Let’s say I am the sole owner of a private company and owner of 100% of the float of a heavily shorted shell. The private company was paying me $5 million per year.

I have the shell purchase the private company for one share and pay out the $5 million in dividends and I still get the exact same $5 million back I was getting when it was private as I own 100% of the outstanding.

The difference, is all the other IOU shareholders also get paid. If there was 100 times the float outstanding naked, then shorty would have to write a check for $500 million each and every year and watch helplessly as the share price and his margin requirement rises until he pops.

There are lots of shells like this. Look for the companies that traded at .001 on the pinks.

Rinse and repeat and suddenly $500 million seems like a lot of money as all those delisted companies come back to life with new businesses to extract revenge from the bad guys.

INCAPABLE or CULPABLE ?

It seems the bad guys are the same ones going bankrupt and the same ones writing anti SHO letters.

Letter from Madoff on SHO.
http://www.sec.gov/rules/proposed/s72303/s72303-284.pdf

Private Madoff conference call on SHO with SEC.
http://www.sec.gov/rules/proposed/s72303/s72303-431.pdf

http://www.sec.gov/comments/s7-12-06/s71206-149.pdf

As what has become a pattern of the SEC, the investing public is not given equal face time to openly discuss matters/analysis with the Commission as is frequently being afforded to the institutions the Commission is responsible for regulating; a double standard that puts in question the Commissions true motives. [Ref: The SEC’s Documented Memorandums to meetings held during the inception of Regulation SHO with the Securities Industry Association, National Service Clearing Corporation, Bear Stearns, Madoff Investment Securities, Hill Thompson, Citigroup Global Markets, and LEK Securities Corp http://www.sec.gov/rules/proposed/s72303.shtml

Once considered a radical practice but only a minor source of inefficiency, payments for
order flow – agreements by which dealers offer monetary rewards or other non-pecuniary
services to brokers in exchange for the routing of retail market bid or ask offers116 — have
become a core regulatory concern. The controversy became prominent in 1993, when Madoff
Investments mysteriously garnered 10% of NYSE-listed volume through a legal “kickback”
scheme that permitted brokers to increase personal revenues without obtaining the consent of
their clients.117
http://www.sec.gov/rules/proposed/s71004/jdmt011405.pdf

“The Madoff Exception”
http://www.chx.com/content/Participant_Information/Downloadable_Docs/MarketRegulation/1_InformationMemoranda/2004/MR_04_26_Regulation_SHO.pdf

Regulation SHO, Rule 200 – Order Marking and Ownership

SEC Rule 200(g) defines the ownership of securities with regard to short sale transactions previously enumerated under SEC Rules 3b-3 and 10a-1(d). Pursuant to the provisions of SEC Rule 200, all sales of equity securities must be marked “long”, “short”, or “short exempt”.

Orders can be marked “long” only when the seller owns the security being sold, and such security is in the physical possession or control of the broker-dealer, or it is reasonably expected that the security will be in the physical possession or control of the broker-dealer prior to settlement.

Orders must be marked “short exempt” if the seller is entitled to rely upon any exception to the tick test under SEC Rule 10a-1 and Exchange Article IX, Rule 17. Short sale transactions involving a specialist pursuant to the so-called “Madoff” exception or the equalizing exemption under SEC Rule 10a-1(e)(5) (sales by specialist or market maker on a zero-minus tick), however, need not be marked as “short exempt.” Orders marked “short exempt” must also comply with the stock locate requirements detailed in SEC Rule 203 below, unless some exception applies…

The SEC investigated David Rocker and Rocker Partners the same time they investigated Gradient and Overstock.com. Eventually the SEC gave all three a no-action response but it took the SEC an extra few years to give Overstock theirs as opposed to Rocker and Gradient.

What have we learned since then?

Gradient settled with Overstock.com and admitted to the error of their ways and did so publicly. Most likely there is something the PR did not tell us but for all appearances teh settlement proved the SEC was wrong in giving up the no-action letter.

This Remond article likewise exposes the fact that Rocker could not make money unless they engaged in a scheme (strategy) that was illegal. So why didn’t the SEC find this out when they investigated Rocker and his trading records?

Doesn’t this all go to show that the SEC is incapable of identifying fraud even when it is handed to them? The Madoff scandal is now proving the SEC can audit the books of a Ponzi scheme and still give it a clean bill of health.

1. It is a true statement, REG SHO does authorize naked short selling. However,
2. Only within the settlement cycle, which is generally inside 3 days.

Fails outside the settlement cycle (rule 15c6-1) are not authorized by anything in REG SHO by anyone and thus all fails are illegal.

So we should be clear as a bell and differentiate between

1. Legal naked short selling, withing the settlement cycle
2. Illegal naked short selling, outside and beyond the settlement cycle
3. Fails to Deliver, always illegal

From Investorsvillage!! You’ve got to see this.

Why don’t these guys get arrested for counterfeiting? Has anyone contacted the secret service?

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20081019/REG/310209975

The credit crisis is causing a growing number of delivery failures with Treasury securities.

The latest data from the Federal Reserve Bank of New York showed that cumulative failures hit a record $2.29 trillion as of Oct. 1. The federal settlement period is T+1 (trade date plus one day).

The outstanding U.S. public debt is $10.3 trillion.

“Current [fail] levels are at historic levels,” said Rob Toomey, managing director of the Securities Industry and Financial Markets Association’s funding and government and agency securities divisions. “There’s been significant flight to quality” with the market turmoil, he said.

With the strong demand for Treasury securities, “some of the entities that bought Treasuries are not making them available in the [repurchase] market, which is the traditional way to get them,” Mr. Toomey said.

Unlike some past bouts with high failure rates that involved particular bond issues, the current high fails involve all types of maturities, he said.

This month, New York- and Washington-based SIFMA came out with a set of best practices to reduce failed deliveries.

This year, the New York Fed revised its own Treasury market trading guidelines. Its guidelines, originally released last year, warned that short-sellers “should make deliveries in good faith.”

Only difference here was I don’t think Copper River’s manipulative hand was up this puppet’s back. Think it was about a foot lower.