Deutsche Bank Sold Massive Amounts of Phantom Stock

    A couple of days before Lehman fell and all hell broke loose on Wall Street, Floyd Norris, the chief business correspondent of The New York Times, published a blog (headline: “Short Sale Conspiracies”) wherein he implied that I was mentally insane for suggesting that Deutsche Bank Securities had been caught selling “massive amounts of phantom stock.”

    I promise to take this up with my psychiatrist, but first let me tell you a bit more about the peculiar case that led the New York Stock Exchange to hand Deutsche Bank Securities the largest fine in history for violations of SEC rules designed to prevent the creation of what the chairman of the SEC has called “phantom stock.”

    The NYSE’s disciplinary order states that Deutsche Bank’s traders “effected an unquantified but significant number of short sales…without having borrowed the securities.” Indeed, the traders sold the shares “without having any reasonable grounds to believe that the securities could be borrowed for delivery when due…”

    This is a clear-cut case of abusive naked short selling – traders selling stock without bothering to even check whether the stock could be obtained. In other words, Deutsche Bank’s traders were selling phantom stock, and it appears that they were doing this systematically over the course of the 22 month time period (ending in October 2006) that the NYSE investigated.

    I asked NYSE spokesman Scott Peterson how much stock Deutsche Bank sold without knowing that the stock could be borrowed. He said, “We’re not saying how much, but let me put it this way: It was A LOT.” (The emphasis was his.)

    Interestingly, however, the NYSE pointedly did not include the words “naked short selling” anywhere in its written disciplinary action. And the Big Board’s spokesman went to great lengths to suggest that Deutsche Bank was not engaged in naked short selling. “This is a case of failure to locate stock,” the spokesman said. “We’re being careful not to call it ‘failure to deliver’ stock.”

    Mr. Peterson referred me to a section of the NYSE’s disciplinary order where it says that “according to [Deutsche Bank’s] delivery records,” there were “only two failures to deliver.”

    So Deutsche Bank systematically failed to even locate the stock that it sold, but the NYSE isn’t calling it “naked short selling,” and Deutsche Bank managed to deliver the stock in a timely fashion in all but two instances.

    Does this seem strange to you? It should.

    SEC rules give short sellers three trading days to borrow and deliver real shares. If the stock is not produced within three days, it is called a “failure to deliver.” If a company’s shares “fail to deliver” in excessive quantities, the SEC puts the company on the so-called “threshold” list of publicly listed firms that are likely victims of improper naked short selling.

    When I pressed Mr. Peterson, the NYSE spokesman, he conceded that there were not “only two cases of failure to deliver.” In fact, Deutsche Bank routinely failed to deliver specific securities–all of which appeared on the SEC’s threshold list. When I asked how much stock Deutsche Bank failed to deliver, Mr. Peterson said, again, “a LOT.”

    So what was this “only two cases of failure to deliver”? It turns out that there were only two instances (among the sample of questionable trades for which it was charged) where Deutsche Bank still had not delivered the stock after thirteen days. Surely the NYSE must have known that failures to deliver of three to thirteen days are considered by the SEC to be improper naked short sales. At the time of the Deutsche case (the rules have since been changed slightly) day thirteen was the point at which the SEC would hand the delinquent naked short sellers a pathetically light penalty, forcing them to forfeit their short positions by buying back (rather than borrowing) shares.

    In practice, this 13-day rule only encouraged stock manipulation. Some traders, correctly reckoning that the SEC would do nothing, simply left stock undelivered for weeks or months at a time. But a great deal of abusive naked short selling involved traders who sold phantom stock and (obviously) failed to deliver it on day three, and then absorbed the “penalty” on day 13 – purchasing (rather than borrowing) the stock and delivering it.

    As soon as they closed out their “short” positions (which were fake positions since they never intended to borrow the stock), the traders would immediately sell another batch of phantom stock and leave that undelivered until day 13. By the end of each of these 13 day periods, the phantom shares had, of course, diluted supply and watered down the price (at which point it was hardly a “penalty” to have to buy back the stock).

    A great number of the companies that appear on the SEC’s “threshold” list have been subjected to precisely this pattern of abuse. And if I understand the NYSE spokesman correctly, this is what Deutsche Bank was up to – short selling phantom stock with no intention of borrowing shares, waiting to buy (rather than borrow) the cheaper shares at day thirteen, and then selling more phantom stock, targeting the same threshold-listed company, the very next day.

    Deutsche Bank did this week after week for at least two years.

    Predictably, the SEC has not gone after anyone in the Deutsche Bank case. Instead, it leaves the NYSE to render its “largest ever” fine – a mere $500,000, which is many millions, if not billions, of dollars less than what the bank earned from its illegal activity.

    And the question remains: Why is the NYSE failing to call this illegal activity by its proper name: “naked short selling”?

    When the NYSE levied its fine at the end of August, the scandal of naked short selling was beginning to receive nationwide attention. Indeed, the SEC had just lifted a temporary emergency order designed to prevent the crime – three weeks after stating that abusive naked short selling had the potential to topple the American financial system.

    Moreover, Deutsche Bank had recently become embroiled in a multi-billion dollar lawsuit filed by shareholders alleging that Deutsche and several other banks were involved in a “conspiracy to engage in illegal naked short selling of Taser International Inc. and to create, loan and sell counterfeit shares of Taser stock.”

    Clearly, Deutsche Bank had reason to keep its involvement in naked short selling under wraps. I asked Mr. Peterson whether the NYSE had cut a deal with Deutsche Bank, whereby Deutsche agreed to pay the fine, and the NYSE agreed to portray its case as something other than a clear-cut instance of abusive naked short selling.

    Mr. Peterson told me to put my question in writing. I did this, and waited for several weeks for a response. No response was forthcoming.

    Another interesting question is whether Deutsche Bank’s prime brokerage (which services hedge fund clients) was involved in the naked short selling. If it was, this would suggest that the bank was helping its hedge fund clients manipulate stocks, including, perhaps, Taser International, whose shareholders had filed that multi-billion dollar lawsuit.

    The NYSE disciplinary actions makes it seem like only Deutsche Bank’s proprietary traders (who trade for the bank, not for any hedge fund clients) had broken the rules. When I asked Mr. Peterson about this, he said, yes, the prime brokerage was not involved.

    However, the NYSE’s disciplinary action said, in legalese, with no explanation, that at least two of the five Deutsche Bank proprietary trading desks investigated by the NYSE “failed to adhere to the independent trading unit aggregation requirements.” This was a reference to SEC “unit aggregation” rules, outlined in Regulation SHO, which prohibit prime brokerage units and proprietary trading units from coordinating their short-selling activities.

    In other words, it seems possible that Deutsche Bank’s proprietary trading unit was washing naked short positions for its prime brokerage, which had placed phantom stock sales on behalf of market manipulating hedge fund clients.

    I asked Mr. Peterson if this was the case. He said to put the question in writing. I did this, and waited a few weeks for a response. No response was forthcoming.

    Apparently, Mr. Norris, the chief financial correspondent of the New York Times, spoke to the NYSE, because he regurgitates its party line, almost verbatim. He says the case against Deutsche Bank is “largely about the failure to locate shares before they were sold short…But there do not seem to be many cases of sustained failures to deliver.”

    He goes on to improperly define “failures to deliver” as occurring on day 13. He buys into the suspect claim that Deutsche Bank’s prime brokerage wasn’t involved. And he implies that the case could be a matter of “record keeping violations,” apparently unaware that these “record keeping violations” were in fact brazen failures to deliver of unborrowable stock – typically lasting right up to day 13, when the traders “penalized” themselves by buying back the shares, no doubt at a steep discount to the price at which they had sold them.

    Mr. Norris concludes, “I don’t know if Mr. Mitchell’s suggestion [that Deutsche Bank sold massive amounts of phantom stock] is nutty or prescient, but I do not see how it is supported by what the Big Board says it found.”

    Of course, what the Big Board says it found might be quite different from what the Big Board did find. That a prescient nut case has to point this out to the presumably sane chief financial correspondent of the New York Times speaks volumes about the media’s coverage of the naked short selling scandal and the state of America’s public discourse.

    * * * * * * * *

    This post was written by:

    - who has written 88 posts on Deep Capture.


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    55 Responses to “Deutsche Bank Sold Massive Amounts of Phantom Stock”

    1. AMG says:

      You are dead on.

      AMG

    2. Brian says:

      Amazing. Thanks!

    3. n-tres-ted says:

      Great work, Mark. Stay after them.

    4. pickled_shark says:

      http://www.cnbc.com//id/27182581?

      Video of cramer pretty much reciting your last post regarding morgan stanley, Mark, sans the part about his and the ib’s own complicity of course.

      Maybe he’d like to guest blog. /laughter

    5. iStandUp says:

      This story illustrates to my mind how the SEC continues to engage in a cover up of the vast amount of naked-shorting being used on Wall Street day after day. And now it is clear the NYSE is following the SEC’s lead and also engaging in a cover up.

    6. Inept says:

      I just ask myself, despite the lack of meaningful prosecution of this abuse of securities laws, whether the treasurers of companies that need investment banking would be foolish enough to deal with an IB such as DB that has shown itself ready to abet the destruction of a company’s ability to raise capital when needed. Part of the game of the manipulative shorts is to force massive dilution upon any company that might need to make a secondary offering to support growth. They are easy to identify – they will need cash at some point – and the game is to spread rumors and destroy confidence just by the market action in their stock. The enablers in the SEC and the “self-regulatory” groups have created a situation where the deck is stacked against small, innovative companies and individual investors who do not have access to the special privileges granted to many HFs and prop desks.

      Even the vaunted “liquidity” brought to such stocks by the shorts, given the tight spreads, is illusory. The spreads in many of the stocks that find themselves on the SHO list, for instance, are between bids and offers of much less than 1000 shares – commonly 100 shares. Such liquidity is great if you essentially have no transaction cost, but individual investors are preyed upon as the price moves away from them either with a limit order or a dangerous market order for an order of any size.

    7. Inept says:

      #4, pickled_shark, I have distributed that Cramer link to many, many people. He summarizes what is a very difficult situation for many to understand. He also is not likely to suffer from the sobriquet of “conspiracy theorist” that has been thrown at those who DO understand what has been happening.

      Is Cox’s place in financial history enough punishment for the guy?

    8. iStandUp says:

      The more I think about this cover up by the SEC, the more I think the best way to attack this problem is to file a CLASS ACTION LAWSUIT against the SEC for allowing Market Makers to issue new shares of any publicly traded company without the approval of the Corporation Board and its shareholders.

      With the worldwide meltdown of our financial system, I think we could easily get a million Americans who would like sign up to support such a lawsuit.

      And if each of these one million Americans donated $20.00 to the cause, there would be 20 Million dollars to hire lawyers to file such a class action lawsuit. Such a lawsuit would also bring this topic to main stream news.

      Are there any lawyers reading these posts that could comment on the possibilities of such a CLASS ACTION LAWSUIT

    9. Tom says:

      Interesting article. NASDAQ trying to get into the clearing and settlement market. Wonder if they can get it right.

      http://www.ft.com/cms/s/0/af26baa6-9969-11dd-9d48-000077b07658.html

    10. iStandUp says:

      FYI – Since this morning, I have been unable to post a message on a Yahoo Financial message board with a LINK to this story:

      http://www.deepcapture.com/deutsche-bank-sold-massive-amounts-of-phantom-stock

      I wonder if this a new policy at Yahoo to BLOCK http://www.deepcapture.com or just momentary insanity of the software… we shall see in coming days.

    11. ron doc says:

      We all are missing the big reason and that reason is the large hidden hand behind all of this.

      I think Patrick knows,only hope he stays healthy!

      People Patrick knows know and maybe some are quietly helping him out before everything is destroyed. I can only hope!

      Despite everything God also knows and that is why I am holding out for a solution.

    12. iDontKnow says:

      I would appreciate it if someone can explain to me what is the difference between “failure to locate” and “failure to deliver.”

      I’m left with the impression that “failure to locate” is what happens if three days have passed since the stock was shorted and it was not yet borrowed from somewhere. While “failure to deliver” is the same thing but after a thirteen day period (at which point the shares have to be bought back on the open market).

      But I must say that I’m pretty new to the investment world, so my understanding of these terms might be incorrect. That’s why I’m hoping somebody else could offer a more thorough explanation.

    13. dr. d says:

      Sir, A failure to deliver occurs on T+3 (“settlement date”) when the seller of securities fails to deliver that which it sold. A mere “locate” is an ultra-flimsy concept lobbied for by hedge funds and securities industry lobbyists. It falls well short of a “hard pre-borrow” which is more of a contractual matter. Even with a “locate” you’re still supposed to deliver by T+3. Mere flimsy “locates” would be used by abusive naked short sellers doing “intraday” or “intra-settlement cycle” attacks while trying to induce panic selling in the absence of an “Uptick rule”. A “locate” in reality has evolved into an illegitimate nudge, nudge, wink, wink given as a courtesy to fellow DTCC participants. That T+13 date you cited is the date by which delivery failures of “Threshold list” securities are to be bought in. This proved to be worthless as the crooks would merely “cross” or “park” their delivery failures every 12 days to circumvent being bought in. These are obvious cases of fraud as they serve only to postpone the “settlement” of the trade involved (which is forbidden by 15c6-1 of the ’34 Act) and to increase the lifespan of the readily sellable “securities entitlement” that resulted from the delivery failure. Recall that the original “contract” entered into was that delivery would occur by or close to T+3 because there really are “legitimate” reasons for 2 or 3-day delivery delays. Thus T+3 becomes T+ 300 and the incredibly damaging securities entitlements are given plenty of time to artificially manipulate the share price downwards due to their being readily sellable and thus dilutionary.

    14. bruiser says:

      I wonder how much phantom stock flooded the market in the last half hour….

      Bring back the uptick/plustick rule!!!

    15. dr. d says:

      I forgot to mention that in 2 days (10/17) idue to the new Rule 10b-21 it will officially be an act of fraud to give a bogus “locate” or to use deceit in your ability or intent to deliver by T+3. Likewise it will be deemed an act of fraud to lie about your “locate” source or your “ownership” of the securities you’re selling. When you lie about your “ownership” of securities you can bypass expensive borrows of “hard to borrow” securities because you bypass (fraudulently) labeling your sale as a “short sale” even though it really is. This introduction of the “F” word (“Fraud”) may or may not deter some of this criminal behavior that intentionally manipulates share prices lower. Share price “manipulation” has always been a form of “10-b fraud” but formally recognizing it as such may help provide the heretofore missing meaningful deterrence to these crimes. Many of the people contributing to this site, especially Dr. Byrne, are to be thanked for pushing 10b-21 through.

    16. dr. d says:

      Bruiser, in regards to the rescission of the “Uptick Rule” you mentioned I had really though I’d seen it all in almost 3 decades of studying naked short selling abuses. Then the SEC pulled the plug on the 74 year old “Uptick Rule” right in the midst of a worldwide demand for naked short selling reform. Why? Because a “pilot study” said it wasn’t doing that much good. As far as the need to quickly reinstate the “Uptick rule” you need to appreciate the concept of “self-generated leverage”. A clearance and settlement system like ours unconscionably based upon “collateralization versus payment” as opposed to “Delivery Versus Payment” when combined with no uptick rule is unfathomable. It results in the ability to access a self-generated leveraging cycle involving knocking out the bids in a serial fashion, inducing panic selling, merely collateralizing the debt and then scooping up the buyer’s money as the share price predictably tanks. This then allows the securities fraudsters that absolutely refuse to deliver that which they sell to assume and collateralize that much higher of a naked short position which results in another cycle of attacking the bids mercilessly, inducing more panic selling, collateralizing the obligation, scooping up the buyer’s money, etc. Being allowed to attack bids in a serial fashion not only triggers panic selling by especially the elderly unwilling to sustain a huge life-changing loss but it allows fraudsters to trip stop loss orders visible only to them. I still can’t believe they actually rescinded it with as many baby boomers as there are within striking distance of a well-deserved retirement. I can only imagine the pressure from the securities industry lobbyists and the hedge fund industry lobbyists it must have taken. Gee, I wonder why our entire financial system nearly imploded?

    17. bruiser says:

      dr.d – I am always glad to see intelligence in comments. I certain am and have been aware of the additional power that the recission of the “Uptick Rule” has given to shorts. It means that with a complicit broker and a little bit of capital, any schmo can make money selling short. All they have to do is to continually sell to the bid, create a panic, push the price down, wait a few days and cover. I would think that in a thinly traded stock, this would be relatively simple. At the very least, restoring the “Uptick Rule” would bring a measure of order to the markets and perhaps reduce the volatility a bit. (I feel pretty certain that volatility was a desirable effect to many of the hedge funds).

    18. Mitchell says:

      CLASS ACTION LAWSUIT against the SEC for allowing Market Makers to issue new shares of any publicly traded company without the approval of the Corporation Board and its shareholders.

      REG SHO LIST companies and shareholders sum a large amount of people.

    19. Sis.Temic Risk says:

      RIN 3235-AK06 “Naked” Short Selling Antifraud Rule
      AGENCY: Securities and Exchange Commission.
      ACTION: Final rule.

      SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting an antifraud rule under the Securities Exchange Act of 1934 (“Exchange Act”) to address fails to deliver securities that have been associated with “naked” short selling. The rule will further evidence the liability of short sellers, including broker-dealers acting for their own accounts, who deceive specified persons about their intention or ability to deliver securities in time for settlement (including persons that deceive their broker-dealer about their locate source or ownership of shares) and that fail to deliver securities by settlement date.
      DATES: Effective Date: October 17, 2008.

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

    20. SteveP says:

      The NY Times has NEVER been considered a reliable journal by intelligent people. If Mr. Norris was either reliable or intelligent, he wouldn’t fit in at the NY Times and would have to be fired.

    21. jeff says:

      So let me get this right.

      SEC’s Protection priorities:

      1) Deutch Bank
      2) Hedge Funds working the grift
      3) Owners of the DTCC
      4) Hedge Fund Lobby
      5) American Taxpayer
      6) Legit Lehman shareholders

    22. iDontKnow says:

      dr. d,

      Thanks a lot for your extensive reply. I think I understand a little more now. I would have a couple more questions, though.

      You mentioned that one way of avoiding the whole “fail to deliver” issue is to practice intra-day trading. That is, massive naked short selling at the start of the trading day, followed later on by equally massive buys.

      I’m just wondering: isn’t this an extremely risky proposition? What if one day there are some buyers willing to invest a significant amount of money in the stock? What if other investors/speculators start buying back as soon as the buying sentiment becomes predominant? Isn’t it extremely easy for a massive seller to find himself in a short squeeze, unable to cover his earlier trades without a significant loss?

      With no other option but to cover your sells by the end of the day, an attacker is, in my humble opinion, extremely vulnerable.

      I was wondering: are there any notable examples of naked short selling gone bad? Given the risks involved, especially in day-trading naked short-selling, I’d expect to be quite a few. (Yet, I’m unaware of any… maybe with the exception of LTCM.)

      Is it possible for a company to buy its own stock from a naked short-seller, and then simply cancel the shares? (I think it should be.) What if the company buys a significant amount of shares (>50% outstanding)? That should dramatically influence the short interest rate, and make it a lot more difficult for the naked short-seller to find someone from which to lend the shares.

      Are all the companies exposed to such attacks? (For example, I have a hard-time imagining how a company like Microsoft or Google could be driven into oblivion through such a tactic.)

    23. Anonymous says:

      Can you please send this story to your congress man or the NY Attorney General and tell us how they respond to this.
      Why is nothing being done about this?

    24. iStandUp says:

      Wonderful idea!!!!

      I have been wondering in my mind what I should write to my elected officials in Washington, and now I see that this story should be in my letter to my Senators and Congressman.

      I think this suggestion is most excellent since it will give our elected officials a concrete example for them wrap their mind around!

    25. Reporter101 says:

      What a bunch of crooks !!!

      Lehman Brothers, Inc. (CRD #7506, NewYork, NewYork) submitted a Letter of
      Acceptance,Waiver and Consent in which the firmwas censured, fined $250,000 and
      required to revise its written supervisory procedures regarding compliance with SEC
      Rule 200(f) and NASD Rule 3370(b)(2).Without admitting or denying the findings, the
      firmconsented to the described sanctions and to the entry of findings that its written
      plan of organizationmaintained to identify each aggregation unit, specify its trading
      objective(s) and support its independent identity failed to accurately describe a
      separate aggregation unit established for its riskmanagement purposes. The findings
      stated that the firmfailed to ensure that all traders in each aggregation unit pursued
      only the particular trading objective(s) or strategy (or strategies) of that aggregation
      unit and did not coordinate strategy (or strategies) with any other aggregation unit. The
      findings also stated that the firm’s supervisory systemdid not provide for supervision
      reasonably designed to achieve compliance with applicable securities laws and
      regulations, including SEC Rule 200(f), according to which the firmshould have
      maintained a written plan of organization that identified each aggregation unit,
      specified its trading objective(s), supported its independent identity and ensured that
      all traders in an aggregation unit pursued only the particular trading objective(s) of that
      aggregation unit. The findings also included that the firm’s failure to comply with these
      requirements affected the accuracy of the aggregationmethodology used to support its
      trade-by-trade calculations of net position. FINRA found that the firm’s ability to ensure
      the accuracy of its trade reports as to whether a particular trade was long or short,
      and whether a particular short sale was prohibited, was impaired and that, in some
      instances, this impairment resulted in flawed calculations of net positions, which
      resulted in violations of NASD Rules 3350 (the short sale rule) and 6130, and SEC Rule
      10a-1. FINRA also found that the firmaccepted short sales in securities for its
      proprietary account and customer short sale orders and, for each order, failed to
      annotate an affirmative determination that the firmwould receive delivery of the
      security or that the firmcould borrow the security or otherwise provide for delivery
      of the securities by settlement date. In addition, FINRA determined that the firm’s
      supervisory systemdid not provide for supervision reasonably designed to achieve
      compliance with NASD Rule 3370(b)(2). (FINRA Case #2004100012901)

      http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinaryactions/p117220.pdf

      Tradestation Securities, Inc. (CRD #39473, Plantation, Florida) submitted a Letter of
      Acceptance,Waiver and Consent in which the firmwas censured, fined $70,000 and
      required to revise its written supervisory procedures regarding short sales and
      compliance with NASD Rules 3110(b)(1), 3350, 3360, 3370 and 6130(d)(6).Without
      admitting or denying the findings, the firmconsented to the described sanctions and to
      the entry of findings that it accepted customer short sale orders in securities and, for
      each order, failed tomake/annotate an affirmative determination that the firmwould
      receive delivery of the security on the customer’s behalf, or that the firmcould borrow
      the security on the customer’s behalf for delivery by settlement date. The findings
      stated that the firmfailed to report short interest positions to FINRA. The findings also
      stated that the firm’s supervisory systemdid not provide for supervision reasonably
      designed to achieve compliance with applicable securities laws, regulations and NASD
      rules concerning short sales and compliance with NASD Rules 3110(b)(1), 3350, 3360,
      3370 and 6130(d)(6). (FINRA Case #2005000725101)

    26. Ron Moss says:

      Talk about your typical Junk Yard Dog From MortgageIT to sales to INDYmac This Dog should not be licensed to trade in the US.

    27. LibBerte says:

      Fraud Is Still Fraud, And Then Some

      http://www.dailypaul.com/node/55223#comment-727086

      “While “naked” short selling as part of a manipulative scheme is already illegal under the general antifraud provisions of the federal securities laws, we believe that a rule further evidencing the illegality of these activities will focus the attention of market participants on such activities. Rule 10b-21 will also further evidence that the Commission believes such deceptive activities are detrimental to the markets and will provide a measure of predictability for market participants.”

    28. dr. d says:

      “i don’t know”-your question is a good one. If the “intra-day” attack doesn’t work out then the “intra-day” attack is extended to an “intra-settlement cycle” attack. There are 4 full trading days between the morning of trade day and the afternoon of T+3. That’s an eternity. If the “intra-settlement cycle” attack doesn’t work out then you simply fail to deliver and the FTD (failure to deliver) goes either into the “black hole” for FTDs known as “ex-clearing” or into the “C” sub accounts of the DTCC where the DTCC with 100% certainty will pretend to be “powerless” to buy it in. From the DTCC’s now famous 1/27/06 press release:
      ”DTCC subsidiaries clear and settle trades. Short selling and naked short selling are trading strategies regulated by the marketplaces and the SEC. DTCC is involved after a trade is completed at the marketplace. DTCC does not have regulatory powers or regulatory responsibility over trading or to forcing the completion of trades that fail. As the SEC has stated, fails can be the result of a wide range of factors.”

      If the corporation under attack is on the “Threshold list” then you simply either cover by T+12 to avoid the T+13 mandated “buy-in” or illegally “cross” or “park” the delivery failure with a co-conspirator to “refreshen” the delivery failure and illegally postpone the “settlement” of the trade (Rule 15c6-1 makes it illegal) which in turn allows the securities entitlements resulting from the delivery failure to do its damage to the share price via inflating the “supply” of readily sellable “entities” whether they be legitimate shares or mere “securities entitlements”. In a clearance and settlement unconscionably based on “collateralization versus payment” instead of “delivery versus payment” you never, never, never have to cover a naked short position. All you have to do is to “collateralize” it. That’s why this is a game for the rich that have no problem in collateralizing huge debts. Picture a hedge fund with $10 billion that is leveraged at 10-to-1 by its prime broker. They would be insane to ever cover a naked short position in our DTCC-administered clearance and settlement system. All of the world authorities on clearance and settlement systems including the Bank for International Settlements (BIS) and the Committee on Payment and Settlement Systems and the
      Technical Committee of the International Organization of Securities Commissions in its “Recommendations for Central Counterparties (November 2004) clearly state that a clearance and settlement system with integrity must be based on “Delivery versus payment” and the seller of securities should NEVER be allowed to gain access to the funds of a purchaser of securities UNTIL he makes good form delivery of that which he sold. Our DTCC disagrees which makes U.S. development stage corporations the prey of choice for abusive naked short sellers worldwide. Interestingly the new 10b-21 that becomes effective tomorrow introduces the concept of “aiding and abetting” fraudulent behavior for the various “facilitators” of these frauds on Wall Street.

    29. Awed says:

      If everyone involved in the scam is on the take, do we have a casino or a market? My vote is clearly for casino as the government, financial houses, and regulators are all on the same payroll and we the taxpayer and “investor” (e.g. mark) are at the virtual craps table.

    30. Frank Henry says:

      Hi,

      “…what a web we weave…”

      Lets hope that all nations and all players
      clean up this mess.

      Thanks and Good Luck.

    31. Steve Lemelin says:

      Bravo Mr. Byrne!!!!

      Just wrote this piece highlighting naked shorting. This goes beyond corporate securities. It is estimated by reliable sources, that approximately 90% of all gold and silver contracts on the commodities exchange (COMEX), has no metal to back it. Didn’t counterfeiting claims on ownership begin in 1913 with the Federal reserve Act??

      THE ABUSE OF YOUR FICTITIOUS WEALTH:
      http://deliberatecoincidences.blogspot.com/2008/10/abuse-of-your-fictitious-wealth.html

      Best regards,
      Steve Lemelin
      P.S. James Puplava fund manager at FINANCIALSENSE.com, is hot on this topic and has highlighted Attorney John O’Quinn and Wes Christianson’s lawsuits about thuis. WIll this be the next “big tobacco” suits?

    32. pr says:

      this article is being featured at http://www.marketrap.com/

      We need to spread this and stop this nonsense.

    33. Jack W. says:

      The world assets have been stolen by naked shorts – no difference as printing real cash!. This is really fxxking big time!

    34. LibBerte says:

      Dr d

      You remarked that Rule 10b – 21 “ … introduces the concept of aiding and abetting…”

      I understand why those who have followed the SEC ‘hands off’ approach to naked short selling under past enforcement policy recognize these new announcements and rules as substantive changes; however, there are reasons ( ex post facto) to take the SEC enhancements at face value in the way they wish to characterize them — mere clarification and renewed emphasis.

      http://www.dailypaul.com/node/55223#comment-727086

      Under section F to the discussion here is how to SEC chooses to introduce the concept of aiding and abetting:

      SECURITIES AND EXCHANGE COMMISSION
      17 CFR PART 240
      [Release No. 34-58774; File No. S7-08-08]
      RIN 3235-AK06
      “Naked” Short Selling Antifraud Rule

      F. Aiding and Abetting Liability

      “In the proposing release, we stated that ‘[a]lthough the proposed rule is primarily aimed at sellers that deceive specified persons about their intention or ability to deliver shares or about their locate source and ownership of shares, as with any rule, broker-dealers could be liable for aiding and abetting a customer’s fraud under the proposed rule.’”

      In responding to comments concerning possible adverse impact, at page 33, the discussion of Rule 10b – 21 continued:

      “Another commenter stated that, ‘unless Proposed Rule l0b-21 were modified to eliminate aiding and abetting liability and allow reliance upon customer assurances, the price discovery
      and liquidity provided through short sales may be constrained.’ Although broker-dealer concerns regarding aiding and abetting liability under Rule 10b-21 may potentially impact liquidity and efficiency in the markets, we believe that such an impact, if any, will be minimal. Rule 10b-21 as adopted does not impose any additional liability or requirements on any person, including broker-dealers, beyond those of any existing Exchange Act rule. Aiding and abetting liability is a question of fact, determined on a case-by-case basis. In addition, as we stated in the Proposing Release, broker-dealer’s would remain subject to liability under Regulation SHO and the general antifraud provisions of the federal securities laws.”

      If aiding and abetting fraud has always been illegal, these rules are not new standards, but merely shed light on how past conduct should be scrutinized.

      Look out DTCC and Broker-Dealer Participants, HERE WE COME!!

    35. Inept says:

      http://www.thestreet.com/print/story/10442744.html

      This comment is not addressed to the specific post by Mitchell, but I want to reach this audience.

      Regarding the link above, Cramer’s schtick has always gotten under my skin, but some of his commentary of late is pegging much of what is happening. He has gone from being a colluder with those abusing their heft to overwhelm and move markets and individual stocks to pointing out the danger they represent when they themselves are overwhelmed. I guess it’s a matter of what goes around comes around, not that that is any comfort to the rest of us.

    36. iStandUp says:

      SALT LAKE CITY, Oct 10, 2008 /PRNewswire-FirstCall via COMTEX/ — Overstock.com, Inc. (OSTK) chairman and CEO Patrick M. Byrne sends an open letter to President George W. Bush.

      October 10, 2008

      Mr. George W. Bush
      President of the United States of America
      1600 Pennsylvania Avenue
      Washington, D.C. 20500

      Dear President Bush,
      I was pleased to hear you say today that the SEC is taking action to stop manipulative practices in our markets. One such practice that the SEC must stop immediately is the insidious practice of naked short selling. In order for our stock settlement system to work so that trades actually settle, the SEC (or Congress) must take the following steps:

      1. Enact a market-wide mandatory pre-borrow requirement for all short sales;
      2. Put in place a market-wide hard-delivery requirement on T+3 for allsales;
      3. Require that for any failure-to-deliver, broker-dealers must force amandatory buy-in;
      4. Track each trade cradle-to-grave, so that prosecutors can go after naked short sellers;
      5. Require regular and timely disclosure by naked short sellers of when and how many shares they are failing to deliver; and
      6. Enforce these rules, including significant monetary penalties and jail time.

      In addition, I believe that Washington must conduct a 9-11 Commission kind of investigation into our nation’s entire clearing and settlement system.

      Naked short selling is a significant issue. It has contributed to the recent fall of some of our financial institutions and exacerbated the current market crisis.

      A well functioning capital market should settle trades. Only when there are laws in place that ensure settlement of all trades and when those laws are vigorously enforced, will the scourge of manipulative naked short selling stop.

      Sincerely,
      Patrick M. Byrne, PhD.
      Chairman and Chief Executive Officer

      cc: Senator Harry Reid, Senate Majority Leader
      Senator Christopher J. Dodd, Chairman, Senate Banking, Housing, and
      Urban Affairs Committee
      Senator Richard Shelby, Ranking Member, Senate Banking, Housing, and
      Urban Affairs Committee
      Representative Nancy Pelosi, Speaker of the House of Representatives
      Representative Barney Frank, Chairman, House Committee on Financial
      Services
      Representative Spencer Bachus, Ranking Member, House Committee on
      Financial Services
      Christopher Cox, Chairman, Securities and Exchange Commission
      Kathleen L. Casey, Commissioner, Securities and Exchange Commission
      Elisse B. Walter, Commissioner, Securities and Exchange Commission
      Luis A. Aguilar, Commissioner, Securities and Exchange Commission
      Troy A. Paredes, Commissioner, Securities and Exchange Commission
      Eric R. Sirri, Director, Division of Trading and Markets, Securities
      and Exchange Commission
      Henry “Hank” M. Paulson, Jr., Secretary, Department of Treasury

      ( http://www.marketwatch.com/news/story/ov…{EEA800B4-FAD6-41EC-9453-ADE0D72057E9}&dist=hppr )

    37. AMG says:

      I do not believe in coincidence. Just finished a blog posting “Selective Transparency: Who is the SEC Really Protecting?” that reviews the many changing positions of the SEC as it related to the public dissemination of the short positions of the major hedge funds and institutions over the last month. The article compares the decreasing number of stocks that appear on the SHO List over this period as well as the markets declined. You don’t actually think these “bad boys” actually located shares to match the naked short positions, do you? My guess is that, under the selective transparency of the SEC they just covered.

      The SEC knows exactly what went on in the past and what is transpiring currently. If they would simply require a firm “locate” number going forward they would not have to deal with the naked shorting problem going forward but that simple logic seems out of their realm of understanding.

      In any case, take a read and keep watching. Working on another article as to how we deal with extinguish phantom shares. That is going to take a little input from our friends at the DTCC but I’m sure they will be happy to cooperate . . . yeah, right.

      Enjoy what is left of the weekend.

      http://aaronmorgangroup.typepad.com/aaron_morgan_group_blog/

    38. Sis.Temic Risk says:

      D-day looms for Lehman contracts

      A fresh shockwave from the collapse of US investment bank Lehman Brothers could hit home on Tuesday when complex insurance contracts worth hundreds of billions are settled, it was reported.

      Around 360 billion US dollars (£208bn) in so-called credit default swap (CDS) contracts are due to be paid off following the company’s failure.

      A CDS essentially acts like an insurance policy against defaults on corporate bonds or loans.

      It is a form of derivative contract, gaining a “derived” value from the performance of the bond it is based on.

      But because Lehman went bust, those selling CDSs to insure against default on its corporate bonds will be forced to stump up the cash to buyers.

      Tuesday is the D-Day for the complex web of transactions. A City source told the Sunday Telegraph: “Everyone will be watching the situation and wondering what’s going to happen.”

      AIG, the insurance giant which was one of the biggest sellers of CDS products, is thought to have large exposure to Lehman Brothers and was bailed out by the US Government last month.

      The Treasury has pumped in more than 120 billion US dollars (£70bn) into the stricken firm so far.

      Other insurers of Lehman’s debt are thought to be hedge funds, who created and sold CDSs as a lucrative revenue-raising exercise in better times.

      Although CDSs were originally designed as insurance products to allow investors to hedge against the risk of default, traders have also used them as speculative tools.

    39. LibBerte says:

      AMG :

      This Dog Will Hunt !!

      You’ve got a good nose and are trailing the right scent.

      http://www.dailypaul.com/node/69628#comment-732808

      You are on point !

      http://www.dailypaul.com/node/69201#comment-726977

      Let’s see if we can flush ‘em out ( since they flock together) and bag some of these birds of prey and retrieve what they’ve clutched in their talons before they feather their nests more….

    40. AMG says:

      LibBerte . . .

      . . . and everyone else . . . thanks.

      The response aned feedback has been very positive and sincerely appreciated. We all appreciate everything everyone does . . .

      . . . time to make the minority the majority.

      AMG

    41. ron doc says:

      Bet this one wants to jump in the old jet and beat it out before the bullets start flying!

      So long, suckers. Millionaire hedge fund boss thanks ‘idiot’ traders and retires at 37

      Andrew Clark in New York The Guardian, Saturday October 18 2008 larger | smaller Article history

      The boss of a successful US hedge fund has quit the industry with an extraordinary farewell letter dismissing his rivals as over-privileged “idiots” and thanking “stupid” traders for making him rich.

      Andrew Lahde’s $80m Los Angeles-based firm Lahde Capital Management in Los Angeles made a huge return last year by betting against subprime mortgages.

      Yesterday the 37-year-old told his clients that he had hated the business and had only been in it for the money. And after declaring he would no longer manage money for other people, because he had enough of his own, Lahde said that instead he intended to repair his stress-damaged health; he made it clear he would not miss the financial world.

      “The low-hanging fruit, ie idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking,” he wrote. “These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government,” he said.

      “All of this behaviour supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

      Lahde became one of the biggest names in the investment industry when one of his funds produced a return of 866% last year, largely by forecasting the US home loans industry would collapse.

      In his farewell letter, which concluded with an appeal for the legalisation of marijuana, Lahde said he was happy with his rewards and did not envy those who had made even more money.

      “I will let others try to amass nine, 10 or 11 figure net worths. Meanwhile, their lives suck,” he wrote, citing a life of back-to-back business appointments relieved only by a two-week annual holiday in which financiers are still “glued to their Blackberries”.

      Lahde’s retirement came amid an implosion among the hedge fund industry – some 350 of the funds have liquidated this year, according to Hedge Fund Research.

    42. Inept says:

      Boiled Blood – any astute observer didn’t need SeekingAlpha to tell them what happened. Paulson sought protection against liability when he first proposed the big bailout. Anybody know what happened to that – did our wonderful Congress give it to him? Not that it’s a model in this regard, but my sense of justice likes what China has been known to do to those who have unduly profited from what is, after all, corruption of the highest order. I.e., more kidneys available for transplant. WE have the inmates running the asylum. In different times and different places, what is happening to our economy is the stuff of revolution. ARRRGH!!

    43. Sean says:

      The word is getting out and traction has taken hold…

      Folks if South Dakota can do it why can’t others ? Are all states crooked or owned by Wall Street?

      http://www.youtube.com/securitiesreform

      Also please look at this other video

      http://www.youtube.com/watch?v=-KQwbouyCXo&feature=related

    44. Sean says:

      With everything that is going on they are still decimating OSTK stock price. Now down to $10. These guys are not scared of anykind of reprucussions. They must know something that we dont!!!

    45. Sean says:

      I wonder who dropped dime on her? You think Dick Fuld? Naw, but I think we may have another Gary Aguirre in the making here.

      Enjoy the read..

      Senate Investigators Target SEC Officials

      Senate Investigators Target SEC Officials

      Inside Knowledge on Bear Stearns Cited

      By Amit R. Paley

      Washington Post Foreign Service
      Wednesday, October 22, 2008; Page D03

      Senate investigators are looking into whether senior officials at the Securities and Exchange Commission provided confidential information to former colleagues working on Wall Street.

      The inquiry began after the SEC’s Inspector General received an anonymous tip earlier this month. It alleged that Linda Chatman Thomsen, the agency’s director of enforcement, gave information about investigations into Bear Stearns around March to the general counsel of J.P. Morgan Chase, which at the time was considering whether to buy the troubled investment bank. The Oct. 7 complaint claimed that the inside knowledge obtained by the attorney, Stephen M. Cutler, a former head of enforcement at the SEC, allowed J.P. Morgan to low-ball its bid to purchase Bear Stearns.

      A copy of the complaint was also provided to Sen. Charles E. Grassley (R-Iowa), the ranking member on the Senate Finance Committee.

      In a letter sent last night to the SEC, Grassley asked for information about all SEC investigations into Bear Stearns, as well as communications between SEC officials and J.P. Morgan Chase about those cases.

      “Such conduct would reinforce the appearance that Enforcement decisions, and disclosures of information about them, are sometimes based not on the merits,” he wrote in his letter yesterday, “but rather on access to senior officials by influential representatives of power brokers on Wall Street.”

      An SEC spokesman declined to comment last night. J.P. Morgan Chase did not respond to a request for comment last night.

      The inspector general, H. David Kotz, issued a report last month that criticized what some agency employees called the “common practice” of outside lawyers gaining access to senior SEC officials. He also said the agency should consider disciplining Thomsen for such behavior while she was in charge of an insider-trading case.

      Grassley raised concerns last year about improper communications between high-level SEC officials and attorneys at firms under investigation.

    46. Sean says:

      What a surprise, guess whowas caught and fined for naked shorting??

      October 22, 2008, 3:15 pm

      We See Dead People: $250K Fine for Lehman Short-Sales

      Posted by Heidi N. Moore
      Sometimes, when Deal Journal closes our eyes, we can picture Lehman Brothers Holdings as it was when it was still alive.

      We aren’t the only ones, apparently. The Financial Industry Regulatory Authority, or FINRA, scores our prize for Great Moments in Delayed Reactions for its fine and censure of Lehman. As Bill Singer’s Broke and Broker Blog discovered today, FINRA has censured and levied a $250,000 fine on the defunct firm, which is in ugly process of unwinding what it owes to creditors.

      To give FINRA full credit, the Wall Street self-regulatory group was investigating the complaint before Lehman’s bankruptcy filing in mid September. FINRA’s complaint–all too prescient, as it turns out–was that Lehman didn’t provide enough disclosure about its short sales and didn’t do enough to distinguish between the securities firm’s own short-selling orders and those of customers.

      FINRA says: “The Firm’s ability to ensure the accuracy of its trade reports as to whether a particular trade was long or short, and whether a particular short sale was prohibited, was impaired and that, in some instances, this impairment resulted in flawed calculations of net positions….The Firm accepted short sales in securities for its proprietary account and customer short sale orders and, for each order, failed to annotate an affirmative determination that the firm would receive delivery of the security or that the firm could borrow the security or otherwise provide for delivery of the securities by settlement date.”

      If Lehman couldn’t guarantee that it was allowed to borrow the stock or would in fact receive the borrowed share, that would count as naked short-selling, a practice that isn’t illegal but was roundly criticized in recent months.

      Of course, FINRA isn’t the only one to get its licks in long after Lehman’s bankruptcy surprised the markets. Credit raters Moody’s Investors Service and Fitch infamously downgraded Lehman to a junk rating–after the Sept. 15 bankruptcy filing.

      Lehman’s bankruptcy proceedings are teeming with angry creditors trying to figure out just how much the firm had in assets, and how much they can expect to get. Considering that those creditors are trying to figure out where over $630 billion in stated assets went, FINRA’s $250,000 claim is hardly the biggest concern.

      Permalink | Trackback URL: http://blogs.wsj.com/deals/2008/10/22/we-see-dead-people-250k-regulatory-fine-for-lehman-short-sales/trackback/

    47. Hang_'em_High says:

      Is this the start of a Foreign Relations NIGHTMARE with China regarding the lack of enforcement of settlement causing Fails-to-Delivers created by the Naked Short Sellers?

      The Chinese company, Origin Agritech (“SEED”), has “….has filed a letter of complaint with the U.S. Securities & Exchange Commission regarding the naked short selling of the company’s stock.” (see press release link below)

      Maybe pressure from Mainland CHINA will trigger the SEC to require a PRE-BORROW on all short sales?

      In my view, the manipulation by the Naked Short Sellers caused the Financial Sector crash – which has spread around the world. Until the financial CRIMINALS are hanging high, this manipulative fraud will continue — and all investors (worldwide and in CHINA) have been — and are still being affected — as panic-selling has now set into the markets.

      Senator Orrin Hatch estimates that total Fails-to-Delivers amount to $6 BILLION PER DAY. This makes Enron look like an anthill.

      May God Bless Dr. Patrick Byrne and Mr. Mark Mitchell (American Heros) and other courageous, brave people for fighting back against these financial criminal cowards – who can only manipulate easy money, not earn money.

      Link to Origin Agritech’s news release:

      http://biz.yahoo.com/bw/081006/20081006005989.html?.v=1

      On a side note, I hope the State of South Dakota is successful in stopping Fails-to-Delivers in their state. The former Attorney General there has led a charge…and now has a General Ballot Measure for the people to vote on….on November 4th, 2008. Here’s the link to their website:

      http://www.voteyes9.com/

      With the very strong, powerful, influential Hedge Fund lobby at the Federal level, I recommend that each and every person contact their state legislators (elected officials) to request that legislation be written asap — modeled after the State of South Dakota. It’s the path of least resistance. These financial manipulative criminals can be stopped at the State Level.

      If every state gets 19,000 signatures, and General Ballot Measures pass in each state, then the Naked Short Sellers will be prosecutable.

      Let’s get some justice back into the markets!

      Hang_’em_High

    48. mateo says:

      This grass roots movement to draw attention to “naked shorting” is great. However, I have a problem that Jim Cramer is featured on their website http://www.voteyeson9.com (there is an earlier post regarding South Dakota legislation on the ballet). As usual, he is being featured as the guardian of “main street.” I know for a fact that he and Greenberg were after Hansen Natural Corp. several times. As an investor in that company, I will never forget what they did and how far the stock would move down after they did it…and I will never forgive them. These acts are criminal. All completely baseless claims. Now, if you all would, please contact this organization (voteyeson9) and ask them to remove Jim Cramer as their poster child. They don’t need him for this and either do we. Thanks to everyone who has contributed.

      mateo

    49. AMG says:

      Our latest blog entries and the announcement of “Citizens for Wall Street Reform” a non-profit organization we formed to fight the illegal activities on Wall Street.

      New Entry Aaron Morgan Group Blog entry wher we tie the pieces of the puzzle together and show why securities have been falling off the Threshold SHO List. It is not due to finding “locates”.

      http://aaronmorgangroup.typepad.com/aaron_morgan_group_blog/2008/10/number-of-secur.html

      The New Blog: Citizens for Wall Street Reform

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

      Educating and bringing awareness to the public is one this. Taking action to the next level is another.

      No one could ever thank Mark, Patrick, Judd and all others who centralized this cause. It is up to the rest of us to move it forward.

      AMG

    50. Rich says:

      It’s time to simply outlaw short selling. Such activities are parasitic in nature with no benefit to the good of the overall market. Fraud = criminal = jail + forfeiture of wealth

    51. AMG says:

      . . . just require a verifiable locate. Shorts do provide liquidity when done fairly and prevent manipulation on the opposite side of the market.

      If that problem is solved in this fashion all we need do is turn our attention to a bigger problem. Phantom shares, the excess number of shares, over and above the stated outstanding and authorized number of shares need be absorbed.

      The question is how. Perhaps a topic for a future blog but honestly, without what is nothing less than “repatriation” by the issuer, this task will be almost impossible.

      Imagine having 150% of your stated aurhorized shares trading without the underlying company having the benefit of those shares creating the commensurate add on capital as if issued. In other words, if the shorts cover, the money should go to the issuer. The question becomes, at what price this transfer of wealth occurs.

      AMG

    52. mhelburn says:

      In the closing days of the election, McCain finally recognizes the criminals on Wall Street, but he jumped on the bailout like the rest of the lemmings in Washington. Obama makes some references that won’t offend anyone.

      I doubt that there will be any leadership from the White House, certainly not any in a timely manner. McCain was correct in asking for Cox’s removal, but came off like a quick-shooter.

    Trackbacks/Pingbacks

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