adapt to circumvent the law. The evidence suggests the system fails to curb illegal shorting activity by hedge funds, individuals, brokers and market makers who are able to hide, misrepresent the reasons behind the short positions, and attempt to use significant loopholes, until they are caught.
Fails-to-Deliver are, in essence, counterfeit shares because naked shorting (selling shares you don't own) creates an imbalance in the market as the sell side is artificially increased with naked short shares. Typically, a stock market investor or trader has three days (T+3) to cover. According to SEC rules, if the broker-dealer has not located a share to borrow, they are supposed to take cash in the short account and purchase a share in the open market. This is called a "buy-in," and it is supposed to maintain the total number of shares in the market place equal to the number of shares the company has issued.
"The markets check to see if the amount of fails to deliver is more than 1/2 of 1% of the total outstanding shares in that security. If it is, then it goes on a "Threshold List." If it is then on the Threshold List for 13 consecutive settlement days, restrictions on short selling then apply.The "close-out" requirement forces a participant of a registered clearing agency to close out any "fail to deliver" position in a threshold security that has remained for 13 consecutive settlement days by purchasing securities of like kind and quantity. If the participant does not take action to close out the open fail to deliver position, the participant is prohibited from making further short sales in that security without first borrowing or arranging to borrow the security. Even market makers arenot exempt from this requirement."
The problem is clearly in the loopholes, enforcement, regulation, and penalty side of the equation. Your broker dealer is responsible for enforcing Reg SHO, Rule 10b-21, and Rule 203(b)(3)(iii) of Regulation SHO. Demand it!
4. We need transparency in the Identity of Shorts Creating Counterfeit Shares:
We can limit the amount of counterfeiting by demanding that they enforce the law at the broker-dealer and market-maker level. The identity of the shorts is not known. Further, regulation needs to be adopted because current rules obscure their true identity by allowing them to hide behind the prime brokers and/or hiding behind layers of offshore domiciled shell corporations. The magnitude of the counterfeiting is locked within the prime brokers and market makers who basically use the loopholes to protect themselves and their customers.
There are three mechanisms for the creation of counterfeit shares:
1. Fails-to-Deliver.
If a short seller cannot borrow a share and deliver that share to the person who purchased the (short) share within the three days allowed for settlement of the trade, it becomes a fail-to-deliver and hence a counterfeit share; however the share is transacted by the exchanges and the DTC as if it were real. Since forced buy-ins rarely occur, the other consequences of having a fail-to-deliver are inconsequential, so it is frequently ignored. Enough fails-to-deliver in a given stock will get that stock on the SHO list, (the SEC's list of stocks that have excessive fails-to-deliver), which should (but rarely does) see increased enforcement. Penalties amount to a slap on the wrist, so large fails-to-deliver positions continue to exist for months and years. Regulation SHO, implemented in January 2005 by the SEC, was supposed to end wholesale fails-to-deliver. We need to stop the financial industry from exploiting these loopholes:
Stock sales are either a long sale or a short sale. A broker can mis-mark the trading ticket by checking the long box when it is actually a short sale. Thereby the short never shows up in the system. The position usually gets reconciled when the short covers.
Settlement of stock transactions is supposed to occur within three days. If it doesn't settle in three days a naked short should become a fail-to-deliver. SEC routinely and automatically grants a number of extensions before the naked short gets reported as a fail-to-deliver by giving brokers an opportunity and discretion to create a lie for the reason why the short shares have not been delivered or covered. Short hedge funds and broker dealers have multiple entities, many offshore, so they sell large naked short positions from entity to entity. Broker-dealer can create a phony 'easy to borrow list.' They can 'roll' their position broker-to-broker, or hedge-fund to hedge-fund, in block trades that never appear on an exchange. Each movement can reset the time clock for the naked position becoming a fail-to-deliver resulting in quickly getting a company off of the SHO threshold list.
The prime brokers can do a buy-in of a naked short position. Typically, they tell the short hedge fund when the buy-in will take place. For example, they may say at 3:30 EST on Friday, then hedge fund naked shorts into their own buy-in or has a another hedge or controlled entity do it, and then rolls its position, hence circumventing Reg SHO.
Large broker dealers typically operate internationally, and can play the shell game with regulators who come in to check compliance by taking large naked positions out of the country and returning them at a later date.
Broker-dealers make enormous profits by charging large fees for the "borrowed" shares. Shares loaned to a short are supposed to remain with the short until he covers his position by purchasing real shares. Broker-dealers do one-day lends, which enables the short to identify to the SEC the account that shares were borrowed from. As soon as the report is sent in, the shares are returned to the broker-dealer to be loaned to the next short. A daily loan can allow eight to ten shorts to borrow the same shares, resetting the SHO-fail-to-deliver clock each time, which makes all of these counterfeit stocks look like legitimate shares. The broker-dealers have an incentive to do this activity because they charge each short for lent stock.
Margin account buyers inadvertently aid the shorts. If a short-seller sells a naked short he has three days to deliver a borrowed share. If the naked stock is purchased in a margin account, it is immediately put into the stock lend cycle and, for a fee, is available as a borrowed share to the short who counterfeited it in the first place. This margin process is perpetually fluid with multiple parties, but it serves to create more counterfeit shares and is an example of how a counterfeit share can grow due to the existence of margin account activity rules.
Margin account agreements give the broker-dealers the right to lend those shares without notifying the account owner. Shares held in cash accounts, IRA accounts and any restricted account is not supposed to be loaned. Broker dealers have been known to change cash accounts to margin accounts without telling the owner the real motive behind the move, or take shares from IRA accounts, take shares from cash accounts and lend restricted shares.
Ex-clearing. This is the second tier of counterfeiting that occurs at the broker dealer level. Most of the problems here are in the magic of accounting. Strict auditing rules to audit this activity for compliance should help. The financial Accounting Standards Board issued statement No. 161, to enhance disclosure of derivatives and hedging, but does little to address naked short selling.The brokers sometimes disguise naked shorts that are fails-to-deliver as disclosed shorts. Broker-dealers essentially accounting for them as borrowed shares when they are not. This also makes naked shorts "invisible" to the system so they don't become fails-to-deliver, which is the only thing the SEC tracks.
This is just a sample of loopholes used under the guise of the discretion given brokers by the SEC. The SEC only tracks the Fails-To-Deliver and the counterfeit shares that exist at this ex-clearing tier can be ten or twenty times the number of fails-to-deliver.
5. Arena short attack play book:
Don't give up your shares to artificial manipulation. We know that abusive short selling is not random acts of some renegade hedge funds, brokers, individuals, or market makers, but rather a concerted or coordinated effort with a business plan that is carried out by a consortium of one or more of these players.
e. Paid bashers. The shorts will hire paid bashers who "invade" the message boards of the company. The bashers disguise themselves as legitimate investors and try to persuade or panic small investors into selling into the manipulation.
This does not cover every dirty little trick that the shorts use when they are manipulating the stock. But, it clearly undermines the free market system and investor confidence in it.
6. What to Do?
Call, email or fax your broker to enforce Reg SHO, Rule 10b-21, and Rule 203(b)(3) of Regulation SHO. Do not sell your shares. Don't listen to noise by paid bashers. Don't set stop losses.
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