The Naked Short Selling That Toppled Wall Street

The Wall Street Journal stated in a lead editorial last week that the SEC was “reasonable” to “clamp down” on naked short selling. Well, that was progress of sorts, though one wonders how it could have taken all these years for the nation’s most important newspaper to suggest that it might be “reasonable” to put an end to criminal activity that has eviscerated hundreds of companies and destroyed countless lives.

And now that this criminal activity has been implicated in the Humpty Dumptying of our financial system, one grows wistful for the golden age of journalism when editorialists (people working for famous newspapers, not just cyber weirdos) would express a little outrage, demand that heads roll – muster something better than “reasonable” to describe the limpid “clamp down” of an SEC that bows in oily servitude to the very short-sellers who manhandled our markets.

Alas, The Wall Street Journal is not angry about the scandal of naked short selling. To the contrary, it devotes most of its editorial to tut-tutting the SEC for taking the mild step of requiring hedge funds to disclose their short positions. This, the Journal laments, means the government wants to “slap a scarlet letter on short sellers.” And (shed a tear) hedge funds will now have to “worry that their strategies will be put on display for the world to see.”

Might the world like to see which hedge funds are employing the strategy of illegal naked short selling – offloading huge chunks of stock that they do not possess – phantom stock – in order to drive down prices? No, nothing to see there, says the Journal. Having thoroughly investigated the matter, the editorialist reports that there is “no evidence of widespread naked shorting of financial stocks in this panic.” Indeed, the Journal assures us that there is no evidence that short sellers have engaged in any market manipulation whatsoever.

That is a mighty bold claim. As the Wall Street Journal itself reported, the SEC has ordered two dozen hedge funds to turn over trading records as part of its investigation into possible short-seller manipulation of six big financial institutions — American International Group, Goldman Sachs, Lehman Brothers, Morgan Stanley, Washington Mutual, and Merrill Lynch.

The SEC has never in history prosecuted a major case against a short seller, and there is no reason to believe that it is actually going to nail someone now. But it is not difficult to see why the SEC feels that is has no choice but to investigate.

It must investigate, or at least appear to investigate, because the data scream, “Investigate!”

Take the case of Washington Mutual, which met its demise on the same day that the Journal published its editorial. While the SEC has not yet released data covering the last couple weeks of turmoil, the data through June show that at one point that month “failures to deliver” of Washington Mutual’s stock reached an astounding 9 million shares. From June 5 to June 19 there were, on any given day, at least 1 million WaMu shares that had “failed to deliver.”

In other words, hedge funds and brokers sold as many as 9 million shares that they did not possess (which is why they “failed to deliver” them), and they kept the market saturated with at least 1 million phantom shares for more than two weeks. WaMu’s stock price dropped by more than 30% during this period. Similar attacks, with similar effects, occurred one after another in the months leading up to June.

That is very good evidence of illegal market manipulation.

Aside from Washington Mutual, Bank of America, Fannie Mae, MBIA, Ambac, and close to 50 smaller financial firms – not to mention a couple hundred non-financial companies – have appeared on the SEC-mandated “threshold” list of companies whose stock has “failed to deliver” in excessive quantities.

That, too, is very good evidence of illegal market manipulation.

A number of the big banks never appeared on the SEC’s “threshold” list. Perhaps that explains the Journal’s claim that there is “no evidence” that naked short selling contributed to our financial crisis. If so, the Journal does not understand the methods that naked short sellers use to manipulate the markets. The Journal also does not understand how powerful financial elites manipulate the government (and the media).

Peter Chepucavage, the former SEC official who authored Regulation SHO (the rules that governed short sales from 2005 until the SEC temporarily banned short-selling of financial stock last week) has told us that the rules were watered down under fierce pressure from the hedge fund lobby.

One result is that Regulation SHO did not force short sellers to borrow real shares before they sold them. They were given three days to produce stock before it was declared a “failure to deliver.” If they missed the three-day deadline, they were given another ten days, after which they were supposed to buy (not borrow) real shares and deliver them, or face penalties.

In practice, many hedge funds and brokers ignored the deadlines without repercussions. But even traders who met the deadlines were able to churn the markets. Since they were not required to possess real shares before they hit the sell button, they could offload a large block of phantom stock and let it dilute supply for three to 13 days. When the deadline arrived, they might borrow real shares and deliver them, and then sell another block of phantom stock, which would hammer prices for another three to thirteen days.

Or, rather than borrow real shares, the hedge fund might buy stock (the price having been knocked down during 13 days of diluted supply) from a friendly broker. Often, the brokers did not have any stock to sell the hedge fund, but they pushed the sale button anyway. The hedge funds then used the broker’s phantom stock to settle its initial sale of phantom stock, and when the broker’s deadline came, he bought an equal quantity of phantom stock from another broker, and so on.

A lot of journalists have portrayed this naked short selling as “legal.” In fact, it is grossly illegal assuming the goal is to manipulate markets. But the SEC until recently shied away from making that assumption. So long as the hedge funds met the delivery deadlines, they could distort and destroy at will.

Another result of the short-seller lobby’s intervention is that a company does not appear on the SEC’s “threshold” list unless there are failures to deliver of more than 10,000 of the company’s shares (and at least 0.5% of its total shares outstanding) for five consecutive days. So long as there are no failures on day six, there are no flashing red lights at the SEC. That is, threshold (excessive) levels of phantom shares can float around the system for a total of eight days (three days before they are registered as “failures to deliver,” plus five more) without a company being designated a victim of naked short selling.

An eight-day blast (or even just a one day blast) of, say, a couple-hundred thousand phantom shares can knock down a stock’s price very nicely. Blasts of a million-plus shares, which are common, can do even more damage.

If a company has weaknesses that can be blown out of proportion with help from the media, and if hedge funds blast the company with phantom stock, then pause, then blast again, then pause, then blast again — over and over — for a couple of months, then the company’s share price can soon be in the single digits. – without ever having appeared on the SEC’s threshold list.

Unsurprisingly, the data through June shows this blast-pause-blast pattern in the stocks of nearly ever major financial institution that has been wiped off the map, and quite a few that were in death spirals before the SEC temporarily banned short-selling. Very often, huge failures to deliver have occurred in stretches of precisely five days – just long enough to keep a stock off the threshold list.

The attack on Bear Stearns, for example, began on January 9, when hedge funds naked shorted more than 1.1 million shares. The shares “failed to deliver” at the end of Friday, January 11 (the three-day deadline). For the next four days, beginning Monday, January 14, there were massive failures to deliver, peaking at 1 million shares on January 17. That is, the attack lasted a total of eight days, with failures to deliver lasting precisely five days. On day six, there were few failures to deliver, so Bear did not appear on the threshold list.

Over the next few weeks, there were several more blasts – with failures to deliver ranging from 200,000 to 500,000 shares. Those were threshold levels, but the failures lasted less than five consecutive days, so no flashing red light at the SEC.

On February 28, 800,000 shares of Bear Stearns failed to deliver. For the next five business days, anywhere from 100,000 to 350,000 shares failed to deliver. On day six, there was a pause — few failures to deliver. So no threshold list – no flashing red light at the SEC.

A week later, just before CNBC’s David Faber reported the false information (given to him by a hedge fund “friend” whom he had “known for twenty years”) that Goldman Sachs had cut off Bear’s credit, somebody naked shorted more than a million shares of Bear’s stock.. Over the course of the next couple of weeks, there was a sustained effort to drive the stock to zero, with massive failures to deliver every day — peaking at 13 million shares.

This attack lasted long enough to put Bear Stearns on the threshold list, but by then, it was too late. The bank’s mangled remains had been swallowed by JP Morgan. Ultimately, at least 11 million shares of Bear Stearns were sold and never delivered.

Meanwhile, the naked short sellers began their attack on Lehman Brothers. On March 18, Lehman’s stock had begun to increase sharply, so somebody unleashed more than 1.5 million phantom shares. Those failed to deliver on March 20. For the next three days, there were failures to deliver of between 400.000 and 800.000 shares — far exceeding the daily “threshold.” That helped the share price to fall sharply, but on day five, there were no failures, so Lehman didn’t appear on the threshold list of companies victimized by naked short selling.

On April 1, another round of naked short selling commenced, coinciding with a wave of false rumors about Lehman’s liquidity. That continued until April 3, when SEC Chairman Christopher Cox, for the first time, told a Senate committee hearing that naked short selling was a big problem. Using the words “phantom stock,” he said many companies had been affected and vowed to crack down.

For a few weeks after that, there was not much new naked short selling.

Then, on May 21, short-seller David Einhorn gave his famous speech accusing Lehman’s executives of cooking their books. Though Lehman, like most banks, was guilty of participating in the dodgy business of securitized debt, it was not cooking its books. It had, however, failed to mark some of its assets down to levels prescribed by Einhorn, who waved the CMBX index as the proper barometer of commercial mortgages.

The CMBX comes from a company called Markit Group, which is owned by four hedge funds, the names of which the Markit Group will not disclose. I don’t know if the managers of those hedge funds are friends of David Einhorn, but the Wall Street Journal’s Lingling Wei published a story in February noting that the CMBX “doesn’t make sense.” It grossly undervalues commercial property, implying default rates, for example, that are four-times higher than they are in reality.

Nonetheless, the media, including the Wall Street Journal, trumpeted Einhorn’s analysis, which was distorted in many other ways – but that is a tale for a future blog.

For now, it is enough to know that coinciding with Einhorn’s speech, somebody naked shorted more than 200,000 shares (the settlement date for that sale was May 27, three business days after the speech, owing to a holiday weekend). Thus began a five day stretch of failures to deliver (ranging from 120,000 to 450,000 shares). On day six, as usual, there were few failures to deliver, so Lehman did not appear on the threshold list.

After a pause of a few days, somebody circulated the falsehood that Lehman had gone to the Fed for a handout. Coinciding with that rumor, hedge funds naked shorted close to 1.5 million shares. Those shares failed to deliver three days later, on June 9. The next day, there were 650,000 failures. The day after that, 263,000 failures. On day four, there were 510,000 failures. On day five, there were 623,000 failures. Time for Lehman to appear on the threshold list. But, on day six, of course, the failures to deliver stopped. No list – no flashing red light at the SEC.

Throughout this time, Einhorn continued to appear on CNBC and in the major newspapers, doing his best to make Lehman’s problems (which were real, but probably, at this stage, manageable) appear to be both catastrophic and criminal. From May 21, the day of Einhorn’s speech, to June 15, the stock lost almost half its value.

For reasons that I cannot fathom, Lehman then opted for a strategy of appeasement. Rather than challenge Einhorn’s assumptions, Lehman aimed to silence him and his media yahoos by doing what they asked. It “reduced its exposure” to mortgages, primarily by marking them down to levels dictated by Einhorn’s bogus index – the CMBX. This is the main reason why it booked a 2.8 billion loss in the second quarter.

When Lehman announced its quarterly results, on June 16, there was another blast of naked short selling, with failures to deliver at threshold levels from June 19 to June 24. Exactly five days. Then the failures stopped. No threshold list. No flashing red light.

I look forward to the day (in a few months) when the SEC will release data covering July to September. But I can tell you right now what happened next.

On June 30, somebody floated the false rumor that Barclays was going to buy Lehman at 15 dollars a share (it was then trading at 20). Simultaneously, hedge funds no doubt naked shorted large blocks of shares. It’s a safe bet that the data will show failures to deliver lasting precisely five days.

On July 10, somebody (SAC Capital?) circulated the false rumor that SAC Capital was pulling its money out of Lehman. Hours later, there was another false rumor — that PIMCO was pulling out its money. Quite certainly, these rumors were accompanied by naked short selling, with failures to deliver beginning three days later, and probably continuing at threshold levels for precisely five days. Lehman’s stock lost almost 50% of its value in the four weeks leading to July 15..

At this point, the SEC finally came to realize what was happening to Lehman. It realized that similar madness had destroyed Bear Stearns. It realized that AIG, Citigroup, Fannie Mae, Freddie Mac, Bank of America and fifty other financial companies were getting clobbered in exactly the same fashion.

Clearly, naked short selling posed a real threat to the stability of the financial system. So the SEC issued an emergency order forcing hedge funds to borrow real stock before they sold it. No more saying “Yeah, my cousin Louie has the stock in a drawer somewhere.” No more naked short selling.

This order protected only 19 big financial institutions – which is as far as the SEC thought it could go and still retain friendly relations with its short-selling paramours – but it was something. During the three weeks that the emergency order was enforced, Lehman’s stock price increased by around 50 percent. The other companies that had been under attack enjoyed similar rebounds.

The short-sellers, of course, fumed. Some of those fumes wafted to The Wall Street Journal and other prestigious publications, which lambasted the SEC for issuing the emergency order. They published all manner of mumbo-jumbo about the emergency order wrecking “market efficiency” – though the only evidence of this was an utterly dubious report circulated by the short seller lobby (see here for the details), and it was hard to comprehend what could possibly have been “efficient” about a market getting smothered with false information and fake supply.

Of course, the SEC, captured by the short-sellers, and ever mindful of the media, decided to let its emergency order expire, and announced no new initiatives to stop naked short selling..

The day after the emergency order expired, Lehman’s stock nosedived. So did a lot of other stocks that had enjoyed a temporary reprieve.

Mark my words, the data for August and September will show that soon after the order was lifted, rampant naked short selling began anew.

It will show a sustained attack on Fannie Mae and Freddie Mac, with failures to deliver exceeding one million shares, until the day the two companies were nationalized. It will show Lehman getting hammered (blast-pause-blast) until its stock was so low that there was no way it could raise capital. And it will show that in Lehman’s final days, hedge funds sold unprecedented amounts of phantom stock, knowing that the stock would never, ever have to be delivered.

Two days after Lehman was vaporized, AIG watched its stock fall to as low as one dollar. The data through June shows that AIG was repeatedly blasted with phantom stock, often in stretches of eight days (three + five), with peak failures to deliver reaching 2 million shares. It’s a safe bet that the data will show that these attacks continued, and grew in magnitude, until a price of one buck per share resulted in paralysis, and AIG had to be nationalized. But the company never appeared on the SEC’s threshold list.

After AIG, the rumor was that Citigroup would go down next. The data through June shows that Citigroup was bombarded – blast, pause, blast – with massive amounts of phantom stock. Failures to deliver peaked at 8 million shares. No doubt, the blasts continued and grew in magnitude in the days leading up to September 16, when Citigroup’s stock went into a death spiral.

On September 17, the SEC rushed out new rules governing naked short selling. The new rules seemed a lot like the old rules. Hedge funds would not have to actually possess stock before selling it. Instead, they would merely have to “locate” the stock. The SEC would have no way of knowing whether hedge funds had “located” stock, but if they lied and told their broker, “Yeah, I located the stock, I got it somewhere, push the sell button,” then that would be “fraud.” Presumably, the brokers, who depend on the hedge funds for most of their income, and are complicit in their naked short selling, would line up to inform the SEC that their clients were telling them lies.

Meanwhile, the hedge funds would still have three days to deliver stock, with no strong penalties for failing to do so, and no mechanism for determining whether a hedge fund had delivered real stock, as opposed to new phantom stock that it had received from a friendly broker. As for the “threshold” of five consecutive days before a company could get on the list that sets off the flashing red lights that the SEC ignores – that would remain the same.

When these rules were announced, the short-seller lobby cheered loudly. The media transcribed the lobby’s cheerful press releases, and then the naked short sellers eliminated Merrill Lynch. After that, they turned on Goldman Sachs and Morgan Stanley, at which point both stocks went into death spirals and the companies’ CEOs treated us to the spectacle of calling the SEC to complain that Morgan and Goldman (ie., the companies that housed the brokerages that invented and profited the most from naked short selling) were now getting mauled by their own monstrous creations.

A week later, the Wall Street Journal stated in an editorial that there was “no evidence” of naked short selling or market manipulation during this financial crisis.

* * * * * * * *

P.S. I am a former employee of The Wall Street Journal editorial page. I think it is the finest editorial page in the world. I enjoyed my time at the Journal. They let me live in Europe. I got to write mean things about socialists.

But with genuine respect, I say to my former colleagues –you are like the boy in the bubble. You live and breath the “free markets” paradigm. This is healthy, but it is limiting. It is not the real world..

Please, get out of that bubble. Get dirty with the data. Behold the slop in our clearing and settlement system. Consider how this slop is affecting our market, and tell me what is free or efficient about it.

Please, do it quickly.

If you do not, this nation is screwed.

Mark Mitchell

[email protected]

  1. look at the lack of a pre-borrow this way: You go to the local home depot to buy some merchandise. You move up to the checkout counter and lay your mercandise out. The teller rings you up and ask for payment. Instead of cash or a cerdit card, you buy on a locate and in this case the locate is the advertisement you received in the mail for a new credit card.

    There is no guarantee in delivery, just a locate we all receive that an opportunity MAY exist thet you can borrow the money to make god on payment.

    Only on Wall Street.

  2. How deep is the conspiracy?

    If you look on the surface the public hears the words “naked shorting” understanding that it is illegal.

    The conspiracy, from the top down as so well stated in your article, illustrates that the SEC has not prosecuted a major case under the various statutes that make “naked shorting” a crime. Is this the first part of the conspiracy or is this the last part of the conspiracy, or is it both?

    What gets reported are the actual naked shorts that remain naked. What about the naked short shares that are “parked” by various hedge funds for others and essentially rotated between the accounts of the same or other hedge funds to beat the T+3 rules. What about the amount of shares sold short in the morning only to be covered by the end of the day. In my day on the street they called this “free riding” and if a retail client tried to do it their account would be frozen. The same is not true for a prime brokerage client of the true perpetrators of the crime. They encourage their hedge fudn clients to do this as that is the way they make money. If a prime broker knowingly allows such a practice they are a party to the practice and should be subject to civil and criminal actions taken by plaintiffs in the courts . . . but just try to get the information you need to win a case of this nature.

    If you can, try to figure out the many transfers employed by the DTCC and NSCC in matching, clearing and above all, finding shares to ensure that its clients are not “naked” at the end of the period in question. If you are able to get by that task I’ll give you one more to think about . . . the many varied partners who essentially own and operate the DTCC and the NSCC are the same companies that serve as prime brokers for the hedge funds that are permitted, yes permitted, to “naked short” stocks.

    Now you add in the SEC. Quite often the people that comprise this agency are former captains of the prime brokerage industry. Do you think they are ever going to rat out their friends? It kind of difficult to do so when you belong to the same “country club”.

    Call it what you will, an “old boy network” or perhaps a “gang of thieves” but no matter how you cut it, it’s rigged for the big boys against the little guy.


    The conspiracy that starts and ends with the SEC was furthered today by the SEC not, for use other than their own interests, forcing the $100 million money managers to report their short positions publicly. They have reasons to do this and they are all the wrong reasons. If they were to release this information, the companies and individuals that are subject to the “naked shorting” crimes would line up at the doors of the courthouse and, with stated probable cause, be able not only to file their suits and obtain the data necessary to run their claims, they would win. In addition, the many pension funds, endowments and others who give their money to these alternative investment strategies would have to answer to the public at large. Hell, there would be enough Class Action lawsuits filed that every securities attorney in the county would be fully employed and not have to fabricate their lead plaintiffs in the case.

    Capital formation is the goal of our securities system, not capital destruction. The SEC has once again had the chance to do the right thing. They could have let the information come out and simply stood by and watched as those harmed by “naked shorting” took their battles to the court . . . but they didn’t allow it. It is not that the information is not available, it is available but will be given to the SEC only. Gee, what are they going to do, tell these hedge funds that they should take more care to cover their tracks so that they don’t get in trouble? This has to end.

    I know too much. I’ve been at this game against the powers that be for far too many years. It is time to reveal that from the SEC, down through the DTCC / NSCC to the prime brokers / clearing agents to their hedge fund cleints then right back up the ladder through the DTCC / NSCC all under the watchful eye of the SEC, the information exists to make this parctice stop overnight.

    For the benefit of all, force the SEC to reveal this data. Make the DTCC / NSCC produce documentation of each and every trade, from cradle to grave, for anyone who wants to see it . . . take the responsibility away from corrupt regulators and give it back to the people. It’s time.

  3. “Oiy Vey”…cries the masses, “open the books, show us the fails data”….so the SEC posts years of CNS fails on its web site,all neatly arranged quarter by quarter.
    “Here…” says the SEC, “Here is the raw data…. all that we have on CNS fails from 2nd qtr 2004 to today”.

    The great unwashed shakes it head numbly looking at the hundreds of thousands of lines of failed reports in each segment of the raw data.

    This is the effect that the data will have on most investors.

    BUT, a few will have specific symbols in mind (like I did). Slowly, starting in 2004 and only looking for one Company, i began the task of slowly cutting and pasting each entry of “one specific symbol” into a new FAIL ledger. After laboriously working through 04 05,06,07 08 my work revealed a picture that I knew would shock me!

    Finally,my new CNS failure ledger of “one specific symbol” revealed the impossible. My one specific symbol, which has now remained dormant after being butchered in a huge reverse split leaving only about 30,000 shares issued and outstanding in total has a total fail number of 218,649,909 shares.

    For every REAL share issued by this specific symbol approximately 7288 phantom shares that have FAILED.

    I repeated the laborious procedure again picking a quite well known symbol, and then another symbol, and after three similar exercises I sat back in horror and amazement.

    Our own DTCC through its CNS has maginified real issuers stock into a morbid mess of fractional reserve deposit like leverage.This is not SLOP in the SYSTEM

    The entire supply and demand equation has been subject to manipulation.

    Investots around the WORLD that have been blindly throwing their cash into American stocks and bonds have been hoodwinked, bamboozled into the belief they were investing!!!

    Our great DTC through its CNS has AIDED and ABETTED miscreants to STEAL billions of investor dollars.

    The SEC through the miraculous power of NASDAQ/FINRA ‘blue sheets’ knows every trade “from cradle to grave”. I know this because I have seen the evidence when SEC Enforcement lay out the trading patterns of what the SEC calls ‘an investigation”.

    The SEC CANNOT prosecute the MISCREANTS. THE SEC ARE MISCREANTS.Captured regulators playing dress up with a whistle and a badge, hoping no one will notice what they turn a blind eye too.







  4. The masses are getting woke up by the loss of everything. They are getting in a killing mood. Think not? Call you congressmans office and ask them.

    Do you crooks,who I know folow this site, really think you won’t be hunted down, shot or hacked up and hung from the nearest lamp post or limb?

    There was a Italian who thought he was immune in the 40’s…

  5. What can Joe Sixpack do to force the SEC to disclose the hedges trading records ? Can a petition signed by the masses citing FOIA
    get this information into public view ? We can not sit here and continue to be financially raped by these miscreants.

  6. If Reagan were President instead of dealing with the Russians and the Berlin Wall he might have said something like this . . . “Mr. Commissioner, make those records public.”

    Just as Patrick started the ball rolling years ago, it is up to each and every one of us to take the issue to our representatives. You will find out quickly what side of the table they sit. It is public pressure that gets things changed and change is slow. The statute of limitations on fraud is long enough however so start the ball rolling.

    Here is the link to your representative. Use it and let them know of the fraud cover-up that has destroyed capital formation and innovation in this great country.

  7. One comment, a FOIA request MAY get the information on short sellers’ positions from the SEC; in which case victims can get the names and addresses of their manipulators. IF the SEC refuses the FOIA request, a federal court order will be in order. Worst case a subpoena delivered to the SEC after a lawsuit is filed. In any event, now that the SEC is collecting the data in one place, even if they don’t want the public to see it, those of us who intend to go hunting stock manipulators in the near future will have the ability –though it may take a while– to find out who the whores are.

  8. Goldman Sachs is the investment bank of choice for most Hedge Funds (see the 10/2 New York Times article titled “36 Hours of Alarm”).

    CNBC gave the Hedge Fund operators (like Chanos, Ackman, Einhorn) an open forum to bash the companies they were shorting.

    Meanwhile, Moody’s downgraded existing Financial Guarantors MBIA and Ambac, which created an enormous market opportunity for a new market entrant, Berkshire Hathaway Assurance Corp.

    What is now the common thread between GS, CNBC (owned by GE) and Moody’s? Berkshire Hathaway, which now has a substantial ownership position in all of them.

    That should answer the often-asked question “who benefits?”

  9. There’s a huge uproar over the passage of the $800+ Billion “Bailout” Bill. During discussions concerning it, I’ve tried to get folks to visit this site and read the story that I already know well. The main Deep Capture Story is long and doesn’t tie into the current context until the very end, which I’m certain alienates some folks. This makes the site and its story hard to promote, which is very unfortunate because if people knew this story they would be really fired-up to the point they would take to the streets, which IMO is the only way we’re going to force the government’s hand. Is there anyway to change this dynamic? I know the article this comment thread is attached to tries to tie-in current events, but there’s no overt connection made between the “need” for a “bailout” and the gross naked shorting criminal conduct. I try to make this connection when promoting the site, but without any overt connections made here, those responding to my promotion are likely to become quickly disappointed and leave without learning what they must. The audience I’m trying to inform are rank-and-file citizens, not investors, so any discussion must tie-into their own context.

    So I guess I’m looking for advice, while asking for a short, easy-to-understand to understand essay that connects the dots so folks will be motivated to read the whole Deep Capture story.


  10. Looks like someone in congress just grew a pair

    Letter from H. Waxman to J. A. Paulson

    George Soros got the same letter

    October 2,2008
    Mr. John Alfred Paulson
    Paulson & Co., Inc.
    590 Madison Avenue, 29th Floor
    New York, NY 10022
    Dear Mr. Paulson:
    The Committee on Oversight and Government Reform is conducting an investigation into
    the causes and effects of the financial crisis on rWall Street. As part of this investigation, the
    Committee will be holding a hearing on the role of hedge funds in our financial markets and their
    regulatory and tax status. I am writing to request your testimony about these issues before the
    Committee on Thursday, October 16,2008, at 10:00 a.m. in Room 2154 of the Raybum House
    Offrce Building.
    I ask that you be prepared to testiff about whether hedge funds, including yows, pose
    systemic risks to the financial markets; whether the lack of federal regulation of hedge funds is
    appropriate; whether the terms of your compensation and those of other hedge fund executives
    promote excessive risk taking; and whether the special tax treatment of the compensation of
    hedge fund managers is warranted.
    In order to assist the Committee in preparing for this hearing, I ask that you provide the
    following documents and information for the time period from January 1,2005, to the present:
    l. A list of all hedge funds under your control, the total assets under management of each
    fund at the end of each year, and all private placement memoranda and other reports to
    investors relating to those hedge funds.
    Documents suffrcient to show the value and nature of each hedge fund’s position at the
    end of each year in mortgage-backed securities, collaterulized debt obligations, credit
    default swaps, and other securities or derivatives, and the amount of leverage used by
    each fund.
    All documents, including e-mails, drafted, sent, or received by you relating to (a) the
    level of risk or leverage associated with your hedge funds or other hedge funds; (b) the
    Mr. John Alfred Paulson
    October 2,2008
    liketihood that your hedge funds or other hedge funds could suffer significant losses or
    collapse; or (c) the systemic risk or impact on the economy that could follow from
    signif,rcant losses by or collapse of your hedge fund or other hedge funds.
    4. The compensation paid to you and the next two highest paid officers in your firm and the
    formula used to calculate this compensation. Please include with your response a table
    showing the compensation paid to each individual, broken out by year and type of
    compensation (e.g., overhead fee, carried interest, bonus, etc.).
    ‘ 5. All documents, including e-mails, drafted, sent, or received by you relating to the tax
    treatment of compensation to hedge fund managers.
    You should provide the documents and information to the Committee by l2:00 noon on
    Thursday, October 9, 2008. In addition, I ask that you advise the Committee by 12:00 noon on
    Monday, October 6,2008, whether you will comply with this request on a voluntary basis.
    The Committee on Oversight and Govemment Reform is the principal oversight
    committee in the House of Representatives and has broad oversight jurisdiction as set forth in
    House Rule X. Attachments to this letter provide additional information for witnesses appearing
    before the Committee and about how to respond to the Committee’s request for documents and
    If you have any questions about this request, please contact me or ask your
    representatives to contact Theodore Chuang or Erik Jones of the Committee staff at (202) 225-
    Henry A.’Waxman
    cc: Tom Davis’
    Ranking Minority Member

  11. On the Waxman Letter . . .

    It is a start. Like others subjected to the harm of the hedge fund industry, while on the right track Waxman is fishing but still does not know what he is looking for. He is asking questions but not the right questions.

    It takes street experience, someone who knows and understands the securities industry from every angle, from the inside out willing to assist those on the outside seeking to put an end to what has become nothing short of “capital destruction”.

    I’ve got a plan, something that will expose the fraudulent and illegal activities as well as expose the identities of its perpetrators.

    No one can do this on their own and I want to thank all who have been so kind to post in these threads as well as other sites. In particular, I want to thank those who have made direct contact with us.

    As much as one knows is as much as one does not know. Your two cents have enabled us to enrich the value of our two cents. As I now better understand the efforts attempted by others to rectify this situation to date, it became apparent that what we have to offer may represent the missing link that ties it all together.

    I may think out loud this weekend so bear with me. We hope to have the complete plan thought out by early next week . . . enjoy the weekend.

    [email protected]

  12. Karlof1

    ……..So I guess I’m looking for advice, while asking for a short, easy-to-understand to understand essay that connects the dots so folks will be motivated to read the whole Deep Capture story………

    Professionals who have been told this tragedy simply feel that the elements of the problem lay simply in the abilty to create IOU’s and sell the as real stock, pocketing the cash.

    The the unforgivable DTC SLOP system market particpants found ways to create ‘electronic’ shares based on the trading liquidity of ‘real shares’.

    Market participants may have been leveraging this way for at least 40 years. In the last decade the practice was further honed as HEDGE FUNDS sacked the system and PRIME BROKERS satisfied the demand for paper.

    Unsettled trades are like grains of sand in the machine. If enough sand gets in the machine the machine breaks.

    Did I miss much? Oh Yea.

    Watch DEEP CAPTURE the movie



  13. I refer to them as “phantom shares” instead of naked shorts as most of the problem has nothing to do with shorting. It’s about trading fluff as if it is something real.

    You are being drawn into a fake debate if you let them force you to talk about shorting when the problem is that much of what trades on the market is fluff.

    The headline version is that the custodians who are in charge of holding other people’s property in trust, only fractionally back the claims on that property. They commit fraud, knowing there is nothing you can do about it as the SEC regulators and elected lapdogs are their employees.

    They assume that since very few people ever ask for their certificate, they can get away with holding far fewer real shares than what they are obligated to.

    Since they are among the 400 richest families, they don’t have to be regulated because they are the kings and you are their serfs and the fraud laws will never be applied to them.

    The banking royal families that print money out of thin air to lend us, then tax us to pay the interest think they have it figured out, but they forget the internet and the guillotines of the French revolution and 1776.

    We remember the massive transfer of wealth to the counterfeiters in 1929.

    This time it will be different.

  14. Congress should declare war on the Cayman Islands and get our (NSS) money back, Also, go after all so-called “patriot” corporations who have thier offshore post box located there to help cheat on taxes, thus giving us more debt.

    I have had enough of this.

  15. it is, and always has been about flooding the market with counterfeit stocks, bonds etc… to artificially drive down the price. In the case of large cap companies, the real shares are purchased once the damage is done, in the case of small caps and OTC BB stocks, the intent was ALWAYS to drive the company to ZERO and never cover…

    IE in the case of Sedona

    “sell with unbridled levels of aggression”

    This is not complicated, folks, but there sure are a lot of people who want it covered up for the all too obvious reason – it is a CRIMINAL ACT and even could be looked at as SEDITION or TREASON.

    The SEC is CLEARLY responding to pressure from people they are supposed to be REGULATING…..

    This is sick.

  16. Another great write Mark! These blast, pause, blast “pulses” clearly accentuate the need for both T+0 “Hard borrows’ and T+3 “Hard deliveries”. Bogus “Locates” have become a form of “currency” on Wall Street wherein all DTCC participants feel obliged to grant one when asked to. That’s what fraternity brothers do. Recall the statistic that only about 7% of “locates” result in “borrows”. What this tells us is that you can do a whole lot of damage between the morning of T+0 and the afternoon of T+3. Oftentimes corporations being beseiged by these “pulses” will have “Hard to borrow” securities which is always synonymous with “expensive to borrow” securities and often synonymous with “impossible to borrow” securities. These “pulse-like” attacks often involving bogus “locates” circumvent expensive and/or impossible “borrows”. The risk/reward analysis performed even by crooks becomes attack with all you’ve got because the “borrow/locate” is a freebie. In an unmanipulated market an expensive “borrow” provides a natural market deterrent to these abuses because it might not make economic sense to do the short sale. With bogus “locates” you can “pig pile” onto the corporation under attack and dilute its share structure with an unlimited number of incredibly damaging “securities entitlements”/IOUs/”placeholder securities” that unfortunately are treated as being readily sellable as if they were the real McCoy which they are not. Why are they treated as being readily sellable? Because the authors of UCC Article 8 that allows for the creation of ultra-short termed “securities entitlements” knew that the DTCC had the mandate to “promptly settle” all transactions and that the SEC had the mandate to provide “investor protection and market integrity”. The assumption made by the authors of UCC 8 was that this SRO (the DTCC and its NSCC subdivision) as well as the regulators (the SEC) would obviously be all over the age and number of these incredibly damaging “securities entitlements” poisoning the share structures of corporations targeted for attack. They assumed that if a DTCC participant absolutely refused to deliver that which it sold in a timely manner then this delivery obligation would be “bought in” by the NSCC and the shares would be sent to the buyer’s broker. That’s what an unconflicted party (theoretically the NSCC) with the mandate to “promptly settle” all trades would do. The problem is that a buy-in is 180-degrees antipodal to the financial interests of the abusive DTCC participant that co-owns the DTCC and is the boss of the NSCC management refusing to do the buy-ins. The authors of UCC 8 were badly mistaken in their assumption!

  17. Radioguts , I have read your same posts on other message boards, Ragingbull ect, please stop with this nonsense. Why would you blame the Cayman Islands??Or are you just joking? If so its in poor taste. The culprits that you should be blaming will be meeting on the 16th of October in front of the Committee of Oversight and Government Reform, go to war with them please. The Cayman Islands are just a conduit for their criminal actions.

  18. I agree with you, Sean. The jokes are in poor taste. But what have we been talking about? The crooks are right our noses on Yahoo, SI, and Raging Bull. Sure enough. If the Government was serious about reform we already would’ve seen some indictments The meeting is just the tip of the iceberg.

  19. dr. d Interesting post. Does it make sense to start lobbying to get the UCC revised to close the loophole you describe? What is the process for that?

  20. dr. d,

    Solid post. Full understanding of the way the DTCC / NSCC so convolutes its own charter as it self-protects the firms it serves is not a mystery. It would be unlikely that any internal investigative action therein, or one run by the SEC, would serve to ameliorate the harm. The network these people operate within is far too intertwined.

    It is going to take outside action by a consortium whose work, if properly compiled, will provide Congress with the information and tools necessary to make changes.

    Stopping the illegal activities is one thing. Establishing damages and if possible allocating to the appropriate parties is another story. I’m more interested in the creation of the data and analysis from the information that is available first. We can worry about the other issues once that is complete.

    In the interim, let me speak about an issue in theory that illustrates the harm many have spoken of, shares in existence being greater than shares issued. Let’s assume you have a company that has issued 50,000,000 shares. You check the records and find that insiders own 20,000,000 shares and institutions own 40,000,000 shares thus the actual float, not including free traded shares is 120% of the issued amount. This may seem illogical but our work suggests that stocks subject to being naked shorted often display such ratios. sometimes much greater.

    If a hedge fund that is naked short covers shares they have to buy. If you assume free traded shares remains constant, unless an insider or institution is the seller how does this ratio ever decrease? There are a number of stocks that have recently come off the SHO List but their respective ratios, as discussed above, has not changed. You may ask how that could happen?

    The fact that these ratios do not decrease, as stocks are removed from the list, suggests that the hedge funds employ the illegal technique of “parked” or “free-riding” shares. With either type of trade, a true conspiracy exists. Naked shorts are not being covered, they are being exchanged. The exchange can be between two accounts controlled by the same hedge fund or through accounts owned by separate hedge funds. There are numerous ways in which market makers (another unbridled tool of the prime brokers) can serve this dual illegal purpose as well but our SEC sees no reason to close that loophole either.

    My Dad became a broker when I was 13. Forty years later there is little I have experienced or do not understand about how the securities industry works. Many people who read this thread and have issues relating to specific securities, similar to what we all have spoken of, have contacted me by email. The stories have many similarities.

    In listening to what each person has to say suggests that the “patterns” both you, me and others have spoken of are becoming more clear and eveident daily. I need to hear from more people, share owners of other company’s stocks whose names have appeared or still appear on the SHO List, who have been victimized by this conspiracy. This will enable us to complete a puzzle that is missing but a few pieces.

    I’ve done this kind of work before and see where a cross sectional analysis of current and former SHO Listed companies will turn the tide against every conspiring entity from the prime brokers to the hedge funds to the DTCC / NSSC all the way up to the SEC.

    I list my email address again for you or anyone who has an interest to contact me. Information will always be kept confidential as some of those who have already been in contact are the very people who run these companies. Looking forward to hearing from one and all and like others, for being a small part of a large number of people who have made a difference.

    [email protected]

    Please note, we are “reconstructing” our website to add a segment that deals directly with the forensic side of this securities issue. We hope to have it complete (or close to complete) early this week. Others made this an issue of awareness. It is up to the rest of us to drive home the information we collect and unearth such that change is effected.

  21. Limpid means clear or pure and bright. I think you may have meant limp. You know, when you don’t have an editor you can make little slips

  22. I read everything here and I’m very impressed. Tell me how I can help. This is a terrorist attack against one of the core principles of the west.

  23. Treason is a capital offense with a penalty of execution and the smug corporate welfare criminals don’t understand that the proletariat are not stupid and they are sick and tired of being treated like rubes.

    As the rich realized in France, money, power and influence means nothing when your head is in a guillotine.

    These people are enemies of America.

    I say we start the arrests with the Herb Greenbergs and Gary Weiss’s to make an example, then go for people who are paid to lie like Stu Goldstein and Larry Thomson at the DTCC, then start arresting the commissioners at the SEC and scumbags like Shelby who was on the take both as a republican and when he was a democrat.

    It’s time we take this country back from the parasites that suck wealth from the middle class. They are little mosquitos and it is time we get the fly swatter and show them who is boss.

    The current corrupt system gives these scumbags power, but they are tiny little people with names we can put in lights and they are very arrestable.

    We the people ARE and always HAVE BEEN in charge and it is time we stop acting like children.

  24. Who Really Owns Your Money? Part I: The DTCC
    by: Anthony M. Freed posted on: October 02, 2008

    As the average American’s wealth continues to be whittled away by tumultuous markets, the rising cost of living, and the disastrous lack of leadership being displayed in the Nation’s Capitol, folks are just beginning to realize they have no idea who or what is in control of their wealth.

    Many assume that the players they see and hear about on TV – like Hank Paulson, Ben Bernenke, or Alan Greenspan – work for the US Government, because that is who signed their paychecks. It is an easy mistake to make, as they look like Civil Servants in most every way: They are appointed by the President, they are confirmed by the full Congress of the United States, and they are paid with US Tax Dollars. Civil Servants then, right?

    Well, no – not necessarily.

    Most folks know absolutely nothing of the basic facts about how our finances are administered. They are unaware that the Federal Reserve is a privately owned company who’s shareholders are not citizens nor patriots, and who have no interest in the continued success of the United States beyond what we were able to offer them as a Super Power over the better part of the last century.

    Just watch as the financial power centers are slowly shifted from the United States to the far east, particularly China, who’s system of government-controlled “free trade” has made them the fastest growing Empire in history. They don’t have to worry about what a Congress or constituents might think, no protesters to drive by, no subpoenas to dodge. Oh, and the environmental and human rights laws…

    Totalitarianism geared towards textbook Fascism is a much more favorable environment for Capitalism to thrive in than is our Representative Democracy, which has outlived it’s usefulness since the development of the Multinational Conglomerate.

    After years of unrestrained borrowing and spending, during which time the vast majority of our fundamental production capabilities and jobs were displaced and reestablished over-seas using subsidies provided by American tax dollars, the United States has lost it’s title as the best place in the world to keep and grow your money. We have essentially lost our AAA rating with the world. We are insolvent, and the world is running on us.

    How can we tell?

    How about the $700BB withdrawal they are working on for Wall Street and foreign-owned banks? How about the GSE bailout? And the record number of recent trips banks have made to the discount window – the one they opened up to gamblers (investment banks) months ago? FDIC funds for Indy Mac and others? And how many transactions like Countrywide’s $11.5BB loan from the Federal Home Loan Bank System do we know about? Or all the treasuries being auctioned to provide liquidity?

    And we are still borrowing and spending – just like they keep asking us to. Aren’t you glad your Social Security is not in the stock market right now? They already talked us into 401K’s that are quickly losing their value, both in the markets and through inflation and devaluation. And they have already tricked us into taking all the equity out of our homes to finance our lifestyles, which are lavish by world-wide standards. What freedoms and advantages we enjoy in our lives are not the norm, and those freedoms and advantages are being eroded so rapidly as to be almost imperceptible.

    The false confidence that we as a people collectively hold that this State of Grace that we have enjoyed and have been blessed with for so long in this country will somehow continue unabridged for perpetuity is our hubris, and now our tragedy is realized as the final chapters of our great saga reveal our fate.

    The foundations for this wholesale withdrawal of our Nation’s wealth were first laid when the Federal Reserve System was developed, which will be covered in later posts. The crisis at hand today demands we look at some of the relevant parts players that are acting to subvert our Rights, our Middle Class, our National Security and the Constitution of the United States, before we get into the history.

    I was worried that nihilistic, neo-liberal ‘neo-cons” were setting the stage for Fascism under some delusion called the Project for the New American Century dreamed up by the Bush family and their minions, but I was wrong. They started setting up all the mechanisms in earnest by the early 1990’s under President Bill Clinton, who I always thought was too chummy with George Herbert Walker Bush-41 and was really a closet Right-Winger.

    Isn’t he singing McCain’s praises now when he is supposed to be bucking for Obama? It will not surprise me a bit when McCain dumps Sarah Palin and announces – no, not Joe – but Hillary C as his running mate. Probably just paranoia, but I would not put it past the Clintons or old Turd-Blossom Carl Rove.

    Anyway, the point is of this series is to reveal some of the “undisclosed” workings of our financial system, which as it turns out has long been an un-natural, undemocratic and un-constitutional marriage of private power and public funds for generations, and to shed some light on these unprecedented actions of our Federal Government which are technically displays of classic Fascist principles:

    Various scholars attribute different characteristics to fascism, but the following elements are usually seen as its integral parts: socialism, nationalism, class collaboration, populism, militarism, totalitarianism, dictatorship, collectivism, statism, social interventionism, and economic planning… Fascist governments nationalized key industries and made massive state investments. They thought private property was to be regulated to ensure that “benefit to the community precedes benefit to the individual.” They also introduced price controls and other types of economic planning measures. Fascists promoted their ideology as a “third way” between capitalism and Marxian socialism.
    The Depository Trust & Clearing Corporation is the biggest bank in the world that you have probably never heard it. They happen to be the registered owners of 99% of all paper (stocks, bonds, securities, etc.). Scary, but true. And they have a perfectly good reason for it – with electronic trading, it is impossible to make timely changes to registered ownership of the paper.

    The DTCC retains registered ownership while you as the peasant investor have the designation of beneficiary of the instruments. More on all of that below. First, lets see what the DTCC has to say about itself:

    DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks.
    DTCC’s depository provides custody and asset servicing for 3.5 million securities issues from the United States and 110 other countries and territories, valued at $40 trillion. In 2007, DTCC settled more than $1.86 quadrillion in securities transactions.
    DTCC operates through six subsidiaries – each of which serves a specific segment and risk profile within the securities industry:
    National Securities Clearing Corporation (NSCC)
    The Depository Trust Company (DTC)
    Fixed Income Clearing Corporation (FICC)
    DTCC Solutions LLC
    EuroCCP Ltd.
    DTCC’s customer base extends to thousands of companies within the global financial services industry. DTCC serves brokers, dealers, institutional investors, banks, trust companies, mutual fund companies, insurance carriers, hedge funds and other financial intermediaries – either directly or through correspondent relationships. Increasingly, DTCC’s customers operate both in the U.S. and overseas, where DTCC continues to provide them with services.
    In the U.S., DTCC provides critical services to the markets for U.S. Government and mortgage-backed securities, and to all U.S. equity marketplaces, including the New York Stock Exchange, The Nasdaq Stock Market, the American Stock Exchange, and regional U.S. markets, as well as electronic trading and communications networks (ECNs).
    All services provided through the clearing corporations and depository are registered with and regulated by the U.S. Securities and Exchange Commission (SEC). The depository is also a member of the U.S. Federal Reserve System and a limited purpose trust company under New York State banking law.
    Wow – can you believe these guys are this central to everything that is going on and we have not heard a peep out of them? Wouldn’t you think that their expertise might come in handy right now? Maybe they are – but not for the benefit of you and me.

    Why is there so much secrecy in our financial system? Why is so much of the system, and our wealth, controlled by so few people who are so far removed from the law and the Constitution? And how is it they have been getting away with it for so long?

    About the DTCC (from a 2003 article “The unknown 20 trillion dollar company”, and you think mine are long! So here are excerpts):

    Jim McNeff, Director of Training for the DTC… stated “the DTC is a brokerage clearing firm and transfer center. We’re a private bank for securities. We handle the book entry transactions for all banks and brokers. Every bank and brokerage firm must secure their membership with us in case they become insolvent, so your assets are secure with DTC”. Yes, you read that correctly. The DTC is a private bank that processes every stock and bond (paper securities) for all U.S. banks and brokerage houses. The big question is this; Just who gave this private bank and trust company such a broad range of financial power and clout?
    This is another in the list of Federal Agencies like the IRS, FDIC, SEC, and the like who have amazingly broad powers yet little oversight by or subordination to any branch of government. Have you eve heard of an audit by the GAO of the Federal Reserve? You won’t, they are not a government agency, just the “Board” and it’s “Chairman” are, formerly Alan Greenspan and currently Ben Bernenke. The Federal Reserve Board are only an “advisory council” for the President and the families that own the FED, but they are not the decision makers. (More on the Fed in subsequent articles).

    The reason the public doesn’t know about DTC is that they’re a privately owned depository bank for institutional and brokerage firms only. They process all of their book entry settlement transactions. Jim McNeff said “There’s no need for the public to know about us… it’s required by the Federal Reserve that DTC handle all transactions”. The Federal Reserve Corporation, a/k/a The Federal Reserve System, is also a private company and is not an agency or department of our federal government, according to the 1998 Federal Registry. The Federal Reserve Board of Governors is listed, but they are not the owners. The Federal Reserve Board, headed by Mr. Alan Greenspan, is nothing more than a liaison advisory panel between the owners and the Federal Government. The FED, as they are more commonly called, mandates that the DTC process every securities transaction in the US. It’s no wonder that the DTC (including the Participants Trust Company, now the Mortgage-Backed Securities Division of the DTC) is owned by the same stockholders as the Federal Reserve System. In other words, the Depository Trust Company is really just a ‘front’ or a division of the Federal Reserve System.
    Don’t we deserve to know why this is from someone, especially now, like the media or our elected officials? I guess not, so here is more:

    “DTC is 35.1% owned by the New York Stock Exchange on behalf of the Exchange’s members. It is operated by a separate management and has an independent board of directors. It is a limited purpose trust company and is a unit of the Federal Reserve.” -New York Stock Exchange, Inc.
    The banks and brokers are merely custodians for their clients. By federal law (SEC), they cannot hold any assets in the customer’s name. The assets must be held in the name of DTC’s holding company, CEDE & Co. That’s how DTC has more than $19 trillion dollars of assets in trust… or is it really in “trust” if the private Federal Reserve System is technically holding it in their “unknown” entity’s name?
    Obviously, if stock and bond certificates you’ve purchased aren’t in your name, then the “holder” (the Federal Reserve System) could theoretically refuse to surrender them back to you under a “national emergency” according to the Trading with the Enemy Act (as amended).
    Between the market crash and terrorism attacks, I don’t think the powers that be will have too much trouble manufacturing more “national emergencies” with which to further erode our Constitutional Rights. Remember the Patriot Act? They have not even begun to use that on us yet.

    And it appears President Clinton has paved the way for a Gulag Society with his 1994 Executive Order 12919 (which I will also examine in subsequent articles). Right now though, the DTCC:

    Simply put, the Depository Trust Company absolutely controls every paper asset transaction in the United States as well as the majority of overseas transactions, and they now physically hold (as of April 1999) 99% of all stock and bond book-entrys in their street name, not the actual owner’s names.
    REGISTERED HOLDER- A Registered Holder literally possesses, owns, and holds, his stock or bond with his name appearing on the face of the certificate. The company that issued the certificate has registered the owner’s (holder’s) name on their official books. This is the safest way to own a paper asset. You literally possess the fully registered certificate and only you can transfer or sell it. By all Rights and definition of law, you are the owner. You have it, you hold it, you possess it, and you keep it. You have the complete control over it.
    BENEFICIAL OWNER- A Beneficial Owner is nothing more than a beneficiary, “One who is entitled to the benefit of a contract”- A Dictionary of Law, 1893. All book-entry stocks and bonds you purchase make you the beneficial owner, not the registered holder. The owner of a book-entry stock or bond is the entity or name that it is registered under.
    Even the name of the shadow company that is the agent of who knows, possibly the IMF according to this article: CEDE. Can you believe that. CEDE. I kills me.

    CEDE- To surrender possession of, especially by treaty. See Synonyms at ‘relinquish’.” -American Heritage Dictionary of the English Language, 3rd Edition of 1992.
    And that is just the plan, just as soon as everything gets a little more chaotic in our once static lives. Living in an Empire at it’s peak is like living in the eye of the hurricane – and if you lived your whole life there under the still, blue skies, you really have no idea what is heading your way.

    It’s quite obvious that the stock markets are going to ‘crash and burn’ at some future date and for some ‘unknown’ reason… The Great Depression is about to be repeated, and it will be as deliberate and manipulated as the first one that began with the stock market crash of 1929. We are, without a doubt, on the brink of the Mother of all economic Depressions.
    Remember, this was penned in 2003. Pretty prophetic in light of this weeks news. So, how does your portfolio look now?

    Your broker sends you a fancy accounting every month of your purported holdings, along with dividend and interest payments paid. The fact is, you only receive the benefit of ownership (interest and dividends) without holding title to your property. You are at the mercy of the registered owner, the DTC. If you don’t believe this is true, then call your broker right now and ask them who’s name is listed as the Registered Holder of your book-entry stocks and bonds. If you’re lucky, the broker will tell you “why of course you’re the Beneficial Owner”, then you’ll know the truth. He may emphasize to you that the stocks and bonds are being held in “safe keeping” for your own protection. This is broker language for “your stocks and bonds are held by the DTC in their street name as the creditor”.
    I tried it, and they don’t like to talk about it. At all. I had the feeling they did not understand it completely either, but they swore it was only for expedience and nothing sinister. Fine. But why a private company, and why all the cloak and dagger mystery surrounding what is purported to be the most regulated, the most transparent of all industries?

    The reality is that the very history of the Federal Reserve is much more akin to that of conspiracies, Masons and secret inner circles of power. I can’t blame the conspiracy theorists, when you examine even the most tame of the accusations, you find a hell of a lot more mysteries than answers. One more point from the article that I am looking into:

    A greater consideration is just exactly who does the DTC hold these securities for? As the owner, who has the DTC pledged these securities to? Our research points to the Federal Reserve System, an international private banking cartel with major offices found in Moscow, London, Tokyo, and Peking. By treaty with the United Nations and in compliance with the Bretton Woods Agreement, the DTC under regulation of the Federal Reserve System has pledged all those stocks and bonds to the International Monetary Fund (IMF). These are the same paper securities found in your IRA and pension fund accounts, as well as in your brokerage account. Remember, you don’t own them…. you’re just a beneficiary.
    The truth is, the securities you purchased and paid for with your hard earned money is collateral for the United Nations which is backed by the Federal Reserve System and it’s associated agencies, such as the International Monetary Fund. Is it any wonder that the UN can operate year after year with increasing budgets, but without sufficient funds? The UN has nearly $19 Trillion of backing and reserves, thanks to millions of duped Americans. We are financing the New World Dis-Order with our stocks and bonds.
    Sounds so ominous, but then again it doesn’t when we go back to some of the text that DTCC has provided about themselves and some of their initiatives on their own website. Remember, they technically own your securities, they are a private corporation that only serves banks, and they use whatever fees they collect to increase their world-wide monopoly. From DTCC:

    DTCC Organizes GREAT Collaboration with Global Peers: More than 40 delegates from 11 infrastructure organizations across the globe came together in New York in July for the first annual Global Relations Exchange and Training (GREAT) workshop hosted by DTCC. The program is aimed at cultivating relationships among colleagues from international clearers and depositories, and fostering collaboration on key trends shaping operations practices in today’s capital markets.
    Robert Hegarty, managing director and practices leader, Securities & Investments and Insurance from the independent research firm the Tower Group, discussed in his presentation on securities industry trends the demographic shifts transforming the capital markets, and the challenges facing securities and investment firms and infrastructure organizations.
    “There has been – and will continue to be – a major shift of wealth creation from the west to the east and, along with that shift, massive numbers of potential clients to win and service. Companies that don’t embrace this new global marketplace will miss their opportunity to determine their future,” said Hegarty.
    Having several of DTCC’s executives meet with these international delegates demonstrates the priority the organization places on gaining a more global perspective. “The sessions were extremely productive in helping us gain a better sense of the value foreign markets place on our services, and the potential business opportunities we all have outside our home borders,” said Patrick Kirby, DTCC managing director, Asset Services.
    The DTCC is bigger than GM (GM), GE (GE), Google (GOOG), Microsoft (MSFT) and many other mega-companies – all added together. Are you sure you never heard of them?

  25. Dr Bryne, Mr Mitchell, Judd & Big John,

    Do you think the DTC fails will out?, how do you see that playing out?

    Private Equity Investment? Ownership ?

    I see that NYT took great pride parking SAC_Stevie C’s ‘San Simeon’ <complete with its ice rink __ ***vague memories of $8,000 waste baskets***), The mansion looks lovely under Ivan and Mike ***the capturer becomes the prey?****….

    ‘capture is an unbelievable blog…..



    The key to eradicating abusive naked short selling crimes is education. The crime is so heinous and so pandemic that understanding it by the masses will help bring about its eradication. After 28 years of studying this discipline the most effective learning aid I’ve come up with to explain the heinous nature of abusive naked short selling is the “balance” analogy. Picture a scale or “balance” similar to the “scales of justice” you might see on a courthouse building. Let’s let the left hand tray represent the “demand” variable for the shares of a publicly-traded corporation occupied by buy orders and the right hand tray represents the “supply” of readily sellable shares plus the supply of readily sellable “securities entitlements” in that corporation’s share structure. “Securities entitlements”/IOUs/”placeholder securities” result from a seller not delivering that which he sold. Mere “securities entitlements” are treated as being readily sellable in our clearance and settlement system due to the ultra-short termed lifespan they theoretically have due to their being associated theoretically only with “legitimate” delivery failures that couldn’t quite be delivered on time; perhaps by 2 or 3 days. The relative “weights” of these two variables interact to determine the share price of the given corporation through a process known as “price discovery”.

    Imagine what would happen if stock manipulators could sell nonexistent shares into the buy orders that normally fill the demand tray so as to neutralize their share price buoying effect. All DTCC participants and hedge funds have access to their own “conveyor belt” like the ones used to load and unload suitcases onto and off of airplanes. When an abusive naked short sale occurs the securities fraudster merely places his conveyor belt over the demand tray and “intercepts” that buy order before it hits the demand tray and provides its share price buoying effect. This represents manipulation #1 in which the “demand” variable that interacts with the “supply” variable has been manipulated lower by this “interception”. Note that naked short selling occurs into buy orders that surface in the market. The price buoying effect of buy orders is only realized after the buy order hits the demand tray where its “weight” can be registered. This “weight registering” was prevented in this instance. Manipulation #2 occurs when after the “interception” the naked short seller absolutely refuses to deliver that which he sold which causes that buy order to convert into a delivery failure that in turn is converted into a “securities entitlement”. This “securities entitlement”/IOU then is transported down the conveyor belt where it falls onto the “supply” tray which makes it sink downwards. The share price of any corporation is proportional to a line that can be drawn from the middle of each tray and is extrapolated to the right of the supply tray onto a grid. The higher on the grid where the extrapolated line intersects the higher will be the share price from this “price discovery” process.

    Share price “manipulation” is defined as the intentional interference with the supply and demand variables that lead to “price discovery”. Both variables are simultaneously “manipulated” in abusive naked short selling crimes. That’s why the share prices often seem to fall off of a cliff. If you put this entire process into slow motion you’ll notice a very rare phenomenon. The increased demand for shares perhaps associated with record earnings just caused the share price to go down in the intermediate term instead of up. The buy order was not only neutralized but it was converted into a net negative.

    Abusive naked short sellers that have ran up massive naked short positions have to collateralize these debt obligations. If the share price of a corporation that a naked short seller has ran up a massive naked short position in goes up then that naked short seller has to dig into his pocket and come up with a large amount of cash to maintain his collateral position. Some abusive naked short sellers refuse to do this and instead they crank up their conveyor belts to full speed and often they invite their buddies to bring their conveyor belts over to this corporation’s “balance” to help give it a hand in its time of distress. These abusive naked short sellers basically put a selling “blanket” over the targeted company’s shares and naked short sells into pretty much every buy order that appears. They know that eventually all waves of buying must come to an end and once it does end it can methodically “walk down” the share price via a variety of “MMMs” or “market maker manipulations”. This will allow that extra collateralization money to flow back into its wallet.

    Not all conveyor belt activity is illegal. Truly bona fide MMs are allowed to address order imbalances involving buy orders dwarfing sell orders by firing up their conveyor belt and naked short selling into a moderate amount of the buy orders. When the wave of buying ends and sell orders enter the market a truly “bona fide” MM will reverse the direction of his conveyor belt and buy-in and replace the shares it failed to deliver earlier.

    There is a problem, however, in our current DTCC-administered clearance and settlement system. This involves allowing the sellers of nonexistent shares to gain access to the funds of the purchasers of admittedly nonexistent (naked short sold) shares despite the fact that some abusive naked short sellers absolutely refuse to deliver that which they sold in a timely manner. In other words their conveyor belts only go in one direction and they refuse to address markets wherein sell orders dominate over buy orders as the share price drops. This is when truly bona fide MMs cover their naked short positions and deliver the shares they refused to deliver before. The foundation of nearly every clearance and settlement system on the planet (except our DTCC-administered one) absolutely forbids the seller of shares from gaining access to the funds of the purchaser UNTIL he delivers to the purchaser that which it sold him. This is referred to as “Delivery Versus Payment” or “DVP”. “DVP” mandates the use of only conveyor belts that can rotate in either direction which a certain percentage of DTCC participants refuse to utilize.

  27. You are right again, education is key, not just the masses but that is a good place to start. These people, as they did last week, have to contact their representatives in Congress but therein a problem again exists as to educating members of Congress. we have started with a couple who are leading the charge and they are quite receptive.

    With respect to your DVP analysis, this was primarily a tool used within the government and municipal securities segment of clearing until recently being inappropriately employed in equities. It was more used when the actual delivery was in bearer or actual physical certificate form and literally had to be shipped from one depository to another.

    You are a learned source of information and as others have stated, I appreciate your commentary. You are hitting the fringes of what transpires but we are going to need to get to the “meat” to convince Congress to take action.

    I am waiting for our website to be reconstructed (or at least the blog to be formatted) to post an article I have written for delivery to several Congressional representatives and publication therein. Like you and others on this site, we are ready to roll into action with a handful of publicly traded companies on the SHO List already making contact. We need more to do so and look forward to additional emails.

    [email protected]

    A note of interest, the number of companies on the SHO List has decreased in recent weeks but the prices of securities have not increased and the number of shares in the phantom float has not decreased. Stay tuned and watch for the article as the illegal naked short sellers have begun to incorporate two additional illegal activities into their matrix. They can run but they cannot hide forever. This snowball is much larger than it was last week and it is beginning to roll down the hill a little faster. What needs be done is for this snowball to break into smaller snowballs, each growing and building speed towards our eventual goal. Will there be restitution, perhaps, but that is going to take years. First step, get the illegal activity to stop, then deal with the idnetification of who is responsible.

  28. Einhorn basically sparked a run on the banks with the acquiescence of the SEC, which is no doubt populated with criminals from the top down. And I mean Chris Cox right on down the f-ing line.

  29. Your comments about the WSJ appreciation for free markets is out of line. A free market is one in which the parties must bargain with one another using reason, as force and fraud are banned (and punished by objective laws). Contrary to common caricatures, it is not anarchy.

    The current political climate presents a false dichotomy of “more regulation” vs. “deregulation”. Advocates of the free market do not blindly oppose all regulation; we oppose unnecessary, counter-productive regulation. We favor regulations that punish force and fraud.

    In a free market, you can’t sell stolen merchandise, nor can you misrepresent what you’re selling. Naked short selling is fraud, pure and simple. It is no more a part of the free market than is the proverbial sale of the Brooklyn Bridge. Those who sold shares they did not own or legally borrow are also guilty of breach of contract.

    In today’s digital world, it should be feasible for each stock exchange to maintain accurate databases of who owns how many shares of stock, who has loaned shares to others, etc. It should not be possible to sell shares that have neither been purchased nor legally borrowed. If the individual transaction logs contain a precise timestamp that establishes the time line of trades, anyone trying to game the system would be caught, even if the automated systems could not prevent the transaction from occurring. Anyone who somehow manages to “sell” shares they are not legally allowed to “sell” (without some damned good explanation as to why they thought they held more shares than they really did at the time of the sale, such as having themselves been the victim of a naked short) should forfeit the entire sale amount trebled. A second offense should also suspend their trading privileges for a month, and a third offense for life.

  30. This movement to end abusive NSS practices has a crippling public relations problem in that the public doesn’t understand the first thing about it. This stuff IS difficult; everyone I attempt to convey my rudimentary knowledge to develops rigor mortis right away. Patrick’s petition has stalled out at about 1,440 signatures, probably a decent measure of the number of “buffs” like us who have delved deeply. I don’t have a solution for this problem (wanker alert!), but do feel strongly that if the anti-NSS movement is ever going to get anywhere, the public needs to be educated in a way that will enrage and motivate hundreds of thousands, not just the 1,400.

    How ’bout some polished, distilled version of Patrick’s excellent Dark Side / Deep Capture presentations in two or three ten minute YouTube installments, to be promoted to the public in every way possible?

  31. is probably the most distilled version that I’ve seen, even if it is a bit out of date (especially considering the monumental events of the past three months). It’s about an hour long. This isn’t exactly the type of material that you can convey in soundbites (unfortunately).

    Judd, I know you’re busy, but more podcasts would be an excellent way to help spread the word to more people. I know that events seem to be evolving on nearly a daily basis, but this a great medium to help spread the word. If you’re too busy, enlist the help of someone else to get these things out there!

  32. It has been going on for years.
    1987 Princeton Newport Partners.
    Ed Thorpe.

    They shorted the stocks, somehow got
    “interest on the money” which they used
    to by CALL options to protected themselves
    if the stock (for some reason went up).

    Late afternoon they would call the other
    heavy hitters and attack one or two stocks
    … drive it down, down, down … then
    at some point… let the Call Options go
    (most options are never executed) …
    cover the short at the low price… and
    back the truck up to the door and
    shovel the money in.

    Getting rid of the uptick rule … has not
    helped the current situation either.

    All I can say is… Not Good!

    Being able to Naked Short a stock is
    ridiculous … great for Hedge Funds
    and Market Makers … but no one else.
    Theorectically you could short 10 Million
    shares of a stock that only has 1 Million
    shares outstanding. What is that
    all about?

    Thank you

    And, does anyone have any problem with
    Market Makers… ie Goldman, Morgan,
    USB, Credit Swiss… “trading for their
    own accounts now” … it use to also
    be illegal. Now they make almost 1/2
    their profits this way. Where is everyone?

  33. With this bailout, its time to rethink banking.

    I am mostly libertarian, but I recognize critical services, such as police and roads need to be owned by the people.

    The people need to make sure there is a road network that allows for the efficient transportation of goods and services.

    What if banking were wholesaled by the government, so that buying and selling of goods and services could also be done efficiently.

    Private banks would act as the middle men, providing the buildings, paperwork and loan guarantees (they pay back loans that go bad) and you pay them a fee to insure your loan and deal with the paperwork, appraisals, etc.

    – the government bank would have infinite money to lend and because of the retail bank’s role as guarantor, every loan would be repaid in full. The private retail banks would still charge based on credit worthiness and limit loans to ability to repay

    – because money could be created without interest, there would be no monetary inflation

    – the government could pay for its bills by just spending government bank money which they create out of thin air. The value of money would go up or down if they spent too little or too much, but there would be no such thing as government debt.

    – there would be no tax at any level of government

    – all deposits would be pushed from the retail banks to be held at the government bank

    Just is in the current system, there would need to be checks and balances to control government spending (otherwise the spending would lower the value of the money), but under this proposal:

    – there would be no booms and busts
    – the banks would always be liquid and credit always available
    – no taxation
    – no government debt
    – low unemployment
    – deposits 100% guaranteed

    The system would still be capitalistic, but society would be creating money out of thin air instead of the private banks doing it.

  34. It’s very simple. One of my brokers has a message on the form you fill out for submitting a trade. It says”Funds must be in the account before making a trade.” They won’t do a BUY unless the money is in the account. You effectively have the money if you are in a margin account with sufficient equity.

    They should be required to do the same thing for a SELL order. You need to have the security in the account in order to submit the sell. You may have obtained the security by borrowing it (as in the margin account long example).

    This is a fair market. Equal for buyer and seller. All participants should be required to follow that standard.

  35. Great article.

    hedge’s need to disclose their short positions.

    Why they weren’t allowed to is CRIMINAL.

    Sounds like bribes exchanged to politicians.

  36. How can we take action? Has a coalition been formed? Is there any way to force our officials to look into this? Could we push this as a “voting issue”?

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