Technically it’s the clearing firm of the actual naked short seller that is on the hook but they just transfer the liability to their client that put in the order. Remember that these “open positions” that the CF holds are collateralized by the receipts of the naked short sale. The buyer’s money sits in limbo UNTIL delivery is made. What people don’t realize is that abusive naked short sellers have very little of their own “skin in the game”. Except for a coupleof percentagepoints the only money involved is that of the investor. The crooks sell nonexistent shares and refuse to deliver that which they sold after contracting to deliver shares on T+3. The FTD results in the issuance of a share price depressing “security entitlement” and it is credited to the account of the buyer that never got delivery. UCC Article -8 mandates that the CF of the buyer treat the “holder” of this SE as being “entitled” to exercise all of the rights and property interest that comprise the undelivered security. This adds to the “supply” of that which by law must be treated as readily sellable whether they be legitimate shares or mere SEs. This drives the share price down. At the NSCC all you have to do is to collateralize the monetary value of your failed delivery obligation. Thus as the share price drops so too do the collateralization requirements. This results in the investor’s money flowing to the party that refused to deliver that which it sold mainly because it never existed in the first place. It’s pretty good work if you can get it but in order to get it you need to be able to provide massive amounts of “order flow” to either corrupt MMs or corrupt clearing firms willing to enter into ex-clearing arrangements with other corrupt CFs. Thus only hedge funds and Wall Street behemoths are invited to play. You and I don’t have the critical mass to enter into these games.

http://www.nlpc.org/stories/2009/08/10/acorn-funder-jpmorgan-chase-doesn%E2%80%99t-look-good-new-madoff-book

Submitted by Peter Flaherty on Mon, 08/10/2009 – 13:48

A new book by Barron’s reporter Erin Arvedlund asserts that banking giant JPMorgan Chase became aware of Madoff’s Ponzi scheme months before his arrest, prompting the bank to liquidate its positions in a Madoff-related fund. Yet, the bank continued to accept deposits into Madoff’s main account at the bank from unsuspecting investors who were about to lose everything.

NLPC is a critic of JPMorgan Chase’s support for political and social causes that are contrary to the bank’s interests and hostile to the capitalist system itself, such as ACORN. Although these new revelations are a separate controversy, both reflect an apparent willingness by the firm to work with shady enterprises if it is perceived to be in its own interest.

The book is titled Too Good to be True. Excerpts appeared in Barron’s over the weekend. Arvedlund has a great deal of credibility on anything Madoff-related, having written a story in 2001 suggesting that Madoff’s consistent record of returns was suspect.

The only good thing that can be said about JPMorgan Chase is that, like Arvedlund, it was perceptive enough to smell the Madoff rat. But unlike Arvedlund, who tried to sound the alarm, JPMorgan Chase kept quiet and tried to protect itself.

Arvedlund explains:

In 2006, JPMorgan Chase developed a derivative product for its wealthy clients. It was linked to the Fairfield Sentry Fund offered by the Madoff feeder Fairfield Greenwich. The bank offered investors — mostly in Europe — a note that paid three times the earnings, or returns, of the Sentry Fund. The note matured in five years. To hedge its risk on the derivative product, the bank invested in the Sentry Fund itself. This way, if the Sentry Fund did well, the bank’s returns would offset its obligation on the notes.

By the summer of 2008, JPMorgan Chase had deposited $250 million with the Sentry Fund. With the financial meltdown on Wall Street and around the world in full swing, most of the markets were down 30% or more, and yet the Sentry Fund reported gains of 5%. JPMorgan Chase began to grow suspicious.

As a result:

In September 2008, JPMorgan Chase quietly liquidated its entire $250 million position in the Sentry Fund, even though it remained liable on the derivatives it had sold to the wealthy clients. At the time, the Fairfield Sentry investment notes were showing a 5% gain for the year. The bank had concluded Madoff was a phony, and the only way to protect itself was to liquidate anything connected with Madoff.

When JPMorgan Chase bought what was left of Bear Stearns last year, it inherited a relationship with Madoff that is also sure to raise more questions about its ethics. According to Arvedlund:

Brokers who traded at Bear Stearns used the firm’s automated equity order system to buy and sell stocks. A broker would enter the stock symbol and the number of shares he or she wanted to trade. The system was supposed to do the rest: work to find the best counterparty to trade with from among the many market makers that traded with Bear Stearns. However, for Nasdaq stocks, Bear Stearns had an unwritten code: the system automatically defaulted to trade with Madoff.

Madoff reportedly paid Bear Stearns substantial fees for this default setting on their equity order system, and he may have paid other customers to do the same as well. Between 2000 and 2008, Bear Stearns’ 400 or so brokers all used this system, and all their Nasdaq trades defaulted to Madoff. It was a big source of revenue for Madoff, and it vaulted Bear Stearns to a position as the largest counterparty trading with Madoff. The arrangement was in place when Bear Stearns went under in early 2008, and it continued under JPMorgan Chase.

JPMorgan Chase and/or the JPMorgan Chase Foundation are major funders of the Association of Community Organizations for Reform Now (ACORN) and related organizations. ACORN is a network of as many as 360 organizations, structured to escape accountability, a network far more complicated than anything Madoff ever constructed.

ACORN has had its own embezzlement scandal. Dale Rathke, the brother of ACORN founder Wade Rathke, stole nearly $1 million in 1999 and 2000. ACORN treated the crime as an internal matter and did not even notify its board. A whistle-blower made it public. Dale Rathke remained on ACORN’s payroll until June 2008.

According to its 2007 tax return (the most recent available), the JPMorgan Chase Foundation made a million-dollar gift to ACORN Housing, Inc. that year. This donation is likely the tip of the iceberg of the bank’s total support of ACORN. JPMorgan Chase is one of ACORN largest corporate backers, if not the largest. JPMorgan Chase can take a step toward accountability by disclosing the specifics of its support for ACORN.

Last fall, JPMorgan Chase accepted $25 billion in taxpayer TARP funds. In 2008, the top 200 bonus recipients at JPMorgan Chase received $1.12 billion. The firm had 1,144 employees who received a bonus of least $1 million last year, more than any other Wall Street firm.

You would think with all these millionaires walking around the company, there would be at least a passing acknowledgement of the wealth generation potential of a free economy. Not a chance. CEO Jamie Dimon sneers at free market advocates. The firm funds a variety of anti-business activists, ACORN being just the most dramatic example.

Dimon is apparently not self-conscious either about ACORN’s role in the residential mortgage crisis, much of it driven by subprime lending. Starting in the Seventies, ACORN saw the big banks as shakedown targets. The weak-kneed executives at these institutions were pretty easy pickings.

ACORN screamed “racism.” It accused mortgage lenders of “redlining,” or denying credit to borrowers in certain areas. It picketed the homes of bank directors in leafy suburbs.
A way out was offered to the banks. They could make contributions to ACORN and/or they could “invest” in ACORN Housing, which made loans to “underserved” borrowers.

They also could back off from opposition to a law called the Community Reinvestment Act of 1977 that required banks and thrifts to lend more money from areas where they took deposits. It meant more loans to “underserved” communities, and a loosening of lending standards.

Of course, many of ACORN’s “deserving” borrowers were not deserving at all. Increasingly, the banks dumped the loans on Fannie Mae and Freddie Mac, which were under pressure by Congressmen like Barney Frank (D-MA) to make more loans to the “underserved.”

The result was the mortgage meltdown that nearly took down our entire financial system, providing the justification for the massive bailouts of the banks. But Dimon acts like JMorgan Chase has no culpability because of its “solid” balance sheet.

According to Arvedlund, there are already civil suits against JPMorgan Chase by investors whose funds were acccepted into Madoff’s account at the bank after it had concluded that Madoff was a fraud. Of course, this may also be criminal, but there is no word that the bank is the target of a criminal investigation.

During the campaign, Dimon was a vocal supporter of Barack Obama. On July 18, the New York Times called Dimon “Obama’s favorite banker.” Dimon may hope that this relationship will insulate his firm from prosecution in the Madoff case. In any event, JPMorgan Chase’s culture must be questioned, along with Dimon’s credibility and leadership.

In the case MEDX and BMY merger, it is a cash deal.

On the first day after the merger announcement, I think about 50 million share traded.

If there are more than the official number of shares tendered, who loses money? The brokers/dealers? Hedge funds? Individual investors?

In this MEDX example, BMY agreed to pay 2.1 Billion dollars.

If it’s a cash offer and the shareholders approve of it then those naked short will have to match the offer. They do not have to cover. If there’s a large naked short position then the voting will be chaotic and people’s voting power will not be what they think it is but they’ll never learn of this reality. If a “dirty” clearing firm has a ton of FTDs then it will grant the clients of its “introducing” or “correspondent” brokers a “proportionate interest” in the number of shares that it did get delivery of. The foundational concept of “one share, one vote” got thrown under the bus by the NSCC. It had to otherwise NSS frauds would be revealed every time a vote is called. If you want your full voting power you either deal with a “clean” clearing firm (good luck finding one) or you demand delivery of your certs.

What’s really heinous is if the offer was in the form of a “share swap” wherein the shareholders got $16 worth of stock of the acquiror. In this case the crooks will not be asked to cover their naked short position but instead an FTD of the acquiree becomes an FTD of the acquiror prorated by whatever the ratio is. The BOD of the acquiror will never learn it but they will have paid a heck of a lot more readily sellable “shares” (actually readily sellable “security entitlements” that manipulate the share price downwards) for the acquisition then they thought. Again, they have to do it this way otherwise there would be a massive short squeeze in the time period before the vote. The share price of the acquiror will always tank even if the acquisition is accretive to earnings. It’s caused by all of that extra baggage in the form of readily sellable share price depressing “security entitlements” they’re taking on. The share price depression of the acquiree’s FTDs leads to the acquisition being a bargain basement deal for the acquiror (that’s what they thought anyways). Nice clearance and settlement system we have, eh!

I am wondering how outstanding counterfeit shares in brokerage accounts could possibly effect a tender offer for a merger.

Specific Examaple is…
MEDX Board of Directors approved a merger with BMY for $16/shr. The MEDX stock was trading around $8.20 or so.

For the tender offer to succeed, at least 51% of the shares have to be tendered.

Since MEDX is a biotech company that has been naked shorted in the past and most likely there are outstanding naked share floating in the system…

Is it likely the naked positions were covered when the stock went up about 90% overnight?

Or is it possible the naked positions are still un-covered and the tender offer offered a means for the naked shares to be bought by the tendering company and to be counted in the tender offer?

http://www.forbes.com/2009/08/10/pitt-short-selling-intelligent-investing-video.html?partner=daily_newsletter

Why doesn’t Weiss?

http://www.marketwire.com/press-release/Acg-Los-Angeles-1028088.html

Nice work if you can get it.

Pequot, Aguirre & the SEC

Pequot Trading in Google, Cox, Premcor Sparked Warnings to SEC

By David Scheer and Jesse Westbrook

Aug. 10 (Bloomberg) — Pequot Capital Management Inc., once the world’s biggest hedge-fund manager, was cited in at least 44 private reports from exchange watchdogs in the past four years alerting U.S. regulators to potential insider trading, market manipulation or other misconduct, government documents show.

Trades linked to Google Inc., Cox Communications Inc., International Securities Holdings Inc., Premcor Inc. and dozens of other companies prompted surveillance units policing U.S. exchanges to make the referrals to the Securities and Exchange Commission, according to agency records obtained by Bloomberg News. Thirty-six reports flagged possible insider trading. Four indicated possible manipulation and four were labeled “other.”

“The numbers would indicate they had trading that closely preceded 36 material events” said Bradley Bennett, a partner at Baker Botts in Washington and a former SEC investigator who focused on insider-trading cases. “Referrals are very strong at identifying accounts that are worth additional scrutiny,” he said. “Not all referrals result in enforcement actions.”

Pequot founder Arthur Samberg, 68, told investors in a May letter that he planned to liquidate his main hedge funds after a federal insider-trading investigation “cast a cloud over the firm.” People familiar with the inquiry said in January it stemmed from bets Samberg’s company, now based in Wilton, Connecticut, made on Microsoft Corp. in 2001. Neither Samberg nor Pequot has been accused of any wrongdoing by the SEC.

John Nester, an SEC spokesman in Washington, declined to comment yesterday on the previously undisclosed trading referrals to the agency and declined to say whether any are still being investigated. Chris Kittredge, a spokesman for Samberg and Pequot at Sard Verbinnen & Co. in New York, declined to comment.

Schapiro Letter

Pequot oversaw $3.47 billion, according to a May 15 regulatory filing, down from $4.3 billion in November and $15 billion in 2001, when it was the top-ranked hedge-fund firm by assets.

The list of Pequot referrals accompanied a July 14 letter from the agency’s chairman, Mary Schapiro, to Senator Charles Grassley, the Iowa Republican who has been scrutinizing the regulator’s oversight of Pequot since a onetime SEC lawyer complained that his bosses had hindered his efforts to probe the firm. The SEC forwarded all but one of the referrals to its investigators, Schapiro wrote, without indicating the outcome.

The spreadsheet shows that the SEC received alerts from the New York Stock Exchange, the American Stock Exchange, the Chicago Board Options Exchange and the NASD, the brokerage regulator now known as the Financial Industry Regulatory Authority, or Finra.

The entire article can be read here…

http://www.bloomberg.com/apps/news?pid=20601087&sid=ateHbcBlMHp4