It’s difficult to overstate the influence of Wikipedia these days, particularly when it comes to informing media coverage. A recent experiment, carried out by a student in Ireland, makes this very clear. So it should come as no surprise that those who wish to minimize the perceived impact of illegal naked short selling on markets and the economy as a whole have made the online encyclopedia a major point of focus.
Recently, yet another effort to infiltrate and alter the content of Wikipedia by a proponent of illegal shorting came to light and was foiled. As before, the infiltrator was former Business Week reporter Gary Weiss (whom a senior contributor recently termed “one of [Wikipedia’s] most slippery sockpuppeteers”), operating for over a year in complete defiance of an edict specifically banning him from the site based on his very well-documented history of abusing Wikipedia for his own conflicted purposes.
In the past (as you can read about here), we know Weiss spread misinformation relating to stock fraud via Wikipedia on behalf of the Depository Trust and Clearing Corporation (DTCC), the Wall Street firm considered a key enabler of illegal short selling. Exactly who’s sponsoring Weiss these days is unclear; however, as the evidence that follows will demonstrate, his concerted effort to whitewash DTCC’s Wikipedia article makes that company the prime suspect.
Now that his ruse has been uncovered – yet again – the focus becomes one of identifying and repairing the damage done. A brief review of some of the thousands of changes made by Weiss will give you a sense of both the scope of the problem and the nature of his motives. I’m organizing the following tiny sampling of Weiss’s Wikipedia edits by topic, with the content as it originally appeared on the left, with Weiss’s changes on the right. Words added or removed appear in red.
As you read what follows, ask yourself two questions:
Which version, be it the left (before Weiss) or the right (after Weiss), better reflects reality and serves readers (particularly journalists) seeking to form an opinion?
What might be Weiss’s motive for obsessively making these changes (and literally hundreds more like them)?
While there is no dispute that illegal naked shorting happens, there is a fight as to the extent to which DTCC is responsible. Some blame DTCC as the keeper of the system where it happens, and charge that DTCC turns a blind eye to the problem.
Critics blame DTCC as the keeper of the system where it happens, and charge that DTCC turns a blind eye to the problem.
The DTCC has also denied having any relationship with financial journalist Gary Weiss. Weiss is alleged to have manipulated an account on Wikipedia, with assistance from several Wikipedia administrators, to promote naked short selling on the website from January 2006 to March 2008.
Author and reporter Gary Weiss maintains that the SEC enacted Regulation SHO in part due to pressure from a handful of small and microcap companies. He also cites economic justifications for naked short selling and downplays its significance as a problem for the market. (note: upon making this change, Weiss also added a link to his book, referring to himself as a source of “notable media opinions.”)
Amidst growing concern in 2008 about the effect of naked short selling on faltering companies, the SEC issued a temporary order restricting short-selling of the shares of 19 financial firms deemed systemically important. Shortly following the failure of Lehman Brothersin September of 2008, the largest bankruptcy in U.S. history, the SEC expanded the temporary rules to remove exceptions and to cover all companies.
As part of its response to the crisis in the North American markets in 2008, the SEC issued a temporary order restricting fails to deliver in the shares of 19 financial firms deemed systemically important. In September of 2008, the largest bankruptcy in U.S. history, the SEC expanded the temporary rules to remove exceptions and to cover all companies.
During hearings on the 2008 financial crisis before the House Committee on Oversight and Government Reform, former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers.
During hearings on the 2008 financial crisis before the House Committee on Oversight and Government Reform, former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. However, Fuld’s testimony was generally derided as self-serving.
Rolling Stone magazine featured naked shorting in an article, “Wall Street’s Naked Swindle” by Matt Taibbi, in October 2009. In the article, it was reported that an unknown investor had shorted $1.7 million worth of Bear Stearns stock through a variety of options. For the item to make a profit, Bear Stearns would have had to have lost half its value or more in less than nine days. When Bear Stearns collapsed, the options were worth $270 million, or 159 times its previous value.
Rolling Stone magazine featured naked shorting in an article, “Wall Street’s Naked Swindle” by Matt Taibbi, in October 2009.
Effective September 18, 2008, amid claims that aggressive short selling had played a role in the failure of financial giant Lehman Brothers, the SEC made permanent and expanded the rules to remove exceptions and to cover all companies.
Effective September 18, 2008, the SEC permanently removed an exemption for market making in options on stocks, and making an explicit anti-fraud regulation relating to that activity. The stringent delivery requirement is temporary.
In the suit, Robertson requested $1 billion in damages for, in Robertson’s words, “false and defamatory statements” contained in Weiss’ article. Media response to the suit noted the unusually high damages demanded for a libel suit and speculated that the case would be watched with concern by the publishing industry.
The suit was subsequently settled without payment of damages, and Robertson’s fund closed in March 2000.
Starting in June 2009, a series of articles by Mark Mitchell were published on a website called Deep Capture about Milken’s ties to a select group of hedge funds and the stock manipulation of a company called Dendreon (NASDAQ:DNDN). Dendreon has developed a drug called Provenge that enables the human body’s immune system to better fight prostate cancer.
(removed by Weiss and replaced by others at least three times)
If there is a silver lining to this cloud, it’s the following: Wikipedia’s current ruling Arbitration Committee, which has the unenviable task of, among other things, dealing with Weiss and his continued efforts to subvert their authority, is genuinely interested in doing the right thing in this situation. Though you might take that for granted, I can assure you that this has not always been the case. Indeed, at one time, Wikipedia’s ArbCom seemed to go out of its way to enable Weiss’s abuse of this most important social media platform, resulting in (if you can believe it) an even greater number of yet more dramatically skewed and self-serving changes to these articles by Weiss.
Wikipedia has come a long way since then.
Finally, it seems unlikely that Portfolio.com, where he authors a business column, is aware of Gary Weiss’s actions. They would probably appreciate knowing more. If you agree, consider sending a brief and informative note to Condé Nast Publications Group President David Carey: David_Carey@condenast.com.
And now, for what long-time readers of DeepCapture.com will recognize as my favorite part of writing about Gary Weiss: a little running up of the score (piling on with additional insights that don’t necessarily make the case on their own, but certainly make the case much more entertaining).
After discovering the Wikipedia edit placing Gary Weiss within the Fort Knox-like DTCC (see this for the explanation, if you didn’t already follow the link above), I sent DTCC spokesman Stuart Z. Goldstein the following email:
From: Judd Bagley
To: Stuart Goldstein
Sent: Wed, 31 Jan 2007 10:24 PM
Subject: media inquiry
Yesterday I received some information suggesting Gary Weiss either is or has been hired or retained by the DTCC (or DTC or NSCC). Can you confirm the existence of a professional relationship between Gary Weiss and your organization?
More than two days passed with no response. Finally, I received the following:
From: Stuart Goldstein To: Judd Bagley Date: Fri, Feb 2, 2007 at 12:00 PM Subject: your inquiry
*** Body Not Included ***
That’s right…the body of the email read only “*** Body Not Included ***”
With that, I responded:
From: Judd Bagley To: Stuart Goldstein Date: Fri, Feb 2, 2007 at 1:20 PM Subject: Re: your inquiry
Thanks for your reply, though the body appears to be missing…may I trouble
you to re-send your reply?
Goldstein’s record-breaking response (especially considering his earlier reply took two days to arrive) hit my inbox three minutes later:
From: Stuart Goldstein To: Judd Bagley Date: Fri, Feb 2, 2007 at 1:23 PM Subject: Re: your inquiry
My response to your question is no.
On the surface, this would seem to be Goldstein denying a relationship between DTCC and Weiss. The problem is, I didn’t ask a yes or no question. I asked him to confirm something specific, to which he responded “no.” The answer didn’t fit.
I twice asked Goldstein to clarify his response, and was twice ignored.
That’s when I realized I’d been played.
Goldstein’s quick reply of “My response to your question is no” was probably calculated beforehand as his response to my inevitable request that he re-send the reply which read only “*** Body Not Included ***”.
He got me.
Here’s how this applies to Weiss.
Weiss’s most recently-banned Wikipedia sockpuppet, known as JohnnyB256, generally began to arouse suspicion in September, following a series of extremely slanted edits to the Wikipedia article on DTCC. At that time, multiple Wikipedia editors asked JohnnyB256 if he had a relationship with Gary Weiss. JohnnyB256 avoided answering the question (other than to dismiss it as “unmitigated gall”) until a senior Wikipedia administrator known as Lar inserted himself into the conversation to say he felt it was a “reasonable question.”
JohnnyB256 then responded, in a way that was unambiguously directed to Lar alone, saying, “The answer to your question is ‘no’.”
Only problem is, Lar was the one person who never asked him the question. Unfortunately, nobody picked up on this serpentine strategy at the time, allowing JohnnyB256 to claim he’d already answered the question of a link to Weiss when it came up from time to time.
Anybody else suspect Weiss and the DTCC are using the same playbook?
Wikipedia’s Jimbo Wales sees Gary Weiss sockpuppeting all over the internet
As is described at great length in these pages, Wikipedia has been one of the principal battlegrounds in the effort to cover-up the crime of illegal naked short selling.
For just over two key years, former journalist Gary Weiss dedicated an enormous amount of time and energy to the process of gaining control over and skewing the Wikipedia article on naked short selling. We know that given Wikipedia’s influence as a research tool – of journalists in particular – the heavily Weiss-influenced version of the article made it much more difficult than it should have been to get real reporting done on the issue.
Fortunately, as more and more Wikipedians came to see what Weiss was doing, an army of volunteers banded together to prove, beyond any doubt, the extent of Weiss’s deception. Their conclusion: Weiss created multiple Wikipedia identities (commonly known as “sockpuppets”) working in parallel to give the false impression of much more support for his position than actual existed.
This is a huge no-no on Wikipedia, and resulted in Weiss’s permanent expulsion from the project, and the liberation of the naked short selling article (though far too late to matter, as naked short sellers managed to destroy Bear Stearns exactly one month later).
If you’ve followed the Deep Capture saga for very long, that much you probably knew.
Now you’re going to hear the rest of the story.
For the purpose of what follows, you need to know that in 2007, Weiss’s two main Wikipedia sockpuppets were named Mantanmoreland and Samiharris. In September of that year, a group of Weiss’s protectors decided to create a private mailing list in order to counter the efforts of the growing number of people already working together to expose Weiss, his lies and his enablers.
Included on that private list were Wikipedia’s founder Jimbo Wales and three or four dozen other members of the site’s inner circle. Just to complete the illusion, Gary Weiss also joined the list…twice, as both Mantanmoreland and Samiharris.
Some time ago, I was given many of the emails exchanged by what came to be known as the super-secret Wikipedia Cyberstalking list. What follows is an abridgement of one of them.
The thread begins with Weiss sock Samiharris lamenting the failure of an effort to silence Wikipedia editor Cla68, who had engaged in multiple attempts to make the article on Gary Weiss himself (which was, in fact, written by Weiss) read a little less like a promotional brochure.
The matter became so contentious that Jimbo Wales himself and Cla68 exchanged emails in an attempt to find some common ground. By the time that exchange was over, Jimbo wrote to the members of the Wikipedia Cyberstalking list:
“Cla68 has written to me, and what he has written confirms what I have thought for a long time… I am not the only sane and reasonable person who thinks it very likely that Mantanmoreland is Gary Weiss and who would be thrilled to have a proof otherwise.”
“If Mantanmoreland would properly identify himself to me and prove that he is not Gary Weiss, we could put all this to bed quite easily.”
Of course, Mantanmoreland (Weiss) did not appreciate this, and responded:
“I am disheartened by Jimbo’s private comments, disgusted by his handling of stalkers when they correspond with him, and have absolutely zero faith in his ability to properly handle stalker issues himself. I am sorry, but this is something he should delegate to others. When he privately corresponds with a stalker like Bagley or a helper like Cla68 his heart melts and he gets all mushy. It has happened before and it has happened again. It’s not going to stop. Wikipedia’s handling of stalkers is going to fail as long as stalkers can make headway by privately corresponding with Jimbo.”
Jimbo’s slight mangling of Shakespeare can be forgiven by this, his pitch-perfect response:
“The queen doth protest too much, Gary.”
Weiss’s reply barely manages to contain his rage:
“Oh I missed the “Gary”. Please be sure to use that name every time you refer to me, as I want to be reminded of your behavior tonight…because tonight was the night you officially became a stalker.”
That’s right. Weiss, having found some success labeling me and everybody else intent on enforcing some accountability for his actions “stalkers”, actually applied the label to Wikipedia founder Jimbo Wales himself.
At that point, Samiharris (also Weiss, remember) decides to offer himself some support in condemning Wales:
“I have to sleep on it to absorb the magnitude of the founder of Wikipedia acting this way.”
With that, Mantanmoreland and Samiharris signed off.
The next day, Samiharris started a new thread, hoping to recast Mantanmoreland’s earlier attacks on Wales:
“At its very lowest point, Jimbo precisely replicated the tone and content of a [Wikipedia criticism site] Wikipedia Review attack. I mean that literally. His response to Mantanmoreland, calling him “Gary,” could have been made by [Wikipedia Review administrator] Somey.”
To this, Wales offered the response of his life:
“I am frustrated that Mantanmoreland has not been more helpful to us in confirming that he is not Gary Weiss. I think that the evidence for that is insufficient for us to know for sure, but that on average it tends to suggest it. I have proposed a few different ways that Mantan could resolve this, but he is unwilling to even consider it.
And I am frustrated with you for your repeated personal attacks on me and complete refusal to assume good faith. Any allegation against me, no matter how trivial or unsupported by evidence, is accepted by you as fact. I think that’s unfortunate.
That frustration caused me to be inappropriately blunt with Mantan. But the issue is real. My concern is that if Mantanmoreland is really Gary Weiss, then it is only a matter of time until this is proven…either by Bagley or someone else…and we will find that we have been manipulated in a pretty sad way.
The evidence that Weiss has sockpuppeted all over the Internet is pretty compelling, and even the mainstream press has commented over his refusal to directly address it. Is Mantan one of those socks? We have no proof either way, but I think the evidence tends to suggest it.
It upsets him that I think that, but there you go. Speaking the truth as I see it seems to me to be the most simple and direct way to correct any errors that I may have.”
Of course, everything I alleged linking Weiss with Mantanmoreland and Samiharris eventually was very publicly proven, and as Wales predicted, the clout once enjoyed by Weiss’s inner circle defenders was forever diminished.
This exchange, and many others like it involving Jimbo Wales and Gary Weiss in his multiple forms, also convinces me that – contrary to what I have openly wondered in the past – Jimbo’s public denial of the Weiss/Mantanmoreland+Samiharris connection, despite his private acceptance of the same, was based primarily on a desire to avoid damaging Wikipedia, as opposed to any theorized influence brought to bear by his associates in the Chicago options trading community (where a key component of illegal naked short selling takes place). I was wrong about that.
There are a few other insights we can take away about Gary Weiss from this exchange.
First, when backed into a corner, Weiss will reflexively and irresponsibly lash out at his accusers.
Second, Weiss seems programmed to characterize any efforts at investigating his online misbehavior as “stalking.” That, together with cries of “anti-Semitism,” are the two most well-worn tools in his chest.
And third, Weiss’s willingness – even eagerness – to go to great lengths to mislead all around him is pathological. He can’t help himself.
Put it all together, and it’s easy to see why Gary Weiss was the logical choice when proponents of illegal naked short selling sought a resolute apologist for their repugnant practice.
Back in college, where the combination of free time and that university mojo so often lend themselves to this sort of thing, a friend and I challenged each other to cram the most undeniable truth into complete sentences of the fewest possible words.
The second sentence is a reference to the fact that cultural trends will always increase in pervasiveness and acceptance until some limit is broached, at which time opposing forces will be applied that cause society to respond with increasing negativity toward that trend. And, as with an actual pendulum, the higher the upswing, the more forceful the push back will be.
How true both are.
I first encountered the market reform movement near the end of 2005. Over the months that followed, I witnessed the following:
An SEC staffer in San Francisco subpoenaed the communications of Jim Cramer, Herb Greenberg, Bethany McLean, Carol Remond and a handful of other “journalists” suspected of colluding with Gradient Analytics and short selling hedge fund Rocker Partners, only to have SEC Chairman Chris Cox personally sabotage the effort. This was followed up almost immediately by the SEC vindictively subpoenaing Patrick Byrne.
FOIA requests filed with the SEC intended to give some sense of the scope of the delivery failure problem were regularly denied or spitefully filled with minimal accompanying explanation.
Numerous brutal articles were published attacking opponents of naked short selling – Byrne primarily among them – under the bylines of (surprise) Jim Cramer, Herb Greenberg, Bethany McLean, Carol Remond, Joe Nocera, and Roddy Boyd.
Audio tape captured by a market reform operative who covertly accessed a panel discussion featuring Herb Greenberg, Joe Nocera and Dan Colarusso (then Roddy Boyd’s editor) hosted by the Society of American Business Editors and Writers. The theme of the discussion was essentially “How do we deal with these lying anti-naked short selling bloggers who are so critical of us?” Among other things, the tape caught Joe Nocera saying (to loud applause) he felt life was too short to bother understanding whether naked shorting is actually a problem, and Dan Colarusso saying he and his newspaper had the capacity to “crush” Patrick Byrne.
An all-out PR offensive launched by the Depository Trust & Clearing Corporation (DTCC) attacking opponents of naked short selling.
The emergence of Gary Weiss, an ostensibly credible former business journalist and blogger, bursting onto the scene, proclaiming naked short selling beneficial and its opponents crazy.
The hijacking and distortion of the Wikipedia article on naked short selling by whom we would soon learn was none other than Gary Weiss. Given journalists’ well-documented over-reliance on Wikipedia, this was undoubtedly a key factor in our difficulty getting them to provide more balanced coverage of the issue.
A special session of the Utah Legislature which, catching the banks flat-footed, resulted in passage of a law requiring brokerages with operations in Utah to promptly disclose stock delivery failures. But before it could go into effect, and after the prime brokers managed to rally their armies of lobbyists, the law was handily repealed.
Unprecedented growth of companies on the Reg SHO Threshold Securities list, indicating that, contrary to the intended aim of Regulation SHO, naked shorting was becoming increasingly prevalent.
On balance, it was a very dark time for the market reform movement, as every charge was followed by a blistering counter-charge, and every lunge answered by a quick parry. More than once, I recall hearing even the staunchest market reformers openly question the capacity of a rag-tag band of revolutionaries to counter the enormous influence and resources brought to bear by the hedge funds and prime brokers who were getting rich from the practice of manipulative naked short selling, and I couldn’t help but wonder whether I’d picked the wrong battle.
That’s not to say I ever doubted the correctness of the cause – only the correctness of my decision to join a fight that sometimes seemed impossible to win and certain to result in damage to my reputation as it had to Patrick Byrne’s and so many others’.
But in those moments of doubt, I’d remind myself of an eternal truth: the pendulum swings.
In other words, as dark as those days were, there would invariably be restraining forces applied to help slow – and eventually stall and even reverse – the momentum built up by decades of Wall Street villainy and the deep regulatory capture of the institutions intended to counter it.
What we could not have realized – as such perspective only comes with time – is that we (meaning, you, me, and everybody else who’s taken steps to do something about illegal naked short selling) were in fact the very restraining forces so many of us were expecting to arrive, cavalry-like, from some unknown quarter, and that as dark as those days seemed, they appeared quite bright to those who had endured the 1990s and early part of the current decade, when the practice persisted, without restraint, like a drunken orgy.
Of course, the event that finally brought the pendulum to a decisive halt and reversal was the current economic crisis, which saw the term “naked short selling” dragged into the popular lexicon (as determined by Yahoo! listing it as one of its five most popular search terms in September of 2008).
Since then, as the link between naked short selling and the beginning of the crisis itself has been solidly established, valiant members of Congress – most notably Delaware Senator Ted Kaufman – have dragged the issue of naked short selling into the political lexicon, as well.
Where are we today?
The SEC recently enacted permanent restrictions on illegal naked short selling, which include greatly enhanced disclosure of delivery failures and shorting activity.
Jim Cramer has been deeply and publicly shamed. Herb Greenberg is now a ‘consultant’. Bethany McLean has left business journalism. Dan Colarusso continues looking for steady employment. Roddy Boyd, Carol Remond and Joe Nocera all retain their former positions, but seem to steer clear of anything resembling the issue of naked shorting.
The DTCC is mum on the issue as well.
Gary Weiss – since abashed and banned from Wikipedia – sinks ever deeper into obscure irrelevance while the Wikipedia article on naked short selling that he once controlled has been liberated and made to read nearly as it should.
Substantive legislation with the capacity to end illegal naked short selling and other short-side market abuses once and for all is currently working its way through Congress.
As of today, the Reg SHO Threshold Securities list is 23% shorter than it was on the day I met Patrick Byrne (and 90% smaller than it was at its height in July of 2008), and is nearly devoid of the kinds of promising, well-capitalized companies whose inclusion used to be a sure sign of an impending bear raid.
These are all developments that seemed impossible in the dark days of 2006.
But here we are.
Yes, the pendulum is now unambiguously swinging in our direction, but the job is not done. Indeed, we can only be assured of progress to the extent that we each recognize our responsibility to continue pushing.
Apparently aware of the ruin that is his own reputation, Gary Weiss has taken to battling in favor of illegal stock market manipulation on political blog aggregator DailyKos.com, under the pseudonym “Tom Sykes”.
Weiss has a rich history of abusive sockpuppeting, mostly for the purpose of attacking those who advocate ending illegal naked short selling. At one time, Weiss did this on behalf of the DTCC. Now, exactly who’s paying him is unknown, though it must be someone because the fellow has otherwise been unemployed since 2004 (apart from his less-than-lethargic book sales, the pittance in ad revenue generated by his all-but-mothballed blog, and his tiny handful of ostensibly paid pieces for Portfolio Magazine – a publication whose final coffin nail Weiss personally helped to drive).
And the trend continues up to this very day, with Weiss as Tom Sykes.
To anybody who has followed Weiss for any period of time and come to recognize his overly-ripe writing style, that he and Tom Sykes are one in the same is beyond obvious.
But the Deep Capture team adheres to a higher standard when making such claims with certainty, and so I shall now explain how I can do so now.
In other words, one can tie a Yahoo username to a specific IP address, sans ambiguity.
Gary Weiss lives in Greenwich Village, NY, but in August of 2008 he bought a second home upstate (tellingly financed by the property owner, not a bank) in the tiny Sullivan County hamlet of Callicoon Center.
A few months ago, using the above-referenced method, I was able to determine that the Yahoo account belonging to user firstname.lastname@example.org was accessing the web via IP address 220.127.116.11, which maps to within a few miles of Callicoon Center. Given the tininess of Callicoon Center, this is what one would expect of an instance of Weiss being online at his second home.
(Hint: remember that IP address, for we shall return to it shortly.)
With the 15-part series on Dendreon recently completed, and our self-imposed hiatus from posting anything else ended, I decided it was time to prove once and for all that Gary Weiss and Tom Sykes are the same person.
It took a few short hours to hit paydirt.
In short, email sent to email@example.com (the address Tom Sykes lists as his own on dailykos.com) induced the recipient to visit the Yahoo message boards in such a way as to reveal his IP address to me.
The result: 18.104.22.168.
This IP address has been conclusively linked to firstname.lastname@example.org, which in turn has been conclusively linked to Gary R. Weiss, the bumbling sockpuppeteer and defender of illegal naked short selling.
But wait, there’s more.
Among Weiss’s most notable accomplishments has been epic sockpuppeting on Wikipedia in order to cover-up evidence of the damaging impact of illegal naked short selling. Once this finally came to light, Weiss and his home IP address range, which is well known, were unambiguously banned from editing Wikipedia.
But what about Weiss’s new IP address, tied to his new, second home?
Well, as we’d expect, realizing that it was unknown by Wikipedia administrators, Weiss used it, on two occasions, to remove references to Mark Mitchell’s Dendreon-related reporting on deepcapture.com, which had been previously added to the Wikipedia article on Michael Milken. To see these edits for yourself, follow this link, which will show you the only two contributions made by IP address 22.214.171.124. To see the substance of the edits, click on the links that say “diff”. What you’ll then see is a before and after comparison, with the text in yellow being what 126.96.36.199 (Weiss) removed.
What could possibly be motivating Weiss to carry on in this manner?
I see one of two possibilities: either he’s like the 80-year-old Japanese soldier living in the jungles of Guam who refuses to accept that his “side” lost the war, or – as I suspect – he remains in active contact with his “side,” which remains mobilized and intent on subverting all that we’ve accomplished.
So what next?
Well, obviously, the editorial staff at dailykos.com will want to know that they’ve given forum to a deeply conflicted contributor who – beyond simply using a pseudonym – is actively pretending not to be Gary Weiss by referring to Weiss in the third person and linking to his own blog as though it were actually really relevant. You can let them know what we’ve discovered about Mr. Sykes by going here.
Finally, I’d simply suggest the Deep Capture community understand that there are many who are actively working – usually anonymously – to discredit the market reform movement. I encourage you to seek out and bring instances of such to our attention, so that we can investigate further when warranted, in order to better understand their real motives.
And as a postscript, I wish to thank Gary Weiss for being so very predictable. His consistently reptilian-brain-based responses to my occasional prodding has made this aspect of my job not only productive, but very enjoyable, as well.
UPDATE: Both Tom Sykes and Gary Weiss are “separately” expressing outrage at this situation tonight. I encourage each of you to make use of “their” blogs’ comment functions to let “them” know what you think about how “they” have been lying to you.
Note: I have the privilege of being a contributor on an upstart blog where some extremely intelligent criticism of Web 2.0 is taking place. It’s called Akahele.org, and I recommend adding it to your RSS reader.
Akahele, if you’re curious, is a Hawaiian word meaning “slow” or “deliberate”, in contrast with wiki, the Hawaiian word for “fast” (and the origin of the “wiki” in Wikipedia).
The following is my most recent contribution to Akahele, and is an examination of the Wikipedia/Gary Weiss saga, with a new twist.
My direct involvement notwithstanding, I feel it’s both fair and accurate to say that the events surrounding the Gary Weiss/Mantanmoreland affair were among the strangest and most polarizing in Wikipedia’s history.
For those lucky enough to have no idea what I’m referring to, here’s the highest of high-level summations (much more in-depth explanations can be found here and here):
Former business journalist Gary Weiss used multiple sockpuppet accounts to ingratiate himself with Wikipedia’s inner circle and – thanks primarily to the relationships he established there – gain control of, most notably, the article describing an illegal form of stock market manipulation known as naked short selling.
Weiss then proceeded to dramatically alter the content of this and related articles in order to minimize the perceived negative impact of naked short selling while marginalizing critics of the practice, myself included.
There’s strong evidence suggesting Weiss was paid to do this by the very organization many fault as the primary enabler, not to mention a financial beneficiary of, illegal naked short selling.
I suspect most would agree with my assessment that among the darkest moments in the more than two-year drama between Weiss’s arrival and eventual forced departure were those in which Wikipedia co-founder Jimbo Wales injected himself into the controversy – always seemingly uninvited – and always with the effect of derailing whatever progress might have been made toward bringing about Weiss’s removal.
Among these, the most incomprehensible episode occurred at the crescendo of what is widely regarded the largest and most thorough sockpuppeting investigation in the history of Wikipedia, in which dozens of volunteers dedicated hundreds of hours amassing a body of evidence overwhelmingly implicating Weiss in a deeply disturbing deception.
It was at that time that Wales posted an unprovoked indictment of the process under the heading ‘I have personally seen no persuasive evidence’, resulting in Weiss getting another pass. This, despite Wales having told others, privately, that he knew Weiss was guilty; and many more, publicly, that I was a liar for making the same claim.
What follows is my best explanation for Jimbo’s odd behavior.
But first, I need to explain a little more about the nature of short selling, both legal and illegal.
Legal short selling involves selling borrowed shares with the expectation of buying them back and returning them to their owner at a later date and a lower price, allowing the short seller to pocket the difference.
Naked short sellers, on the other hand, sell shares short without borrowing them first, thereby creating the equivalent of counterfeit shares. This has the effect of artificially swelling the supply of stock, which has a markedly depressive influence on price, making the naked short seller rich, while inflicting immense harm upon legitimate shareholders and the companies in which they’ve invested.
There have been, in theory, rules intended to prevent naked short sales from occurring, or at least, from enduring longer than 13 trading days. Unfortunately, the people behind the practice are quite smart, and the monetary incentive to violate the law quite large.
In other words, they’ve found a path around the rules.
And that path runs right through the heart of Chicago’s financial district.
As it turns out, there is a law, known as the “options market maker exemption”, which permits certain brokerages, specifically those registered as ‘options market makers’, to engage in a highly-controlled form of naked short selling in the course of bona fide options market making – comparable to the permission police officers have to exceed the speed limit under certain extreme circumstances when it’s in everybody’s best interest that they do so.
Naked short sellers have discovered that they can essentially “rent” the options market maker exemption from certain corrupt options market makers, producing massive amounts of counterfeit shares in the process.
It’s as though a corrupt cop rented his police cruiser to a random citizen so he or she could drive it around at 120 mph for a day, without being held responsible for any of the damage they might cause.
Of course, it’s silly to think that either the citizen or the cop could get away this, but in the financial world, such overt violations of the law regularly take place on a grand scale. And though the reason is not immediately clear, research proves that this abuse of the options market maker exemption nearly always takes place on the Chicago Stock Exchange.
My guess is that it’s a cultural thing: the same way you’d never even think of bribing a cop who pulled you over in San Diego, while doing the same just 30 miles south in Tijuana is not a big deal.
What does this have to do with Jimbo Wales?
Well it turns out that both he and former Wikimedia Foundation trustee Michael Davis used to work at Chicago Options Associates, where Wales was a research director and Davis was CEO.
To be clear, while it existed, Chicago Options Associates traded options and futures on the Chicago Mercantile Exchange, and was not an options market maker. But because I suspect the Chicago phenomenon is a cultural one, and given the near certainty that Wales counts many equities options market making traders as his friends, I’m not sure it really matters: his professional background is deeply rooted in the same dark corner of the financial world that facilitates the same form of stock fraud Gary Weiss worked so hard to defend on Wikipedia.
Which I suspect explains why Jimbo Wales worked so hard to defend Gary Weiss.
Is Jimbo Wales above influencing Wikipedia content based on his personal relationships?
Rachel Marsden would probably say that no, he is not.
I recently asked Jimbo whether anybody with ties to options market making on the Chicago Stock Exchange sought to influence his decisions in this respect, and was not entirely surprised when Jimbo insisted that they did not.
However I was surprised when Jimbo followed with “it is still to this day completely unproven that the claims you’ve made about Mantanmoreland being Gary Weiss are true.”
Once I’d picked myself up off the floor, I decided to take Jimbo up on his invitation to finally show him the first bit of proof linking Gary Weiss to Mantanmoreland, despite the fact that doing so felt like proving to a skeptic that the moon is not composed of dairy products.
What I ultimately sent Wales were:
Click to enlarge.
A scatter graph (seen at right) showing Mantanmoreland’s Wikipedia editing pattern over several months, including a 12 hour time shift limited to the period in which Gary Weiss was known to be visiting India.
Email from Gary Weiss (if you want to know how I came to possess Weiss’s private email, read this) in which he told a friend that he intended to edit a specific Wikipedia article to include a reference to a book he wrote.
I also made it clear that should these bits of evidence fail to convince him, I’m ready to send much, much more.
Maybe Jimbo was convinced and he decided there was no reason to respond further.
Maybe the evidence simply left him speechless.
Or maybe owning up to his reckless actions in this case would prove unpopular with his friends back in Chicago.
All I know is that once the evidence was sent as requested, the conversation went cold.
Whatever the case, the legacy of Gary Weiss’s campaign of misinformation endures on Wikipedia to this day, due in large part to the apartheid-like probationary status imposed upon the naked short selling article after Wales condemned the inquest into Weiss’s activities as having produced no persuasive evidence.
All the while, Wikipedia remains the first option offered those searching the web for information about naked shorting, and its role in the current financial crisis.
Weiss may have created this problem, but Jimbo Wales — whatever his motivation — has allowed it to persist. The time has come for Wales himself to step in, help find a real solution, and acknowledge the damage this dark episode has caused real people in the process.
“The Matrix is the world that has been pulled over your eyes, to blind you from the truth.”
– Morpheus to Neo, The Matrix
It is the mission of DeepCapture to show you, dear reader, that the financial world you inhabit, a world vouched-for in dulcet Midwestern tones by actor-spokesmen you recognize and trust, a world inhabited by honest brokers looking after your money, brokers who interact through self-regulating exchanges overseen by diligent regulators, themselves overseen by elected politicians looking out for their constituents, themselves challenged by an adversarial free press maintaining a critical posture towards it all, is in fact a “world that has been pulled over your eyes, to blind you from the truth.” It doesn’t exist: it is a socially constructed reality designed to keep you complacent as you feed your savings to the machine.
And I can prove it. For that matter, so can you, right now, from your computer. To explain how, I must continue with reference to The Matrix.
There is a point in the movie where Neo and his comrades are walking up a staircase. Neo glimpses a black cat that disappears then reappears:
In this essay I will explain a glitch that is available for you to verify right now, from your computer. I do not know how long it will remain after I write this, but it has existed for many months, and cannot be fixed without causing other problems for those seeking to keep you deluded. I will take you through three steps, and then you will be able to test this theory from your computer, and see a glitch that should not exist.
STEP #1 OF 3: UNDERSTAND WIKIPEDIA
Wikipedia is a social media encyclopedia. That is to say, it is the work of thousands of people collaborating across the Internet to write millions of articles on every subject one would expect to find in an encyclopedia, and many more. People are free to edit other peoples’ words, adding their own knowledge to the sum. The constitutional principles of Wikipedia demand that such edits and additions be written from a “Neutral Point of View”. Every article is backed up by a discussion page, where the people who are working on that article can meet and work out their differences in an atmosphere where good faith is assumed. Ultimately, differences which are not so resolved are put to community vote. In sum, Wikipedia is socially constructed reality.
Wikipedia has drawn its detractors (myself among them) across many fronts. One thing that both supporters and detractors agree on, however, is the remarkable speed with which Wikipedia is updated to reflect the world around us. When any significant event happens, the appropriate page is updated within minutes, or even within seconds, by someone. Be it a public statement of a treasury official, the passing of a celebrity, or a car bomb going off on a street in Beirut, the appropriate Wikipedia pages are updated before the story has finished scrolling across the wire.
STEP #2 OF 3: SCROLL THOUGH THE HEADLINES OF (OR READ) THESE 21 ARTICLES (a-u) CONCERNING NAKED SHORT SELLING AND THE GLOBAL FINANCIAL IMPLOSION
Second Item – Proposed Amendments to Regulation SHO
The next item on our agenda is the serious problem of abusive naked short sales, which can be used as a tool to drive down a company’s stock price to the detriment of all of its investors. The Commission is particularly concerned about persistent failures to deliver in the market for some securities that may be due to loopholes in the Commission’s Regulation SHO, adopted just two years ago.
At the Commission’s request, the Division of Market Regulation has prepared proposed changes in Rule 203 under Regulation SHO to cut down on failures to deliver.
The need for Regulation SHO grew out of long-standing and growing problems with failures to deliver stock by the end of the standard three day settlement period for trades, some of which were symptoms of abusive “naked” short selling. Selling short without having stock available for delivery, and intentionally failing to deliver stock within the standard three-day settlement period, is market manipulation that is clearly violative of the federal securities laws…
A grandfather provision, however, gave an exception from Rule 203(b)’s mandatory close out provision for any fail to deliver positions established before a security became a threshold security. And another provision of Rule 203(b) – the options market maker provision – provides an exception for any fail to deliver positions in a threshold security if they result from short sales by an options market maker, for the purpose of establishing or maintaining a hedge on options positions created before the underlying security became a threshold security.
We are particularly concerned about the potential negative effect that substantial and persistent fails to deliver may be having on the market in some securities. Specifically, these fails to deliver can deprive shareholders of the benefits of ownership – voting, lending, and dividends from issuers. Moreover, they can be indicative of abusive naked short selling, which could be used as a tool to drive down a company’s stock price. They may also undermine the confidence of investors who may believe that the fails to deliver are evidence of manipulative naked short selling in the stock. In turn, issuers may be harmed, as investors may be reluctant to commit capital to a stock that they believe is subject to abusive naked short selling.
To address these concerns, the Division of Market Regulation is recommending proposals to amend Regulation SHO. The recommended proposals are based on examinations conducted by the Commission’s staff and the SROs since Regulation SHO became effective in January 2005. While preliminary data indicates that Regulation SHO appears to be significantly reducing fails to deliver without disruption to the markets, there continues to be a number of threshold securities with substantial and persistent fail-to-deliver positions that are not being closed-out under existing delivery and settlement guidelines. It appears these persistent fails are primarily attributable to the grandfather and options market maker exceptions to the delivery requirements of Regulation SHO.
The proposals being recommended today would eliminate the grandfather provision, and narrow the options market maker exception. The proposals would include a limited one-time phase-in period following the effective date of the amendment. The proposals also include a technical amendment that would update the market decline limitation referenced in the rule. In combination, these proposals are intended to eliminate the persistent fails to deliver that are attributable to loopholes in Regulation SHO as originally adopted…
WASHINGTON, March 4 (Reuters) – The U.S. Securities and Exchange Commission on Tuesday proposed tougher rules to curb so-called “naked” short-selling abuses and prevent market price manipulation.
SEC Chairman Christopher Cox said regulation SHO, an existing rule partly aimed at short selling abuses, “needs teeth.”
Short sellers borrow shares they consider overvalued and sell them. If the price drops, they repurchase the shares, return them and pocket the difference. In a naked short sale, the investor sells stock that has not yet been borrowed.
The three-member SEC voted unanimously to propose the rule, which targets sellers who intentionally deceive broker-dealers or purchasers about their ability to meet delivery deadlines.
Sellers sometimes deliberately fail to deliver securities as part of a scheme to manipulate the stock price.
WASHINGTON — Securities regulators voted 3-0 to propose a rule intended to crack down on lingering abuses involving so-called naked short sales and failures to deliver shares that have been used in such sales.
The proposal is part of a continuing attack by the Securities and Exchange Commission on short-sales abuses, an effort begun four years ago with the adoption of rules known as Regulation SHO.
Separately, the SEC voted to propose changes that could speed the introduction of exchange-traded funds, without review by federal regulators. (Please see related article.)
Short selling involves sales of borrowed shares, producing profits when prices decline, allowing the short seller to replace borrowed shares at a lower price.
In contrast, “naked” short sellers don’t borrow shares before engaging in short selling, and they may have no intention of borrowing them.
Regulation SHO sought to curb such practices by requiring short sellers to locate shares for borrowing before engaging in short sales, but it did not include any new mechanism to enforce the requirement.
Under the proposal, the SEC would create an antifraud rule targeting those who knowingly deceive brokers about having located securities before engaging in short sales, and who fail to deliver the securities by the delivery date.
SEC Chairman Christopher Cox said the proposal would bring needed teeth to Regulation SHO and address concerns about short-selling abuses, particularly in the market for small-cap stocks. “Reg SHO can’t be effective without enforcement,” Mr. Cox said.
Even with the regulation in place, the SEC received hundreds of complaints last year about alleged abuses involving short sales. While most trades settle within three days, as required, the SEC estimates about 1% of shares that change hands daily, or about $1 billion, are subject to delivery failures.
The SEC’s move last year to close off a “grandfather” exception to Regulation SHO, has done little to reduce longstanding delivery failures, according to preliminary data analyzed by SEC staff.
The SEC has yet to announce its plans for a separate pending proposal to scale back or eliminate an exemption for options market-makers.
Brokers who engage in short selling for customers would not face any new obligations under the proposed antifraud rule, and the SEC said it wouldn’t apply to market makers engaging in market-making activities.
Although the SEC already has authority to sue illegal short sellers, SEC officials said a new rule explicitly targeted to naked short sales might affect behavior. SEC Commissioners Paul Atkins and Kathleen Casey expressed support for the crackdown on abusive sales but said they want to be sure it doesn’t result in unintended consequences, such as driving legitimate short sales offshore.
The U.S. Securities and Exchange Commission will limit the ability of traders to bet on a drop in shares of brokerage firms, Freddie Mac and Fannie Mae as part of a crackdown on stock manipulation, the agency’s chairman said.
Christopher Cox told the Senate Banking Committee that the agency will require traders to hold shares of the two mortgage buyers and the brokerages before they execute a short sale. The emergency order, to be in effect for 30 days, will bar the practice called naked short selling, in which traders avoid the financial cost of borrowing shares when betting they’ll fall.
Cox said the SEC will draft rules “to address the same issues across the entire market.”
Hedge-fund manager William Ackman, who oversees $6 billion at Pershing Square Capital Management, is among those betting that shares of Fannie Mae and Freddie Mac will fall. There’s no indication he is engaging in naked short selling, in which traders never borrow shares from their broker or deliver the stock to buyers.
The SEC has been reluctant to curb short selling “because it would require a major retooling of the plumbing of Wall Street,” said James Angel, a finance professor at Georgetown University studying short sales. “It’s only when the big Wall Street firms are threatened that the SEC does something about it.”
The SEC is investigating whether trading abuses contributed to the collapse of Bear Stearns Cos. in March and the 78 percent drop in the market value of larger rival Lehman Brothers Holdings Inc. this year. Fannie Mae and Freddie Mac have each lost about 80 percent of their value amid speculation the mortgage-market crisis may push the firms into insolvency.
Short-sellers, who borrow shares betting that they’ll decline, are spreading rumors about Lehman in an organized attempt to depress the stock, according to Richard Bove, bank analyst at Ladenburg Thalmann & Co. in Lutz, Florida.
“As with Bear Stearns, Lehman has been targeted by the fear-trade,” said Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone in a report yesterday. Lehman should go private so it can avoid the attacks by short-sellers, he said.
Freddie Mac, down as much as 34 percent today before Cox’s comments, erased some of the decline and fell $1.49, or 21 percent, to $5.62 at 2:34 p.m. in New York Stock Exchange composite trading. Fannie Mae shares rebounded from a 30 percent drop and were down 18 percent.
“I don’t think the government should ban short-selling in anything as long as it’s fully disclosed, as long as there’s no manipulation,” MFS Investment Management Chairman Robert Pozen said in an interview with Bloomberg News yesterday. “Don’t we want the market to work here?”
John Nester, an SEC spokesman, said the emergency order will “require any person effecting a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on settlement date.”
In traditional short selling, traders borrow stock through a broker and hope to profit by selling shares high and later buying them back at lower prices to repay the loan.
Naked short selling isn’t necessarily illegal, unless authorities can prove fraud, such as a scheme to manipulate stock prices.
The demise of IndyMac, coming on the heels of Bear Stearns’ desperate sale to JPMorgan Chase, is a sure sign of the fragility of today’s markets. What’s needed now, more than ever, is reliable information for investors and confidence that trading can be conducted without the illegal influence of manipulation.
Because financial institutions depend on confidence, they are uniquely vulnerable in the current climate. A “run on the bank” can take hold quickly, and can be fatal. But stampedes are not always rational.
When an irrational panic is fueled by a sense of urgency, false rumors that must be acted on immediately and the fear that everyone else may get out first, market integrity is threatened. It is the job of market cops to provide a measure of confidence that financial information about public companies is accurate and reliable — and when it is not, to punish those responsible.
Who profits from intentionally false information in the marketplace? Those who are in on the scam and positioned to benefit from the predictable response of others who believe the fraudulent information to be true.
The classic “pump and dump” scheme, in which a stock is inflated through false information and then dumped on unsuspecting investors when the perpetrators flee, is one example of how this works. “Distort and short” is the same thing in reverse.
Naked short selling can turbocharge these “distort and short” schemes. In a naked short, the usual process of short selling is circumvented, because the seller doesn’t actually borrow the stock and simply fails to deliver it. For this reason, naked shorting can occur even when actual shares aren’t available in the market. It allows manipulators to force prices down without regard to supply and demand.
Next week, the SEC will implement an emergency order designed to prevent naked short selling in the financial firms that the Federal Reserve Board has designated as eligible for access to its liquidity facilities.
Because these are large firms with substantial public float, honest short sellers can readily locate shares to make good on their short positions. Continued legitimate short selling in these issues will act, as it is supposed to, as a way for market participants to invest in the downside and to hedge other positions.
At the same time, eliminating the prospect of naked short selling will help assure investors that it is safe for them to participate, and that the current declining market is not the product of unseen manipulators and “distort and short” artists.
Our emergency order is not a response to unbridled naked short selling in financial issues — so far, that has not occurred — but rather it is intended as a preventative step to help restore market confidence at a time when it is sorely needed.
Many people think naked short selling is already illegal, but that isn’t true. Shares are normally delivered to the buyers within three days of the trade. But in most stocks, including those covered by our emergency order, that three-day period can be extended indefinitely.
Even without these extensions, and even when a short seller locates shares that can be borrowed, there can be problems because the short seller is not currently required to actually borrow those shares until settlement.
As a result, securities lenders can tell multiple short sellers they can borrow the same shares of stock — a sure recipe for a failure to deliver. Once the commission’s order takes effect, this possibility will no longer exist.
The SEC is committed to maintaining orderly securities markets. The abusive practice of naked short selling is far different from ordinary short selling, which is a healthy and necessary part of a free market.
Our agency’s rules are highly supportive of short selling, which can help quickly transmit price signals in response to negative information or prospects for a company. Short selling helps prevent “irrational exuberance” and bubbles.
But when someone fails to borrow and deliver the securities needed to make good on a short position, after failing even to determine that they can be borrowed, that is not contributing to an orderly market — it is undermining it. And in the context of a potential “distort and short” campaign aimed at an otherwise sound financial institution, this kind of manipulative activity can have drastic consequences.
It was famously — perhaps too famously — said that “markets will fluctuate.” That is certainly true if they are well-functioning. As market referee, the SEC neither can nor should direct the market’s fluctuations. Instead, our most basic role is to ensure a continued flow of liquidity to the markets from participants who are confident the game isn’t rigged against them.
Naked short selling can undermine the market’s integrity. For the financial sector in this crisis, certainly, but as soon as possible for the entire market, this is one worry investors shouldn’t have.
The U.S. Securities and Exchange Commission extended an emergency limit on short sales in shares of Freddie Mac, Fannie Mae and 17 brokerages as it prepares broader rules to thwart stock manipulation.
The SEC pushed back expiration of its ban on so-called naked short sales of the firms’ stocks from today through Aug. 12, the Washington-based agency said in a statement. The order aims to keep traders from driving down financial stocks to boost profits after Bear Stearns Cos. and IndyMac Bancorp Inc. collapsed amid rumors they were faltering.
The emergency order, focused on companies whose collapse might expose the U.S. government to losses, gives regulators time to weigh wider restrictions. SEC Chairman Christopher Cox last week told lawmakers the agency is examining other proposals, such applying the ban on naked short sales to the broader market.
“It definitely appears that the SEC is interested in making adjustments to short-sale regulations,” said John Standerfer, vice president for financial services at S3 Matching Technologies, the Austin, Texas-based trade processor.
In traditional short selling, traders borrow shares and sell them. If the price drops, they profit by re-buying the stock, repaying the loan and pocketing the difference.
Naked short sellers don’t borrow shares before settling sales. The SEC is concerned manipulative investors may use the sales, legal under some conditions, to drive down prices by flooding the market with orders to sell shares they don’t have.
Arrange to Borrow
The temporary order, which took effect July 21, requires traders to at least arrange to borrow shares before selling short Freddie Mac and Fannie Mae, the government-sponsored mortgage buyers. The order covers brokerages with access to the Federal Reserve’s discount window, which was opened to investment banks after the March collapse of Bear Stearns.
Market makers have an exception under the SEC order that permits them to sell short to maintain liquidity. Investors, such as hedge funds, previously could start trades without an agreement to acquire shares.
Short sales, particularly among retail investors, plummeted after the SEC announced the ban, according to data from S3 Matching Technologies, which processes trades for three of the top five retail brokerages. The sales fell 78 percent on average among the companies named in the order, compared with trades on July 14, the day before the SEC announced the measure, S3 data shows. The company handles about 15 billion transactions daily.
“I see no reason that will turn around,” said Standerfer in an interview yesterday. “It seems like a pretty restrictive rule to put in place for the entire market.’
Cox last week told Congress the agency may also force investors to disclose “substantial” bets on falling stocks and or reinstate a version of the so-called uptick rule, which barred short sales of stocks when prices are falling.
The uptick rule, implemented after the Great Depression and scrapped last year, allowed short sales only if a preceding trade boosted the stock price. The SEC is studying whether increasing the uptick increment, such as to a nickel or dime, might be more effective, he said.
Over the past several years, Patrick Byrne’s campaign to clean up Wall Street and end a practice that has destroyed companies and cost unwary investors billions of dollars generated plenty of publicity for him, mostly the wrong kind. Critics labeled him nuts, a conspiracy theorist, a complete wack job. Byrne, the chief executive of the Utah-based discount online retailer Overstock.com, even found himself tagged a member of the “tin-foil hat” brigade, a reference to the flying saucer fanatics of the 1950s who adorned their heads with aluminium to ward off, or enhance, thoughts from aliens in outer space. These days, when people talk of Byrne, the word ‘vindication’ comes up a lot. ‘You can always tell who the pioneers are — they’re the ones with all the arrows sticking out of their backs,’ said James Angel, a finance professor at Georgetown University. ‘You really can’t understate what Byrne has accomplished.’
The SEC’s emergency curb on short selling of 19 major financial services firms stocks expired before Wednesday trading, leaving investors to wonder if the measure helped protect the strained system.
Since July 21, the SEC rule banned “naked” short sales on those 19 stocks. Short sellers hope to profit by selling borrowed shares and replacing them at lower prices. In naked short sales, traders don’t actually borrow the shares; that can intensify the downward pressure on a stock.
The rule’s expiration appeared to have some effect Wednesday as financial stocks suffered sizable losses. That could mean short sellers have been at least partly behind big drops in shares of some financial companies.
“There has to be some sort of correlation between the moratorium ending and these stocks being down,” says Eric Fitzwater, analyst at research firm SNL Financial.
Perhaps more telling: The day the Securities and Exchange Commission announced the rule, July 15, was the day financial stocks bottomed for 2008. “If (the SEC) wanted to protect these companies artificially, it served its purpose,” Fitzwater says.
“It is impossible to know how big this problem is, but regulators accept it exists. The American Stock Exchange fined two market-makers for precisely this violation in July 2007. A month later the SEC proposed limiting or eliminating the exemption, but momentum stalled in the face of opposition from banks and exchanges. The anti-short lobby, emboldened by the July ban, is again pushing for an end to the market-makers’ exemption. …. How much does all this matter? Deliberate naked shorting has no place in a well-run market…”
WASHINGTON – With Wall Street engulfed in crisis, the Securities and Exchange Commission is planning measures to rein in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and which some fear could be turned against other vulnerable companies. During emergency meetings between federal officials and investment bank executives over the weekend, SEC Chairman Christopher Cox indicated to the bankers that the agency plans in a few days to impose new permanent protections against abusive ‘naked’ short-selling, a person familiar with the matter said Monday….
TOKYO — Japan moved Tuesday imposed new restrictions on so-called “naked” short selling of stocks, stepping up its efforts to arrest the tumble in domestic share prices.
The Tokyo Stock Exchange has asked member brokers to stop accepting naked short-sell orders, TSE President Atsushi Saito told a news conference.
The TSE’s move followed comments from Finance Minister Shoichi Nakagawa, who said that regulations on naked short selling would be tightened. Mr. Nakagawa didn’t say that the practice would be banned, but the TSE’s move and local media’s interpretation of his comments suggested that the new strictures, to be enforced from today, will be a ban in all but name.
Short-sellers typically borrow stocks and then sell them on, profiting from the fall in price when they buy back the securities. Naked shorting removes the need to first borrow the stock, which means that larger volumes of shares can be dumped on the market. Short-selling generally has drawn fire from regulators across the world, who say it has contributed to the sharp market declines of recent months.
The Japanese government had planned to ban naked short selling from Nov. 4, but the recent plunge in local share prices has caused the new rule to be introduced a week ahead of schedule. The Nikkei 225 Stock Average closed at a 26-year low on Monday, as investor sentiment was battered by the global financial crisis, the rising yen and concerns about an international economic slowdown.
Traders said the naked short-selling ban was one reason for a big recovery in Japanese shares Tuesday.
The ban “was one of the positive factors behind the Nikkei’s gains (in the afternoon), but I don’t think it’s the main catalyst,” said Yukio Takahashi, market analyst at Shinko Securities. The Nikkei ended 6.4% higher Tuesday, erasing most of Monday’s sharp slide, due mainly to the yen’s weakening and firmness in major Asian stock markets, traders said. (See related article.)
The naked shorting ban comes as the government mulls a series of measures to improve confidence in Japan’s financial sector. Among other steps, the government wants to raise the cap on possible injections of taxpayers’ money into domestic banks from ¥2 trillion ($21.37 billion), ease fair-value accounting rules, loosen capital adequacy requirements for banks and enlarge tax breaks for stock investors.
At Tuesday’s news conference, Mr. Nakagawa highlighted the urgency of the task at hand. “I’ve discussed with Prime Minister [Taro Aso] the fact that the coming few days will be very important and that we must take steps immediately,” he said. “Our assessment is that the coming several days will be very important — and therefore dangerous — for the Japanese stock markets.”
Mr. Nakagawa also said the government will immediately open investigations into possible illegal practices linked with naked short selling. The Financial Services Agency, the Securities and Exchange Surveillance Commission and the TSE will work together in looking into past records on such sales practices, he said. “If we find out any violation of the law,” Mr. Nakagawa said, “we will retroactively deal with it strictly.”
CANBERRA: Australia moved to slap a permanent ban on the most controversial form of short-selling yesterday amid an historic fall in share prices, part of a crackdown that is also targeting hedge funds and credit rating agencies.
Interviewer: Let’s talk shorts. Harvey Pitt is former SEC chairman and founder and CEO of Kalorama Partners. Harvey, great to have you with us….Chairman Pitt, do we need to bring back the Uptick Rule? Would that make a difference here at all?
Harvey Pitt: I don’t believe so. The Uptick Rule was almost non-existence in terms of its detrimental affects. There’s a very simple solution and the SEC has it and they know what is. It’s very simply this. If you want to sell a stock short you have to have a legally and forcible right to produce that stock on settlement day. That’s all it takes. If the SEC does that people will not be able to sell short unless they have actually first located and gotten their stock.
Interviewer2: In other words that would do away with naked shorting right?
Harvey Pitt: Absolutely, and naked shorting is what’s causing a lot of the problems in the market.
Interviewer2: Because nobody is forced to deliver. Nobody must deliver. Too much of that going on.
Harvey Pitt: That’s been the real problem. People in affect are just gambling. They’re assuming the stock price will go down. They then spread false rumors to help the stock go down, but they have no skin in the game because they haven’t committed to produce the shares that they purportedly are selling.
Global securities regulators will gather on Monday to discuss rules on short selling and disclosure of credit derivatives, the head of the US Securities and Exchange Commission said on Thursday.
Christopher Cox, SEC chairman, said the meeting, to be held via teleconference, would address “urgent regulatory issues in the ongoing credit crisis.”
The announcement came during yet another tumultuous day of trading in global stock markets.
“In addressing turbulent market conditions, it is essential not only that regulators act against securities law violations, including abusive short selling, but also that there be close coordination among international markets to avoid regulatory gaps and unintended consequences,” Mr Cox said in a statement on Thursday.
The International Organization of Securities Commissions, which includes securities regulators from around the globe, will consider the effectiveness of their recent actions to reduce abusive short selling, without hurting legitimate shorting…
Mr Cox said regulators will explore “possible coordination” on rules relating to naked short sales – when shares are sold without being borrowed first– in particular with regard to position reporting and delivery and pre-borrowing requirements.
p) November 24, 2008 Reuters “Global regulators focus on abusive short selling”
WASHINGTON, Nov 24 (Reuters) – Global securities regulators launched three task forces to study abusive short selling, unregulated financial products and unregulated financial entities such as hedge funds, the U.S. Securities and Exchange Commission said on Monday.
“The working groups were established amid volatile market conditions and designed to support work of the world’s 20 largest economies, which have already agreed to step up oversight of the troubled financial system. “One group will focus on aligning global regulators’ approach to naked short selling, the SEC said.””
Fails to deliver in the US equity market have exacerbated the sharp declines in share prices of financials.
IT IS NO surprise that the stock of Bear Stearns was heavily shorted in the run-up to its government-supported rescue in March, given its high leverage, poor risk management and the fact that its sub-prime bets had gone awry. Short-selling of any financial company would have been understandable by March this year. But just why on March 12, two days before the rescue announcement, almost 1.25 million Bear Stearns shares were shorted is a question that is a little harder to answer.
Up to that point in 2008, cumulative fails to deliver of Bear Stearns’ stock were only between 10,000 and 200,000 on any given day. On March 14, more than 2 million Bear Stearns shares went undelivered, and from then until the end of March, failures increased, peaking one day at more than 13.78 million shares. At the same time, from March 12 to the announcement on Friday March 14, Bear Stearns’ share price crashed from $61.68 to $30, dropping to $4.81 the following Monday.
That the precipitous drop in Bear Stearns’ share price coincided with fails to deliver has forced the market to properly address a long-standing question: are fails to deliver responsible for rapid share price deterioration? Had those failures been averted through better regulation would Bear Stearns have had a slower downfall, or even avoided outright collapse? And what of Lehman Brothers, Fannie Mae and Freddie Mac? Indeed, would all financial companies have enjoyed more resilient share prices, instead of seeing sudden, sharp price declines that were the final nudge to creditors and counterparties abandoning firms and driving them into bankruptcy?
The SEC has since attempted to bring a halt to naked short-selling, which gives rise to fails to deliver, but are its efforts sufficient?
Formal investigations are taking place to look into abusive short-selling of the stocks of both Bear Stearns and Lehman Brothers.
Robert Shapiro, former economic adviser to Bill Clinton, chairman of Sonecon and an adviser to the presidential transition team of Barack Obama, believes there is sufficient evidence that naked shorting accelerated the collapse of Bear Stearns. He says: “Bear Stearns failed because it went bankrupt. However, the pace of the collapse of the stock price was clearly accelerated by the enormous naked short-sale activity. There perhaps could have been a more orderly bankruptcy which would have preserved more of the assets.”
John Welborn, an economist with investment firm the Haverford Group, agrees. “Fails to deliver added to the downfall of Lehman Brothers and Bear Stearns but were not, obviously, the whole story. Fails in Lehman Brothers were never significant enough to drastically alter the tradable float. In Bear Stearns, however, a torrent of fails began on March 12, before the public knew most of the bad news. The important thing to note here is that T+3 settlement essentially allows people to sell an infinite amount of any stock either to precipitate a bear raid or to capitalize on one already in progress.”
Welborn continues: “A bear raid encourages panic selling by long holders. Once enough long holders are induced to sell, then there are plenty of shares available to cover any naked positions ex post. When the long holders have sold their positions and the naked short sellers have covered at a lower price, then the issuer faces a dramatically depressed market. That may make it difficult (or impossible) to recapitalize, especially if that issuer is in the financial sector.”
Naked short-selling can be a confusing topic. A short-seller can only sell short if it can locate a source from which to borrow that security and therefore ensure delivery to the buyer – within the T+3 requirement. In most circumstances it is up to the prime broker to confirm whether it is possible to locate the stock and agree the transaction. If it is not possible to locate a stock, which can happen when certain stocks become illiquid, the trade is not allowed to take place. Market makers are an exception to this rule, and are able to lend stock without having located a source from which to borrow, in order to keep the markets liquid. This type of “naked shorting” is legal. If the source of stock is not a market maker, selling of a stock without having located a stock to deliver is illegal. Illegal, however, means very little when no enforcement penalties are in place.
Up until the end of this summer – not till September did the SEC enforce a crackdown – shorting without locating a source from which to borrow has suffered no penalty in the US, and brokers’ statements about efforts to locate them might be rather vague. “A broker can say he has located a stock, but that’s it,” says a hedge fund manager. “What if five other brokers are looking at that same stock and telling their clients they have located it. Who will get it?”
And if there is no penalty for failing to locate and failing to deliver, then why not just fail to deliver? In equity markets if a short-seller does not deliver, he can simply wait until the stock price deteriorates sufficiently so that he will never have to deliver, and therefore is able to keep the money from his sale. Do short sellers, be they hedge funds or proprietary trading desks, do this often? No. But can they do it? Yes. And were some doing this during the peak of the financial crisis? Absolutely.
One former employee of regulator NASD says he knows of a hedge fund that was shorting Freddie Mac and Fannie Mae on a “massive scale”, with no intention of ever locating stock. “His prime broker let the trade go through regardless as he was a large client of theirs,” he says.
Illegal naked shorting, at its worst, can be implemented to bring a company down. In the present crisis of confidence among financial institutions, it can also simply be a means of jumping on a losing target. If a financial institution’s stock looked as if it was falling, why not short-sell without promising a buy-in within three days and hope that the fall is sufficiently large beyond three days to make an even bigger profit?
A glance at the fails to deliver in the financials market indicates that some investors applied this strategy. A comparison of the average daily reported shares failing to deliver between the first quarter of 2007 and the first quarter of 2008 for the US’s top financial firms showed a clear increase over the period. The data, compiled by Washington publication IA Watch, showed a 335% increase for Freddie Mac, a 226% increase for Citigroup, a 133% increase for Goldman Sachs, a 632% increase for Morgan Stanley and a 1,123% increase for Bear Stearns. One source even suggests that some market participants never intended to buy-in and simply marked their tickets “long” selling shares that they did not even own as they knew they would never have to make delivery.
Fails to deliver: Unheard voices
Fails to deliver in the US stock markets are not a new phenomenon. In response to an increasing number of fails, the SEC introduced Regulation SHO in January 2004. This required that a daily list be compiled of all securities that had more than 10,000 fails to deliver, or more than 0.5% of issued shares failing to deliver for five consecutive days or more. No penalty was introduced to deter fails but it was believed that publication of the list would act as a deterrent. The majority of the stocks on the list were those of small firms on the Pink Sheets or Bulletin Boards and many were regarded as companies with weak business models that were likely to see fails to deliver, as levels of shorting in the stock would be high.
For years, small companies affected, and larger companies such as Overstock.com (which has market capitalization of $500 million) have appealed to the SEC to prevent fails to deliver, claiming that their stock prices have suffered as a result of the practice. In April 2004, in a series of articles, Euromoney warned about the implications for larger household names if fails to deliver were not properly addressed. Shapiro agrees that larger companies are now being targeted. He says: “Ordinarily this doesn’t happen to large institutions with large stock floats but in a panic situation they become vulnerable along with those companies that are always vulnerable – smaller companies that are without large public floats. In a time of panic, mechanisms that allow the markets to overshoot (naked shorts) mean you can drive a stock into the ground.”
Patrick Byrne, chief executive of Overstock.com, continues to lobby against fails but insists it is not a matter of self-interest. “The argument gets reduced to me being upset that stock in my firm might be being shorted. That was never the argument. Shorting has its place, I know. This has always been about why the government is ignoring the loopholes within the settlement system that are allowing for fails to deliver to occur.”
He is certain, as are several other long-standing lobbyists, that the recorded number of fails to deliver is only a fraction of the true amount. “If two broker/dealers clear through the DTCC, and one fails, then the two brokers can turn that failure into a private contract to be dealt with outside the DTCC and it becomes ‘ex-clearing’. After that there is no register of that fail,” says Byrne. If failures are as frequent as suggested, the idea of broker/dealers preferring to cancel out each other’s fails on a private basis is not beyond the realms of possibility.
Wes Christian is partner in a law firm representing 15 companies that allege that their stock price has been driven down by illegal naked shorting and fails to deliver. “We are aware of these deals being ex-cleared and of the failings of Reg SHO. Allowing failures to deliver creates artificial supply and that drives down prices,” he says. The defendants in Christian’s clients’ cases are the majority of broker/dealers on Wall Street.
Fails to deliver in the equity markets are seen to create artificial supply. If a stock can be sold without having to be borrowed, there is a strong possibility that stocks in excess of those issued are being sold. Indeed, several companies, Overstock.com included, have reported instances of more owners of stock than is possible. On March 14 128% of Bear Stearns stock outstanding was traded. These “phantom shares” can be on-lent without delivery again and again, further diluting the stock.
It’s a situation specific to the US markets, say participants. Patrick Georg at Clearstream Luxembourg says there has been no decline in settlement efficiency in Europe. Alan Cameron, head of clearing, settlement and custody client solutions at BNP Paribas Securities Services in London, says he has seen little to indicate similar instances of fails to deliver in Europe. “Some European countries like Spain impose strict fines on failures to deliver, as does Crest. It’s not an issue here in Europe.” Byrne adds that in Europe, the impact on reputation of failing to deliver is a deterrent. A head of a prime brokerage in the UK agrees: “It just does not happen in Europe. Securities get delivered in a timely fashion or business is lost.”
However, settlement is faster in Europe than in the US. It is surprising that the US still operates a T+3 system. Robert Greifeld, chef executive of Nasdaq, questioned the system in March this year at a conference when, in reference to fails to deliver, he said it was hard to believe that in 2008 the market still required three days to settle, and that a T+1 system should be part of a discussion about fails.
The SEC has pussyfooted around enforcing delivery in the US equity market over the past 10 years or so, but the collapse of financials stocks has pushed it to be stricter. On September 17, SEC chairman Christopher Cox announced several actions to “make it crystal clear that the SEC has zero tolerance for abusive naked short-selling.” From that date, fails to deliver beyond T+3 have been subject to a hard close-out. If stocks fail to deliver beyond T+3, the broker/dealers acting on the short-seller’s behalf are prohibited from further short sales in that security unless stocks are pre-borrowed.
This change of tack upsets those such as Byrne who have been fighting to have their voices heard for years. “When companies that had access to the Fed window became victims of fails to deliver, the SEC then had to sit up and take notice,” says Byrne.
Actions taken against naked shorting: Small steps
Since August, the number of companies with stock on the Reg SHO list has fallen from an all-time high of 650 to an all-time low of 90, although this does not take into account ex-clearing data. Shapiro says it is a step in the right direction. “The actions taken are an acknowledgement of the issues regarding naked shorting and fails to deliver at least. Progress is under way. Given there are many issues facing the SEC at the moment, this is encouraging.”
Others, however, are disappointed that more has not been done. Byrne says: “A hard close-out is not nearly enough. To truly stop failures to deliver, the SEC must enforce a pre-borrow where parties have to guarantee that a locate has been found through a contract.” At present, broker/dealers and short-sellers can say they have located a source of stock when several other parties might have also identified the same source. Peter Chepucavage of the International Association of Small Broker/Dealers and Advisers agrees that an initial pre-borrow rule is crucial in preventing fails to deliver. “The industry is resisting an initial pre-borrow rule but it is essential,” he says. “Without it the stock market is like the airline industry. You’re overselling the airplane seats knowing that someone will not be able to board even though they reserved/located, to avoid decrementing their inventory.”
The argument against pre-borrows is that liquidity will dry up, and that shorting will be deterred. However, Greg DePetris at Quadriserv believes the opposite would occur as lending would increase. “A more efficient settlement process should result from recent regulatory changes, and these tighter inventory controls might create new trading opportunities,” he says. “It’s important for anyone in possession of lendable supply to monetize its value, and traditionally that’s been done through the lending spread and reinvestment of cash. The notion of pre-borrows implies that there may be derivative value in the latent supply of securities, which lenders may be able to realize for their clients.”
Welborn says the SEC knows it has to introduce the pre-borrow rule if it wants to eliminate fails to deliver for good. “As long as there are companies on the Reg SHO list, then the problem has not been solved,” he says. “The only sustainable solution to naked short-selling is a rule requiring both a pre-borrow and a hard delivery. With only one of these pieces in place, the system is still open to abuse. For example, a hard-delivery requirement by itself would not have made an iota of difference for Bear Stearns; only a pre-borrow could have put a brake on the naked short-selling.”
Welborn points out that the SEC did precisely this in July when it ordered emergency pre-borrows for Fannie Mae, Freddie Mac and the 17 primary dealers. “The SEC knows what must be done to fix this problem once and for all,” he says.
WASHINGTON, Dec 9 (Reuters) – U.S. securities regulators need to do more to crack down on abusive naked short selling — a type of trading blamed for contributing to the free-fall in financial stocks — former and current regulators said on Tuesday. Amid volatile market conditions, the Securities and Exchange Commission adopted a number of rules to rein in those who profit illegally from stock declines. Making bearish bets on stocks is a legitimate investment strategy but the SEC’s rules are designed to weed out abusive practices, such as investors’ failure to deliver stock by settlement date. Short sellers arrange to borrow shares they consider overvalued in hopes of repaying the loan for less and profiting from the difference. A naked short sale occurs when an investor sells stock that has not yet been borrowed, which can distort markets.
Former SEC Chairman Harvey Pitt praised the SEC for taking constructive steps but said the agency has not done enough.
“Naked shorting is a situation in which someone is gambling but they have no skin in the game. They are not required to make any effort to deliver the shares,” said Pitt, one of the panelists speaking at a “Coalition Against Market Manipulation” event in Washington.
The SEC tightened up its rules this year and required short sellers to deliver securities three trading days after shorting the stock.
Rex Staples, general counsel for an association of state securities administrators, said the states are trying to eliminate the problem, but said “this seems to be a solution that the commission is best-equipped to solve.”
“States are ready to act, but we are throwing our support behind the federal regulator at this point,” said Staples, general counsel for the North American Securities Administrators Association.
Pitt and other panelists said the SEC needed to do more to eliminate ambiguity in its rules.
For example, investors are required to locate shares before shorting them. However, SEC rules require broker dealers to have “reasonable grounds” to believe that the security can be borrowed so that it can be delivered by settlement date. Critics say the language is vague.
“If you want to sell short any security, you should have a legally enforceable right to deliver stock on day of settlement. It’s unambiguous, it doesn’t leave any wiggle room,” said Pitt.
WASHINGTON — U.S. securities regulators need to do more to curb short-selling abuses, a group of academics, business executives and former top regulators said Tuesday.
The Securities and Exchange Commission should close loopholes and enforce current rules against “naked” short selling, said Harvey Pitt, former SEC chairman and now chief executive of Kalorama Partners, a Washington, D.C., consulting firm.
“The agency has to make it clear that naked short selling in any form is prohibited,” Mr. Pitt said at a midday press conference.
Short sellers aim to profit by borrowing shares for sale and replacing them later at a lower price. “Naked” short sellers don’t borrow shares they sell short, which can pummel stocks and facilitate market manipulation.
The SEC has sought to crack down on short-selling abuses in recent years, most recently with an interim rule requiring short sellers to deliver borrowed shares within three days of trade settlement. Mr. Pitt and others urged the SEC to make the requirement permanent and take other steps to stiffen pre-borrowing requirements, provide better tracking of stock-delivery failures, including those outside stock-clearing systems, and force buy-ins when delivery failures occur.
Ambiguous rules limiting naked short selling must be clarified, attorneys say
WASHINGTON (MarketWatch) — A top adviser to President-elect Barack Obama on securities regulation on Tuesday said he wants the Securities and Exchange Commission to require public disclosure of short selling.
“We’re looking for disclosure of positions, with a small delay, after a short sale is made,” said Roel Campos, a former Democratic SEC commissioner and member of Obama’s transition team.
After the precipitous drop in stocks of major investment and some commercial banks including Citigroup Inc. in September, the agency implemented a series of short sell rules, many of which were temporary in nature. Among these, the SEC temporarily banned short sales in roughly 800 financial institutions. That ban expired on October 8.
Regulators and others argued that many short sellers — who make bets that a stock price will decline — contributed heavily to the financial crisis and the collapse of many financial institutions.
The next agency chairman is expected to grapple with whether the agency is doing enough to chill manipulative short selling of shares, particularly when it comes to financial institutions.
Campos is seeking to have the next SEC chairman introduce new rules requiring short sellers to publicly disclose their positions in a manner that is similar to how equity investors are required to reveal their equity stakes.
For example, to comply with the SEC’s 13F rule, investors with $100 million in capital or more are required to publicly disclose their positions 45 days after every calendar quarter. Equity investors with 5% or greater stakes are also required to disclose that information to the agency in either an activist Schedule 13D or passive Schedule 13G filing.
But Campos argues that four-times-a-year public disclosure of short sell positions isn’t enough. He wants to see a requirement that hedge funds and other short sellers disclose their positions publicly more quickly after stakes are made, perhaps as fast as two weeks after each position is taken.
Among the temporary regulations put into place in the fall is a requirement for confidential weekly disclosure of short positions to the agency.
According to the rule, investors with $100 million or more in capital must disclose on a weekly basis to the agency their short positions. However, these investors only must provide that position information to the agency on a confidential basis. The expiration date for the provision was extended in October to Aug. 1 of 2009.
Short seller critics argue that public disclosure will mean their proprietary strategies will be disclosed, enabling rivals to copy their approach. Campos said the delay in public disclosure is intended to protect some proprietary strategies, but that there should be some parity with equity disclosure requirements.
Other ways to rein in short selling
In addition to disclosure, securities attorneys and academics discussed other mechanisms that the SEC could impose that could reign in short selling at an event hosted by the Coalition Against Market Manipulation in Washington.
Participants argued that the agency needs stronger rules limiting illegal naked short selling, the practice of selling shares without arranging to borrow the securities up-front.
The SEC in September adopted rules requiring short sellers and their broker dealers to deliver securities within three days of a trade. Participating investors who fail to arrange to borrow shares in advance are prohibited from making future short sales in the same securities.
But securities attorneys at the event argued that there are too many qualifiers on the naked short selling rule.
Rex Staples, general counsel for the North American Securities Administrator’s Association Inc., said there is a “reasonable” qualification on the delivery requirement. “To the extent you can qualify a word like reasonable, you are going to get that time after time,” said Rex Staples, general counsel for the North American Securities Administrator’s Association Inc.
Former SEC chairman Harvey Pitt, who participated in the discussion agreed that the SEC should eliminate ambiguity when it comes to the agency’s naked short selling provision. The agency should also take steps to enforce the rules.
“The agency must make it extremely clear that any naked short selling is illegal and it has to remove the ambiguities so the rules are very clear,” Pitt said.
Participants also debated bringing back the so-called up-tick rule, a regulation removed last year that allowed short sales only if a preceding trade boosted a company’s stock price.
Georgetown Finance professor James Angel said he wants to see an up-tick rule that would take effect when a stock has fallen 5%. He also sought additional prohibitions when a stock price falls 10% and 15%. Staples argued that the SEC should bring back the same up-tick rule it eliminated in 2007. “It is very helpful in times of financial turmoil,” Staples said.
The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.
As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.
The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.
“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”
In addition to these articles, please note that naked short selling has been implicated in the hobbling of the US financial system by The American Bankers’ Association (12), the US Chamber of Commerce (123 ), the CEOs of Goldman Sachs, Morgan Stanley, JP Morgan, and Lehman, politicians John McCain, Hillary Clinton, Barack Obama, Ron Paul and numerous other congressional representatives, the Chairman of the SEC, the Secretary of the Treasury, and so on and so forth.
STEP #3 OF 3: THE CURRENT WIKIPEDIA PAGE ON NAKED SHORT SELLING OMITS EVERYTHING YOU JUST READ, AND YOU ARE FORBIDDEN FROM FIXING IT
At “the encyclopedia that anyone can edit” it is as forbidden to add information such as that contained in the preceding articles as it would be to sell Adam Smith’s works on the streets of Pyongyang. Instead, right at this second, the Wikipedia page on Naked Short Selling sticks to a thoroughly-discredited two-year out-of-date Party Line that holds that experts think naked short selling is not a problem (or even exists) and the mass media agrees with the experts. Much of the page is written in gibberish apparently intended to make it more difficult for a lay person to confront (which is unusual for Wikipedia). And unique among the millions of Wikipedia articles, it cannot be fixed or updated to reflect any of the information cited exhaustively above.
That’s right. Notwithstanding thousands of articles such as the ones cited above, the current Wikipedia article on naked short selling insists that experts believe that it is not a problem. No mention is made of hearings, statements by economists and SEC Chairmen, emergency federal actions and emergency meetings of regulators from the G-20 to stop the world financial system from implding, etc.
Instead, the tone is set by this quote:
“While concern expressed by the regulator has been echoed by journalists, some commentators contend that naked short selling is not harmful and that its prevalence has been exaggerated by corporate officials seeking to blame external forces for their own shortcomings. Others have discussed naked short selling as a confusing or bizarre form of trading.”
That is, in a 54-word statement about a “concern”, precisely 11 words vaguely describe the existence of the “concern” and 43 say that there is no concern. This, though space is allocated to describe results from two off-topic studies from 2007 (one on failures in the IPO market, the other on the Canadian market):
A study of trading in initial public offerings by two SEC staff economists, published in April 2007, found that excessive numbers of fails to deliver were not correlated with naked short selling. The authors of the study said that while the findings in the paper specifically concern IPO trading, “The results presented in this paper also inform a public debate surrounding the role of short selling and fails to deliver in price formation.”
An April 2007 study conducted for Canadian market regulators by Market Regulation Services Inc. found that fails to deliver securities were not a significant problem on the Canadian market, that “less than 6% of fails resulting from the sale of a security involved short sales” and that “fails involving short sales are projected to account for only 0.07% of total short sales.”
Again, notwithstanding the thousands of articles such as the ones I cited above, the current Wikipedia page maintains that the mass media agrees that naked short selling is not a problem:
Reviewing the SEC’s July 2008 emergency order, Barron’s said in an editorial: “Rather than fixing any of the real problems with the agency and its mission, Cox and his fellow commissioners waved a newspaper and swatted the imaginary fly of naked short-selling. It made a big noise, but there’s no dead bug.” Holman Jenkins of the Wall Street Journal said the order was “an exercise in symbolic confidence-building” and that naked shorting involved echnical concerns except for subscribers to a “devil theory”. The Economist said the SEC had “picked the wrong target”, mentioning a study by Arturo Bris of the Swiss International Institute for Management Development who found that trading in the 19 financial stocks became less efficient. The Washington Post expressed approval of the SEC’s decision to address a “frenetic shadow world of postponed promises, borrowed time, obscured paperwork and nail-biting price-watching, usually compressed into a few high-tension days swirling around the decline of a company.” The Los Angeles Times called the practice of naked short selling “hard to defend,” and stated that it was past time the SEC became active in addressing market manipulation.
The Wall Street Journal said in an editorial in July 2008 that “the Beltway is shooting the messenger by questioning the price-setting mechanisms for barrels of oil and shares of stock.” But it said the emergency order to bar naked short selling “won’t do much harm,” and said “Critics might say it’s a solution to a nonproblem, but the SEC doesn’t claim to be solving a problem. The Commission’s move is intended to prevent even the possibility that an unscrupulous short seller could drive down the shares of a financial firm with a flood of sell orders that aren’t backed by an actual ability to deliver the shares to buyers.”
The Wikipedia page engages in such pettifoggery as: “However, the SEC has disclaimed the existence of counterfeit shares and stated that naked short selling would not increase a company’s outstanding shares” (true only in the narrow technical sense that the SEC does not consider that which is increased by naked short selling to be “outstanding shares”: by the same token, the National Transportation Safety Board could claim that there are no plane crashes because the NTSB considers anything which crashes to no longer be a plane).
And so on and so forth. You will find such gibberish on the naked short selling article on Wikipedia, but what you will not find is any of the information presented in the articles cited in Step #2. It is forbidden to enter that information into Wikipedia.
THE TEST: ARE YOU FORBIDDEN FROM UPDATING WIKIPEDIA WITH THIS INFORMATION?
I know that to many this can be a maddeningly complicated issue, and it may not be easy to know who or what to believe. So I propose that you, the reader, conduct an easy, simple test, using the articles cited above. You can do it in about 2 minutes:
Log on to Wikipedia (if you do not have an account you can create one in seconds);
Attempt to edit it with any information regarding events, data, or quotes from any of the articles cited above.
You will find that it is forbidden for you to add any information, data, or quotes from those numerous articles, or to correct any of the glaring omissions and laughable spin of the current article. If you try, your additions will be removed nearly instantaneously. In fact, you may find yourself banned from Wikipedia while all proof that you even made an edit disappears.
On “The encyclopedia that anyone can edit”, a resource that updates in seconds at the passing of a celebrity or the gaffe of a politician, you will find that you cannot insert quotes on this one topic, even when those quotes come from SEC Chairmen, economists, presidential candidates, Congressmen and Senators, G-20 regulators, and Wall Street leaders, even when those quotes appeared months or years ago in The Economist, Reuters, DowJones, Associated Press, or Bloomberg.
Two million English-language articles work by one set of rules, but this article on a grave financial crime turns out to run on a secret set of rules.
And that, dear reader, is the stutter-stepping black cat that should wake you to the synthetic reality you inhabit.
I recently lectured business students at the University of Texas, on the topic of abuse of social media by stock manipulators. I’ve merged the recording of the lecture with my slide presentation and converted it to video below. For the larger, interactive slideshow version, click here.
As a post-script, I found this experience to be a very positive one, and would welcome similar opportunities in the future. Please contact me via email at: email@example.com If the information contained in this presentation concerns you, and you wish to help, then: 1) email it to a dozen friends; 2) go here for additional suggestions: “So You Say You Want a Revolution?“
For anybody familiar with this site, the following, published today in The Register, will be a reprise of a well-worn tale. But believe me…it’s still well worth the read…
Two and a half years ago, Overstock.com CEO Patrick Byrne penned an editorial for The Wall Street Journal, warning that widespread stock manipulation schemes – including abusive naked short selling – were threatening the health of America’s financial markets. But it wasn’t published.
“An editor at The Journal asked me to write it, and I told him he wouldn’t be allowed to publish it,” Byrne says. “He insisted that only he controlled what was printed on the editorial page, so I wrote it. Then, after a few days, he got back to me and said ‘It appears I can’t run this or anything else you write.'”
The Journal never changed its stance. But last week, the editorial finally saw the light of day at Forbes – after Byrne added a few paragraphs explaining that naked shorting had hastened what could turn out to be the biggest financial crisis since The Great Depression. (get the rest here)
For anybody familiar with this site, the following, published today in The Register, will be a reprise of a well-worn tale. But believe me…it’s still well worth the read…
Two and a half years ago, Overstock.com CEO Patrick Byrne penned an editorial for The Wall Street Journal, warning that widespread stock manipulation schemes – including abusive naked short selling – were threatening the health of America’s financial markets. But it wasn’t published.
“An editor at The Journal asked me to write it, and I told him he wouldn’t be allowed to publish it,” Byrne says. “He insisted that only he controlled what was printed on the editorial page, so I wrote it. Then, after a few days, he got back to me and said ‘It appears I can’t run this or anything else you write.'”
The Journal never changed its stance. But last week, the editorial finally saw the light of day at Forbes – after Byrne added a few paragraphs explaining that naked shorting had hastened what could turn out to be the biggest financial crisis since The Great Depression. (get the rest here)
One of the strangest things I’ve ever seen is how Gary Weiss deals with getting caught in a lie.
A great example of this is his denial of so much as editing Wikipedia, in the face of evidence that not only has he been a very active Wikipedia editor, but that he’s also engaged in an concerted effort to inject misinformation into the Wikipedia articles on naked short selling, prominent opponent of naked short selling Patrick Byrne, and Overstock.com, which is the company Byrne heads as CEO.
To give a little background, here’s what Weiss originally wrote (and later deleted) in his blog in response to my repeated claims that he was the now-infamous Wikipedia editor “Mantanmoreland”.
Bagley didn’t even pretend to have contacted me, not that it would have prevented him from publishing his smears — just as Wikipedia’s denial, and mine, has never prevented him from repeating, again and again, his malicious lie that I have edited Wikipedia.
I think that it is indicative of Judd’s (and his boss’s) malice — in every sense of the word — that he would publish an outright lie while knowing that it is a lie. Both I and the DTCC have denied the total rubbish that he posted on his website.
Similarly he continues to publish the lie that I am this “Mantanmoreland” long after it was, again, denied by both myself and Jimbo Wales of Wikipedia.
Since ASM is an extension of Overstock.com, operated with the blessing and open and enthusiastic support of its CEO, I think that what you have here goes clearly beyond ethical issues. Of course corporate ethics is clearly never a consideration for Patrick Byrne, in earning the merit badges required to gaint he sought-after title of “America’s worst CEO.”
Gary Weiss | Homepage | 02.09.07 – 11:07 am | #
Before proceeding, let’s make sure everybody agrees that Gary Weiss insists my claim that he has edited Wikipedia is a “malicious lie.”
Everybody clear on that?
Good. Now on to Gary’s email. (Read this to learn how I came to posses email between Gary Weiss and another individual).
On 1/28/2006 at 7:19 PM, Floyd Schneider became aware of the battle that was raging for control of the Wikipedia article on naked short selling, and sent a link to Gary Weiss.
The next morning, Weiss sent the following two replies:
From: firstname.lastname@example.org To: Floyd3491@aol.com Subject: Re: (no subject) Date: Sun, 29 Jan 2006 11:13:46 -0500 Received: from unknown (HELO maincomputer) (email@example.com@188.8.131.52 with login) by smtp101.vzn.mail.dcn.yahoo.com with SMTP; 29 Jan 2006 16:13:43 -0000
Note that they’re hijacking that page. However, anyone can unhijack. You just go into edit mode, select all and copy the page when it is in good shape, and save it as a text file. That makes it easier to replace the page when it has been baloneyfied. I may insert a reference to my book at some point…..
From: firstname.lastname@example.org To: Floyd3491@aol.com Subject: Date: Sun, 29 Jan 2006 11:21:46 -0500 Received: from unknown (HELO maincomputer) (email@example.com@184.108.40.206 with login) by smtp101.vzn.mail.dcn.yahoo.com with SMTP; 29 Jan 2006 16:21:43 -0000
right now, for example, it is in pretty good shape. In fact….. well, here
is what one simply has to plug in… attached.
First, we now know that as early as 1/28/2006, Gary Weiss clearly had edited Wikipedia, which is not itself a big deal. Yet, Weiss calls the claim a “malicious lie.”
Indeed, it is Weiss who is lying.
Second, we now know (as if there were any doubt) that Weiss was “Mantanmoreland”. Here’s how:
Note Weiss’s IP address on January 28 and 29, 2006 as reflected by these two emails: 220.127.116.11. Now, look at the Wikipedia edit history of IP address 18.104.22.168.
As you can see, someone using the IP address 22.214.171.124 was eagerly editing the Wikipedia article on naked short selling on January 27 and 28, 2006 and then stops abruptly.
The final act of the editor at IP address 126.96.36.199 was to edit the article to appear precisely how it did in the file Weiss sent Schneider.
Wikipedia editor “Mantanmoreland” is created shortly thereafter and his first act is then to restore the naked shorting article to how it appeared where 188.8.131.52 left off (again, precisely mirroring the content of the attachment Weiss had sent to Schneider).
Weiss sent his second reply to Schneider before any edits were made to that version, noting “right now, for example, it is in pretty good shape.”
From this, we know that Gary Weiss = 184.108.40.206 = Mantanmoreland, and that Weiss’s MANY ongoing denials are among the more deeply disturbing lies I’ve witnessed another human concoct.
While hardly germane, given the gravity of the above, I’d like to make out two additional points (a little running up of the score, if you will).
First, the act of recruiting others to mimic one’s position when editing an article on Wikipedia is known as “meatpuppeting”, and is regarded as a serious offense in that silly culture. This is precisely what Weiss has done here, although there is no evidence that Schneider acted upon Weiss’s request.
Second, for all the times he has lied, Weiss certainly told the truth when he said, “I may insert a reference to my book at some point.”
Beginning one week after the publication of his second book on April 6, 2006, Weiss added (and very jealously guarded) dozens of references to his book, many of which persist to this day.