Weighing the options

    Note: I have the privilege of being a contributor on an upstart blog where some extremely intelligent criticism of Web 2.0 is taking place. It’s called Akahele.org, and I recommend adding it to your RSS reader.

    Akahele, if you’re curious, is a Hawaiian word meaning “slow” or “deliberate”, in contrast with wiki, the Hawaiian word for “fast” (and the origin of the “wiki” in Wikipedia).

    The following is my most recent contribution to Akahele, and is an examination of the Wikipedia/Gary Weiss saga, with a new twist.

    My direct involvement notwithstanding, I feel it’s both fair and accurate to say that the events surrounding the Gary Weiss/Mantanmoreland affair were among the strangest and most polarizing in Wikipedia’s history.

    For those lucky enough to have no idea what I’m referring to, here’s the highest of high-level summations (much more in-depth explanations can be found here and here):

    Former journalist Gary Weiss.
    Gary Weiss

    Former business journalist Gary Weiss used multiple sockpuppet accounts to ingratiate himself with Wikipedia’s inner circle and – thanks primarily to the relationships he established there – gain control of, most notably, the article describing an illegal form of stock market manipulation known as naked short selling.

    Weiss then proceeded to dramatically alter the content of this and related articles in order to minimize the perceived negative impact of naked short selling while marginalizing critics of the practice, myself included.

    There’s strong evidence suggesting Weiss was paid to do this by the very organization many fault as the primary enabler, not to mention a financial beneficiary of, illegal naked short selling.

    I suspect most would agree with my assessment that among the darkest moments in the more than two-year drama between Weiss’s arrival and eventual forced departure were those in which Wikipedia co-founder Jimbo Wales injected himself into the controversy – always seemingly uninvited – and always with the effect of derailing whatever progress might have been made toward bringing about Weiss’s removal.

    Among these, the most incomprehensible episode occurred at the crescendo of what is widely regarded the largest and most thorough sockpuppeting investigation in the history of Wikipedia, in which dozens of volunteers dedicated hundreds of hours amassing a body of evidence overwhelmingly implicating Weiss in a deeply disturbing deception.

    It was at that time that Wales posted an unprovoked indictment of the process under the heading ‘I have personally seen no persuasive evidence’, resulting in Weiss getting another pass. This, despite Wales having told others, privately, that he knew Weiss was guilty; and many more, publicly, that I was a liar for making the same claim.

    What follows is my best explanation for Jimbo’s odd behavior.

    But first, I need to explain a little more about the nature of short selling, both legal and illegal.

    Legal short selling involves selling borrowed shares with the expectation of buying them back and returning them to their owner at a later date and a lower price, allowing the short seller to pocket the difference.

    Naked short sellers, on the other hand, sell shares short without borrowing them first, thereby creating the equivalent of counterfeit shares. This has the effect of artificially swelling the supply of stock, which has a markedly depressive influence on price, making the naked short seller rich, while inflicting immense harm upon legitimate shareholders and the companies in which they’ve invested.

    There have been, in theory, rules intended to prevent naked short sales from occurring, or at least, from enduring longer than 13 trading days. Unfortunately, the people behind the practice are quite smart, and the monetary incentive to violate the law quite large.

    In other words, they’ve found a path around the rules.

    And that path runs right through the heart of Chicago’s financial district.

    As it turns out, there is a law, known as the “options market maker exemption”, which permits certain brokerages, specifically those registered as ‘options market makers’, to engage in a highly-controlled form of naked short selling in the course of bona fide options market making – comparable to the permission police officers have to exceed the speed limit under certain extreme circumstances when it’s in everybody’s best interest that they do so.

    Naked short sellers have discovered that they can essentially “rent” the options market maker exemption from certain corrupt options market makers, producing massive amounts of counterfeit shares in the process.

    It’s as though a corrupt cop rented his police cruiser to a random citizen so he or she could drive it around at 120 mph for a day, without being held responsible for any of the damage they might cause.

    Of course, it’s silly to think that either the citizen or the cop could get away this, but in the financial world, such overt violations of the law regularly take place on a grand scale. And though the reason is not immediately clear, research proves that this abuse of the options market maker exemption nearly always takes place on the Chicago Stock Exchange.

    Why Chicago?

    My guess is that it’s a cultural thing: the same way you’d never even think of bribing a cop who pulled you over in San Diego, while doing the same just 30 miles south in Tijuana is not a big deal.

    What does this have to do with Jimbo Wales?

    Well it turns out that both he and former Wikimedia Foundation trustee Michael Davis used to work at Chicago Options Associates, where Wales was a research director and Davis was CEO.

    To be clear, while it existed, Chicago Options Associates traded options and futures on the Chicago Mercantile Exchange, and was not an options market maker. But because I suspect the Chicago phenomenon is a cultural one, and given the near certainty that Wales counts many equities options market making traders as his friends, I’m not sure it really matters: his professional background is deeply rooted in the same dark corner of the financial world that facilitates the same form of stock fraud Gary Weiss worked so hard to defend on Wikipedia.

    Which I suspect explains why Jimbo Wales worked so hard to defend Gary Weiss.

    Is Jimbo Wales above influencing Wikipedia content based on his personal relationships?

    Rachel Marsden would probably say that no, he is not.

    I recently asked Jimbo whether anybody with ties to options market making on the Chicago Stock Exchange sought to influence his decisions in this respect, and was not entirely surprised when Jimbo insisted that they did not.

    However I was surprised when Jimbo followed with “it is still to this day completely unproven that the claims you’ve made about Mantanmoreland being Gary Weiss are true.”

    Once I’d picked myself up off the floor, I decided to take Jimbo up on his invitation to finally show him the first bit of proof linking Gary Weiss to Mantanmoreland, despite the fact that doing so felt like proving to a skeptic that the moon is not composed of dairy products.

    What I ultimately sent Wales were:

    Gary Weiss wikipedia editing pattern chart. Click to enlarge.
    Click to enlarge.
    1. A scatter graph (seen at right) showing Mantanmoreland’s Wikipedia editing pattern over several months, including a 12 hour time shift limited to the period in which Gary Weiss was known to be visiting India.
    2. Email from Gary Weiss (if you want to know how I came to possess Weiss’s private email, read this) in which he told a friend that he intended to edit a specific Wikipedia article to include a reference to a book he wrote.
    3. A link showing that Mantanmoreland did in fact edit that very article to include a reference to that very book.

    I also made it clear that should these bits of evidence fail to convince him, I’m ready to send much, much more.

    Maybe Jimbo was convinced and he decided there was no reason to respond further.

    Maybe the evidence simply left him speechless.

    Or maybe owning up to his reckless actions in this case would prove unpopular with his friends back in Chicago.

    All I know is that once the evidence was sent as requested, the conversation went cold.

    Whatever the case, the legacy of Gary Weiss’s campaign of misinformation endures on Wikipedia to this day, due in large part to the apartheid-like probationary status imposed upon the naked short selling article after Wales condemned the inquest into Weiss’s activities as having produced no persuasive evidence.

    All the while, Wikipedia remains the first option offered those searching the web for information about naked shorting, and its role in the current financial crisis.

    Weiss may have created this problem, but Jimbo Wales — whatever his motivation — has allowed it to persist. The time has come for Wales himself to step in, help find a real solution, and acknowledge the damage this dark episode has caused real people in the process.

    This post was written by:

    - who has written 104 posts on Deep Capture.


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    40 Responses to “Weighing the options”

    1. Dr. Jim DeCosta says:

      Let’s take post #225 of deepcapture.com’s 3/21/09 article a step further. Who is to blame for not keeping a “tally” of the number of “securities entitlements” or “shares*” currently poisoning the share structures of U.S. corporations to make sure that “overissuances” like that forbidden by UCC-8 don’t occur? Who has all of that information in front of them on a daily basis? The choices would be the NSCC, FINRA, the SEC or the exchanges? The party with the most proximate access to this information would be either the NSCC or FINRA. You obviously can’t blame an individual brokerage firm for not knowing the amount of “securities entitlements” its NSCC “fraternity brothers” have “issued”.

      OK, how about all of those “securities entitlements” resulting from FTDs held in an “ex-clearing” format. The NSCC and the SEC publicly claim that these “contractual arrangements” that brokerage firms enter into outside of the DTCC are not in their SRO or regulatory purview. That’s an interesting concept. All of a sudden blatant securities fraud perpetrated by brokerage and clearing firms outside of the DTCC is not in the purview of the SROs and regulators congressionally mandated to “act in the public interest, provide investor protection and to “promptly settle” all securities transactions”.

      Whose job is it to make sure that securities intermediaries “OBTAIN” and “MAINTAIN” the financial assets to back up their issuance of “securities entitlements” as mandated by UCC Article 8? How about to make sure that “guaranteed control locations” as per 15c3-3 “take physical possession” of all fully paid for shares on behalf of their participants seeking compliance with this “Customer Protection Rule”?

      Can you see why Reg SHO was basically dead on arrival because of language like having “reasonable grounds” to believe a “locate” would result in delivery by T+3 was sufficient to qualify as attaining a “locate”? Knowing how FTDs in essence results in the “issuance” of shares albeit “shares” with no “legal owner” can you appreciate why the Lehman Brothers and Bear Stearns of the world tanked so quickly?

      Because of the SROs, regulators and NSCC participants refusing to obey the investor protection aspects of UCC-8 and 15c3-3 the “shares” issued by FTDs stack up on the roof of a corporation like manhole covers and once there are a certain amount of them they will indeed bring down the corporation and the investments made therein. The fact that these manhole covers are not “legally owned” by anybody and they’re not TECHNICALLY “outstanding” offers little comfort.

      SOME REALITIES CONCERNING OUR CLEARANCE AND SETTLEMENT SYSTEM

      1) Because of the wording of UCC 8-501 the refusal to deliver the shares that you sold for all intents and purposes results in the “issuance” of new shares out of thin air. For TECHNICAL reasons these “shares” have no legal owner nor are they TECHNICALLY “outstanding”. But who cares because they have the same share price depressant effect as a legitimate “share” that is “issued and outstanding”.
      2) As these “manhole covers/shares” stack up on the roofs of corporations the share price of the corporation by definition is manipulated downwards.
      3) There is one and only one cure available when the seller of shares absolutely refuses to deliver that which it sold. It is called a “buy-in”. A “buy-in” essentially removes some of these “manhole covers/shares” that are actively depressing share prices.
      4) The research of Evans, Geczy, Musto and Reed (2003) reveal that only one-eighth of 1% of even “mandated” buy-ins by NSCC participants are ever executed when the sellers of securities absolutely refuse to deliver that which they sold.
      5) The NSCC management has the best view of FTDs and also 15 of the 16 sources of empowerment to execute buy-ins when the sellers of shares refuse to deliver that which they sold.
      6) The NSCC management also has the congressional mandates “to act in the public interest, to provide investor protection and to “promptly settle” all transactions.
      7) Despite this the NSCC management still pleads to be “powerless” to buy-in the delivery failures of its abusive “participants/bosses” that continually refuse to deliver the securities that they have sold. Admittedly this might be understandable for people wishing to remain employed.
      8) The direct result of the NSCC management’s refusal to follow their congressional mandates is the flow of an unknowing investor’s funds into the wallet of those NSCC participants that absolutely refuse to deliver that which they sold.
      9) Despite the fact that the shares sold were contracted to be delivered by T+3 the research of Dr. Leslie Boni performed as a “visiting economic scholar” employed by the SEC reveals that the average age of an FTD at the DTCC for over the counter (“OTC”) securities was 56.6 days. Her research represented the first and last public view of the goings on behind the doors of the secrecy-obsessed “black box” known as the DTCC.
      10) Despite the 1933 Securities Act’s mandate to make all information “material” to the prognosis for an investment available to the investing public the DTCC, FINRA, the SEC and the exchanges absolutely refuse to reveal to prospective investors the amount of these in essence “shares” albeit with no “legal owner” currently poisoning the share price and driving down the prognosis for success of any given U.S. corporation even if the amount has pretty much preordained that corporation to die an early death.
      11) It is not happenstance that the employees (NSCC management) of the abusive NSCC participating market makers, “banksters”, prime brokers, clearing firms, etc. that just so happen to be the financial beneficiaries of these thefts of investor funds are the only parties empowered to provide the only cure available yet refuse to do so as per the bidding of their corrupt bosses. When the party with the mandate “to act in the public interest, provide investor protection and “promptly settle” all securities transactions” attempts to proffer the argument that it is “powerless” to do ANY of the above then I would say that our markets have become “rigged” beyond description. Keep in mind that it is ONLY the abusive NSCC participants and their hedge fund “guests” that have the capacity to establish and maintain massive naked short positions in the U.S. corporations they target for destruction. It might be tough to determine which is the more heinous crime the intentional theft of U.S. investors’ funds or the refusal to allow prospective investors to view the amount of preexisting FTDs poisoning the share structure of a company they might be about to invest in.
      12) Perhaps abusive naked short selling should be looked upon as more of a symptom rather than the main disease process itself. It is symptomatic of certain corrupt “banksters” and their allies co-opting not only the regulatory structure of Wall Street but even the political fabric of our once great nation.

    2. sean says:

      Here is the reason for all that is happening in te markets now (one of the major ones anyhow)

      http://abcnews.go.com/print?id=7210007

      The Executive Who Brought Down AIG
      Joseph Cassano Made More Than $300 Million at the Insurance Firm He Virtually Bankrupted
      By ANNA SCHECTER, BRIAN ROSS, and JUSTIN ROOD
      March 30, 2009—

      The FBI and federal prosecutors are reportedly closing in on the AIG executive whose suspect investments cost the insurance giant hundreds of billions of dollars. The government is investigating whether or not 54-year old Brooklyn-native Joseph Cassano committed criminal fraud in virtually bankrupting the company

    3. ron doc says:

      Yep, Joseph Cassano did it all by hims little lonesome self.LOL

      And nobody in all the vast management of AIG had any idea.

      Now they are all just shocked! SHOCKED I SAY!

    4. sean says:

      Ron doc tat fact that he is still free is beyond me and guess who else is reading the writing on the walls and jumping ship?…

      Goldman Hedge-Fund Managers Carhart, Iwanowski Retire (Update1)
      Share | Email | Print | A A A

      By Saijel Kishan

      March 31 (Bloomberg) — Mark Carhart and Raymond Iwanowski, co-heads of Goldman Sachs Group Inc.’s quantitative investment- management group and Global Alpha hedge fund, retired.

      http://www.bloomberg.com/apps/news?pid=20601087&sid=aFU089IruuNo&refer=home

      Retiring @ 42 and 43 must be nice!!LOL!!!

    5. kevin says:

      Where are the tumbrils?

      If you don’t know what that means, google it!

    6. Anonymous says:

      The clearing system is based on the concept of homeostasis, that over time, the number of buys and sells should be equal.

      The reason is supply and demand should force the curve to the point where supply and demand is equal.

      At any level in the chain, whether an introducing brokerage, clearing brokerage or depository, the thought is that although there could be a fluctuation long or short on a single day, over time, those fluctuations should cancel out.

      By allowing temporary fails, which are covered by longs from different customers a few days later, the system is able to massively reduce the amount of movement of stock.

      In theory, it is a good idea.

      The problem is that the theory doesn’t take into account that if the supply isn’t limited, then you can have huge order imbalances over long periods of time where no matter how many buys there are, they are always overwhelmed by a larger number of sells.

    7. Dr. Jim DeCosta says:

      In order to better understand the key role of these “manhole cover/shares” that result from failures to deliver (FTDs) picture each U.S. corporation as having a flat roof that is supported by springs that stretch from the ground floor to the roof. The “manhole cover” nature of these “shares” refers to their “heavy” share price depressant effect. Regulators, SROs and investors don’t seem to realize it but they “weigh” exactly the same as a legitimate “share” does from a dilutional damage point of view despite the anomaly that they have no “legal owner” since they are derived from a mere “accounting measure” to denote a failed delivery obligation.

      The readily sellable “manhole covers/shares” that pile up on the roof of corporations are the result of delivery failures that gave rise to readily sellable “securities entitlements” that due to the wording of UCC Article 8-501 gave rise literally to “shares” for which there is no specified “legal owner”. This is because 8-501 allows the holders of “securities entitlements” procreated by FTDs “to exercise ALL of the rights and property interest that comprise a real “share of a corporation”.

      Thus for all intents and purposes these readily sellable “manhole covers/shares” without an identifiable “legal owner” behave EXACTLY like a legitimate “share” of a corporation. Since the ability to identify the “legal/nominal/record” owner has absolutely nothing to do with share price determination through the “price discovery” process and since the source of the “issuance” of shares whether it be from the board of directors or inadvertently from abusive naked short sellers from a functional point of view THESE ARE REAL SHARES due to the wording of UCC Article 8-501! I will admit that the lack of an identifiable “legal owner” does contribute greatly to the obfuscation of abusive naked short selling crimes.

      As such they add directly to the “supply” of readily sellable legitimate “shares” already “outstanding” in a corporation’s share structure which interacts with the “demand” variable to determine share price. As the “supply” of that which is readily sellable whether they be “legitimate shares” issued by a corporation or “illegitimate manhole cover shares” in essence “issued” by abusive naked short sellers the share price by definition will be artificially manipulated downwards by their presence within the share structure.

      Due to their incredibly damaging nature it becomes imperative that once it becomes obvious that the sellers of securities had no intent whatsoever to deliver that which it sold that they be promptly bought-in (perhaps on T+6 or so) by those empowered to execute buy-ins i.e. the NSCC subdivision of the DTCC. The damages incurred by a corporation from their invisible presence in the share structure are proportional to the number of “manhole covers/shares” sitting on the roof of a corporation multiplied by the amount of time they sit there. Thus time is of the essence in executing buy-ins.

      As these “manhole covers/shares” pile up on the roof of a corporation under attack they metaphorically depress the roof and compress the springs supporting the roof. Since share prices are directly proportional to the height of the roof then share prices get manipulated downwards due to their presence. When the amount of “manhole cover/shares” get to a critical level they will break the springs and the corporation and the investments made therein will go down.

      Interestingly enough despite the 1933 Securities Act’s (“The Disclosure Act”) mandate to make available to all investors all information of a “material” nature concerning a corporation the DTCC, FINRA, the SEC and the exchanges absolutely refuse to warn prospective investors of the number of “manhole covers/shares” weighing down on the roof and therefore prognosis for success of any corporation. Are the shares that a prospective investor is about to buy that are sold by a criminal that is going to refuse to deliver that which he sold going to result in the “issuance” of a “manhole cover/share” that breaks the springs supporting the roof of the corporation? Who knows?

      What is also interesting is that abusive NSCC participants do have the ability to see the number of preexisting “manhole covers/shares” currently weighing down on a corporation. They would obviously be interested in naked short selling corporations with a large amount of preexisting “manhole covers/shares” because their naked short sale order might be the one that breaks the springs supporting the roof. This would allow the investment funds of the U.S. investor unfortunate enough to have bought those nonexistent shares to flow straight to the seller of the nonexistent shares despite the fact that what he sold never got delivered. How many “manhole cover/shares” are on the roof of the corporation you are currently contemplating an investment in? Is your buy order going to be the one to break the springs?

    8. Fintas says:

      Judd: Maybe you might try approaching it differently. Just pass out a few videos and articles to a few in Las Vegas who have watched their personal wealth decimated by the use of illegal naked short selling I’m certain they’ll be able to get Gary W’s and others attention. .

    9. Tim Maitski says:

      “All the while, Wikipedia remains the first option offered those searching the web for information about naked shorting, and its role in the current financial crisis.”

      It would be easy to get the deep capture home page to show up in Google as the number one result for “naked short selling”.
      Just add “naked short selling” to the title of the page. Have as many people as possible point to the home page with “naked short selling” as the anchor text.

      Get a few other websites up doing the same thing and you could maybe push the Wikipedia page off of the first page of results. Then it wouldn’t really matter too much what was said on Wikipedia.

    10. sean says:

      What have we here???? If he is doing this overseas, what is he doing here? Also maybe the SEC could learn how to bring manipulation to the forefront from these regulators huh? So sad!!!

      Record Fine for Soros Fund On Hungarian Transactions
      Agence France-Presse – 3/27/2009 10:43 AM GMT
      Record fine for Soros Fund over Hungarian transactions
      Hungary’s financial supervisory watchdog announced Friday it had slapped a 1.6-million-euro fine on an investment fund founded by US billionaire George Soros, for manipulating the market.

      The PSzAF said it had fined Soros Fund Management LLC for transactions on the Budapest stock exchange on October 9 that led to a “significant loss in value” of Hungarian OTP bank stocks, which fell in days from 4,000 forint (13.2 euros, 17.86 dollars) to 2,500 forint.

      The PSzAF “is imposing a 489-million-forint fine on Soros Fund Management LLC… for violating the rules regarding the illegal manipulation of financial markets,” the supervisory authority said in a statement on its Internet site.

      The Soros Fund has 30 days to pay this record fine.

      The PSzAF said the fund started putting OTP shares up for sale at 4:27 pm on October 9, just minutes before closing.

      “The timing, the number and the effects of these transactions on the market point without any doubt to a an illegal market manipulation,” it added.

      OTP, Hungary’s biggest bank, was already hit hard by the financial crisis, like many other banks, but then saw its share value crumble in a few days after October 9.

      In a statement Friday, Hungarian-born Soros responded he had been informed of the fine but insisted that he was not involved in the transactions.

      “I no longer control the Soros Fund Management’s operations, I retired last year and now only oversee the transactions to do with my private account,” he said in the statement, published by Hungarian news agency MTI.

      “Soros Fund Management is cooperating with the Hungarian authorities and has also launched an internal investigation” into the illegal transactions, he noted.

      He added he was “deeply sorry the Soros Fund Management had carried out such a transaction.”
      http://news.id.msn.com/business/article.aspx?cp-documentid=2954977

      Ab

    11. iStandUp says:

      Dr. Jim DeCosta,

      You stated:

      “What is also interesting is that abusive NSCC participants do have the ability to see the number of preexisting “manhole covers/shares” currently weighing down on a corporation. They would obviously be interested in naked short selling corporations with a large amount of preexisting “manhole covers/shares” because their naked short sale order might be the one that breaks the springs supporting the roof. ”

      How do the “abusive NSCC participants” know this?

    12. al says:

      Pardon me if this has already been discussed here… but do we have NAMES of the market-makers who are illegally using their exemption? I am sure that the trade pattern difference between bona-fide market making NSS and ANSS would be fairly obvious; is it possible to identify the ANSS market makers and begin investigating them, their alliances, and their compliance with the NSS reporting regulations? There has to be a way to start making inroads to illuminate the actions of the direct violators.

    13. Dr. Jim DeCosta says:

      al,

      That information is readily available with the use of software that has been developed. The problem is that due to “privacy” issues and “proprietary trading methodologies” issues the trading data is only accessible to the SROs and the regulators. Another problem is that only an UNCONFLICTED SRO or regulator would be interested in commissioning those studies. Have you seen any around lately?????? Your choices are the NSCC subdivision of the DTCC, FINRA, the SEC Enforcement Division and the exchanges. Good luck sir!

    14. Dr. Jim DeCosta says:

      al,

      If you add a little transparency to what’s going on behind the scenes in the lending departments you’d also gain a lot of enlightenment. Who are the parties that seem to be awfully obsessed with secrecy? The hedge funds, the DTCC, the market makers, the lending departments, the prime brokers, the “ex-clearing” guys, etc. If only there were a pattern!

    15. Anonymous says:

      Dr. Jim DeCosta,
      Lets not forget to add the NY Fed and our own Treasury to that list.

    16. Dr. Jim DeCosta says:

      anonymous,

      I’ll bet the average guy at the Fed and the Treasury know all about FTDs and “securities entitlements” and the weaknesses of UCC 8-501, etc. That’s the problem in NSS there’s a sufficient level of complexity involved such that none of the regulators seem to have the time or the will to get up to speed on how these thefts occur. So what do you do? You rely on “self-regulation” and let the DTCC regulate themselves. So what does the DTCC do over the years? They rig the market so that the owners of the DTCC, its “participants”, can easily reroute the funds of less financially-sophisticated investors into their own wallets.

    17. Dr. Jim DeCosta says:

      anonymous,

      Now you can appreciate why I insist that EDUCATION is the ONLY chance we have of ending this crime wave.

    18. iStandUp says:

      Mass regulator charges Madoff feeder fund

      BOSTON (Reuters) – Massachusetts’ top securities regulator charged hedge fund firm Fairfield Greenwich Group with fraud for allegedly lying to investors about confessed swindler Bernard Madoff’s phony management business.

      The action on Wednesday marks the first charges against one of Madoff’s feeder funds, which funneled billions of dollars into the disgraced Wall Street legend’s long-running Ponzi scheme.

      William Galvin, Massachusetts’ secretary of state, accused Fairfield Greenwich, a prominent hedge fund firm in Connecticut, of failing to check how Madoff generated the strong and steady returns he said he made year after year.

      “The allegations against Fairfield in this complaint outline a total disregard for such (fiduciary) responsibility which helped the Madoff scheme to stay afloat for so long,” Galvin said in a statement.

      Galvin wants Fairfield Greenwich to return the money that Massachusetts investors lost in the scheme and return the performance fees they paid the firm. He is also seeking an administrative fine against Fairfield.

      Fairfield Greenwich’s Sentry Funds had placed about $7.2 billion, or 95 percent of its assets, with Madoff, whose fraud appears to have totaled about $65 billion.

      Galvin found that Fairfield Greenwich insiders pumped $14.8 million into Madoff’s business only days before the 70-year-old former Nasdaq stock market chairman confessed to authorities that his business had been a fraud.

      Madoff, who was jailed on March 12 after pleading guilty, will be sentenced on June 16.

      (Reporting by Svea Herbst-Bayliss; Editing by Lisa Von Ahn)

      ( http://news.yahoo.com/s/nm/20090401/us_nm/us_madoff_massachusetts )

    19. iStandUp says:

      Dr. Jim DeCosta,

      Now that I understand better HOW the Billionaire Hedge Fund Owners are using the Market Makers Exemption to manufacture stock shares…

      I now appears to me that ALL Hedge Funds that are using a corrupt Market Makers exemption for locate and pre-borrow are operating a PONZI Scheme!!!!!!!

      And ALL Market Makers using their exemption with Guest Hedge Funds to steal funds from investors by REFUSING to DELIVER what they SOLD or by themselves are operating a PONZI Scheme!!!!!!!

    20. Anonymous says:

      Fred, to answer your question in the other thread.

      The Canadian brokerage wouldn’t have an account with the DTC. Their account would be with the CDS, which represents all of Canada. The CDS, in turn, would have an account at the DTC.

      The DTC let’s foreign depositories, such as CDS, Clearstream, Euroclear, etc. have negative balances at the DTC to support arbitrage on stocks that trade in more than one country.

      That’s why companies get listed in Berlin without their permission, to facilitate taking advantage of the arbitrage loophole, which allows foreign depositories to have negative positions.

      More likely, though, the foreign depository has a positive position. Let’s say there are 10 million shares long to shareholders in Canada. The CDS could show a positive balance of 1 million shares and American regulators would have no way of knowing that the CDS is short 9 million shares.

      Those 1 million real shares can be lent by the DTC in America, but also lent by the CDS in Canada, so both sides think they are borrowing real shares.

      Finally, naked shorting of stocks that don’t trade in Canada is legal in Canada even though naked shorting of Canadian stocks is banned.

    21. Anonymous says:

      March 10, 2009

      Although possible, it is unlikely that Canadian regulators will pass significant, permanent restrictions on short-selling, as the current rules appear to address the concerns that led to the restrictions in the United States.

      http://www.langmichener.ca/index.cfm?fuseaction=content.contentDetail&id=10505&lid=0

    22. Anonymous says:

      I’ve also seen negative balances in DTC participant reports. I called the DTC and they said the likely cause was a cert. was deposited, sold against, then rejected by the transfer agent. The participant is allowed to remain negative in that case.

    23. Dr. Jim DeCosta says:

      It’s not too tough to gain an appreciation for why market makers often refuse to cover their naked short positions. Assume a MM sees some buy orders come in at the $10 level. In order to theoretically “inject liquidity” it sells 1 million nonexistent shares at that level. It did this by accessing the “bona fide MM exemption” from having to perform pre-borrows or “locates” before making admittedly naked short sales. Did the MM break the law by ILLEGALLY accessing that exemption? It’s too early to tell. We can only tell by studying his actions AFTER the share price backs off a bit.

      Let’s say that the stock backs down to the $9.50 level after a week of trading since the naked short position was established. A truly bona fide MM would have been covering the preestablished naked short position at perhaps the $9.80 level because as the share price was dropping the “injection of liquidity” was needed from the buy side.

      If the MM were to post a bid at the $9.50 level for 1 million shares then it could lock in a healthy 5% gain over the course of 1 week which annualizes out to about a gazillion per cent annually. What typically happens is that the theoretically bona fide MM is nowhere to be found if the share price were to drop all the way to the $2 level. Why? Because its only deterrent from selling bogus shares all day long and NEVER delivering that which it sold is the fear of a buy-in. Since the NSCC management has cleverly gained a monopoly on the sources of empowerment to execute buy-ins and yet proffers to be “powerless” to execute buy-ins then a MM would be an idiot to EVER deliver that which it sold.

      The trouble with buying back that which you previously sold is that the share price moves up in the process. On paper a corrupt hedge fund manager or abusive MM look like geniuses after selling shares at $10 while the stock is sitting at $1. The hedge fund manager will be periodically paid his 2% of funds under management and 20% of all profits based upon the marked to market status of his investments. What people forget to realize is that covering an enormous naked short position starting at the $1 level might drive the share price up to $15. But if those empowered to buy-in your failed delivery obligation happen to be your employees (NSCC management) and plead to be “powerless” to do it then you’d be crazy to ever cover a naked short position or to ever deliver that which you sold.

      The larger publicly-traded MMs have shareholders to appease. Their success is also measured in a marked to market fashion. Their pay structure is often associated with options which in turn are associated with the current share price of their marketmaking firm. If I were a clever market maker executive I would run up gigantic naked short positions up and down Wall Street, cash in on my options and head for the hills and let my successor inherit these “open positions”.

      What’s the common denominator of all of Wall Street? It’s insatiable greed even if you are working under a microscope like those that attacked Lehman Brothers and Bear Stearns. Does the increase of previous high water marks for failures to deliver 57-fold not seem just a little bit obvious as the employees losing their jobs were cleaning out their disks. The fact that the MMs that had previously established naked short positions in these stocks were still piling on all the way down now reveals that their earlier accessing of the “bona fide MM exemption” was done illegally. They could have locked in monstrous profits by reinjecting liquidity from the buy side at perhaps the $5 level but the insatiable greed common to all Wall Streeters took over and the ensuing “pig piling” of FTDs upon each other while continuing to illegally access that exemption accorded only to truly bona fide MMs.

    24. Dr. Jim DeCosta says:

      Now if you can mentally connect the tremendous disincentive for abusive MMs to EVER repurchase and deliver that which they sell with the incredibly damaging nature of the “securities entitlements” resulting from these delivery failures then you can start to get an appreciation for the pandemic nature of these frauds. Recall that for all intents and purposes except for the meaningless lack of a “legal owner” and the lack of them being TECHNICALLY “outstanding” these “securities entitlements” result in the “issuance” of new shares. One has to wonder how any U.S. corporation unfortunately enough to be targeted in one of these abusive naked short selling (ANSS) attacks can ever survive.

    25. Anonymous says:

      One hedgefund down…and counting. I wonder if their trading records will reflect their NSS. This could open up the illegal trading (if any) and start the process of opening those hedge funds trading records…..

      http://www.guardian.co.uk/business/2009/apr/01/hedge-fund-madoff-fraud-charge

    26. sean says:

      The British are so far ahead of us it almost comical. Maybe we need to stop posting and start sueing..no?

      Rich investors sue Queen’s bankers
      Over 500 Coutts customers who lost millions are fighting backRobert Watts
      MORE THAN 500 of the richest people in Britain are planning legal action against Royal Bank of Scotland (RBS) for losses of more than £200m from investments through Coutts, the Queen’s bankers, which it bought in 2000.

      The claimants include five members of the House of Lords and up to 10 chief executives and finance directors of FTSE 100 companies.

      The action is being master-minded by Sir Keith Mills, the entrepreneur who helped to run London’s successful bid for the 2012 Olympic Games and who says he has lost as much as £30m in interest……

      http://www.timesonline.co.uk/tol/news/uk/article5993101.ece

      Just a thought!!!

    27. Davidn says:

      Dr. Decosta has nailed it. The fund manager gets paid on paper profits.

      Imagine you short some crappy penny stock when it is trading high and sell 10 million shares at high prices, say averaging $2 as you drive it from $5 to $.10.

      You owe $1 million collateral for those 10 million shares, but you’ve generated $20 million in revenue. You can pull out $19 million to invest elsewhere.

      As fund manager, you pay yourself 2% of assets ($400,000) and 20% of profit ($380,000) for each year you can hold that penny stock at a dime by overwhelming buys with no counterfeit shares.

      Now, the crappy little company turns out to be good and cures cancer and the stock runs to $20. You pull a Madoff and close the fund down. You keep your performance pay for the last ten years and let the system (taxpayer) deal with the mess.

    28. Davidn says:

      Should have been:

      As fund manager, you pay yourself 2% of assets ($400,000) and 20% of profit ($3,800,000)

    29. Anonymous says:

      The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

      http://www.theatlantic.com/doc/print/200905/imf-advice

    30. Patchie says:

      Senators Kaufman, Isakson, Tester, Levin, Chambliss, and Specter have submitted a joint letter to SEC Chairman Mary Schapiro expressing concern over the SEC Division of Enforcement response to the OIG investigation into the SEC’s handling of naked short selling. The memo likewise addresses the need for an Uptick rule to be reinstated.

      The memo is located here.

      http://investigatethesec.com/drupal-5.5/?q=node/639

    31. davidn says:

      The problem with the uptick rule is most naked shorts play a long short strategy, so it won’t solve the problem.

      They have a large long position in a different account in a different country they can use to tick the stock up before executing their naked short.

      http://www.asensioexposed.com/longshort.htm

      The only thing that will solve the problem is to make it illegal (arrestable) to claim you have someone’s shares in custody when you don’t.

      Require each of your brokerage, clearing brokerage and DTC to own what they claim to own on behalf of us investors.

      If the trade hasn’t settled, they need to put an asterisk next to that company on every investor at the brokerage that owns that stock saying that there isn’t enough to go around.

    32. sean says:

      Here you go, more than you can imagine and much more to come. Whre are the real big boys in this??

      FBI: Ponzi, Ponzi everywhere. . .
      Press Release
      For Immediate Release
      April 1, 2009
      Washington D.C.
      FBI National Press Office
      (202) 324-3691

      Highlighting Recent FBI “Ponzi” Scheme Investigations
      Given current market conditions, there has been no shortage of Ponzi investment schemes, perpetrators, and victims. These schemes are varied in their methods, but usually lure investors with the false promise of high financial returns or dividends not available through traditional investments.
      This type of fraud is named after Charles Ponzi, who operated an enticing scheme in the early twentieth century that guaranteed investors a 50 percent return on their investment in postal coupons. Instead of investing the money he received, Ponzi simply used it to pay “dividends” to initial investors and pocketed the rest himself. The scheme fell apart when investors grew suspicious and funds dried up, making it impossible to make additional payouts and keep the ruse going.
      “Too often investors are blinded by dreams of untold wealth,” said Assistant Director Kenneth W. Kaiser of the FBI’s Criminal Investigative Division. “These schemes highlight the need for law enforcement and regulatory agencies to be ever vigilant of white-collar crime both in boom and bust years. We also want to remind the public to exercise due diligence in selecting investments and the people with whom you entrust your money.”
      “The bottom line is that individuals must approach investment opportunities with a dose of healthy skepticism,” said Supervisory Special Agent Stephen Kodak of the FBI’s National Press Office. “People are often to willing to suspend their disbelief if they think they will receive a fantastic payout. Just remember: if it sounds too good to be true, it probably is.”
      There is no need to look much further than recent “Ponzi” scheme investigations to realize the scope of this matter. Recent press releases are listed below, with more available at http://www.fbi.gov.
      On 01/05/2009, four Florida defendants were charged in a $1 billion Ponzi investor fraud scheme.
      On 01/23/2009, a Broomall, Pennsylvania man was charged in a large-scale investment fraud that he used as a pyramid, or “Ponzi,” scheme to defraud investors of tens of millions of dollars between 1996 and 2008.
      On 01/26/2009, a Heber Springs, Arkansas man was sentenced to federal prison for defrauding investors of $43 million in a Ponzi scheme.
      On 01/26/2009, a North Haven, Connecticut man was sentenced to 48 months of in prison, followed by three years of supervised release, for operating a multi-million dollar Ponzi scheme in which he solicited investments for fictitious investment programs.
      On 01/27/2009, the President of a Long Island, New York investment firm was charged in a $370 million Ponzi scheme.
      On 02/05/2009, a grand jury in Seattle, Washington indicted three men for operating a $65 million Ponzi scheme.
      On 02/24/2009, the New York FBI Field Office arrested an individual based on the operation of an international, Internet-based “gold unit” Ponzi scheme.
      On 02/24/2009, a Forest Lake, Minnesota man was sentenced for his role in defrauding 519 people nationwide out of approximately $30 million in a Ponzi scheme operated under the name of the Joshua Tree Group.
      On 02/27/2009, a former Brentwood, Tennessee financial advisor and owner of Park Capital Management Group (“PCMG”) admitted to operating an elaborate Ponzi scheme to defraud investors who deposited funds with PCMG for investment in brokered stocks and other marketable securities.
      On 02/27/2009, a Chicago businessman was charged with luring two dozen investors into investing $4.7 million in commodity trading pools and using the money instead to fund two nightclubs, to pay gambling debts and other living expenses, and to make Ponzi-type payments to earlier investors.
      On 03/04/2009, two Arizonans and two others were indicted for a Ponzi fraud scheme. A 90-count indictment alleges at least 300 victims invested $8 million during the scheme.
      On 03/09/2009, a Marblehead, Massachusetts investment advisor was charged with wire fraud in connection with a Ponzi scheme to defraud two of his clients of more than $750,000.
      On 03/12/2009, Bernard L. Madoff pled guilty to an 11-count criminal information and was remanded into custody related to a massive multi-billion dollar Ponzi scheme.
      On 03/12/2009, Dennis R. Bolze was arrested in State College, Pennsylvania on federal wire fraud and money laundering charges associated with a Ponzi scheme.
      On 03/18/2009, an Atlanta, Georgia currency trader was charged with operating a $25 million Ponzi scheme.
      On 03/20/2009, Anthony Vassallo of Folsom, California was charged for his role in a massive Ponzi investment fraud scheme that brought in more that $40 million from 150 investors, many of whom he met in his church.
      On 03/31/2009, Manyu Ogale was sentenced to 10 years in prison on a federal charge of mail fraud arising out of a Ponzi scheme under the guise of a foreign currency “hedge fund” that defrauded investors out of more than $23 million.

    33. Dr. Jim DeCosta says:

      It might seem a bit funny but investors actually “vote on” share price levels. This is part of the “price discovery” process. It is critical that ALL votes both positive and negative count and that’s why LEGAL short selling involving a “borrow” is a very good thing. It also helps inject liquidity, aids in the price discovery process and creates hedging opportunities.

      In a market with integrity this casting of negative votes (short sales) has some “natural” governors that deter abuses in the voting process. First of all there are a finite number of shares that are legally borrowable. Secondly, as that “supply” of legally borrowable shares dwindles the price to “rent” these shares which is part of the legal short selling process goes up due to the effects of supply and demand.

      The share prices of corporations under attack by abusive naked short sellers are also determined by a voting process. The “natural” governors that deter abuses are missing, however. There is an unlimited number of “securities entitlements” that can be generated by those selling nonexistent shares and refusing to deliver that which they sell. Due to the wording of UCC Article-8 these readily sellable “securities entitlements” for all intents and purposes give rise to readily sellable “shares*” of a corporation. The only difference between a “share” of a corporation and a “share*” of a corporation is that a “share*” of a corporation has no TECHNICAL “legal owner” and is not TECHNICALLY “outstanding”.

      Since these two properties have absolutely nothing to do with share price determination then in essence failures to deliver give rise to “securities entitlements” which give rise to the “issuance/release” of “shares”. Since both “shares” and “shares*” of a corporation are both readily sellable then both depress the share price of a corporation from a dilutional effect with equal effect.

      What this results in during this “voting” process that determines share prices abusive naked short selling basically allows the “stuffing of ballot boxes” with an infinite number of extremely easy to generate negative votes. All you have to do is to refuse to deliver that which you sell!

      Fortunately there is a remedy to these “voting” abuses. They are referred to as “buy-ins” and they are the ONLY known cure for delivery refusals. In a “buy-in” the party refusing to deliver that which he sold is FORCED to. “Buy-ins” are another “natural” deterrent to these abuses as they can become rather expensive.

      Unfortunately the party with 15 of the 16 sources of empowerment to execute “buy-ins” (the NSCC management) is employed by the parties refusing to deliver the securities that they sell and they absolutely plead to be “powerless” to execute “buy-ins”. This is despite their having attained a monopoly on 15 of the 16 sources of empowerment to execute “buy-ins” and their congressional mandate “to act in the public interest, provide investor protection and to “promptly settle” all securities transactions. To put it mildly their pleading to be “powerless” is rather suspect as the financial beneficiaries of these thefts of investor funds are the abusive NSCC “participants” that are their bosses.

      So what are we left with? We’re left with all of the “natural” deterrents to these thefts having been surgically excised and the share prices of corporations unfortunate enough to have been targeted for one of these attacks subjected to be easily manipulated into a self-propagating “death spiral”. Is the surgical excision of the natural deterrents to these thefts plus the refusal to provide the only cure available purely happenstance? When the financial beneficiaries of this surgical excision and the refusal to provide the ONLY known cure are the bosses of those doing the excising and the refusing then I might posit that the share prices in certain corporations have been essentially “rigged” to go nowhere but down due to this “stuffing of the ballot box”.

      The premise of the voting process determining share prices is based upon positive votes causing a price enhancing effect and negative votes causing a share price depressant effect. But note what happens in abusive naked short selling crimes. When a buy order is naked short sold into and the failure to deliver (FTD) procreates a readily sellable “securities entitlement” and UCC-8-501 converts this “securities entitlement” into what amounts to as a share price depressing readily sellable “share” then in essence the share price buoying effect of a buy order has been converted into a share price depressing readily sellable “share” as if by magic.

      What are we left with in these attacks? We’re left with the anomaly that BOTH buy and sell orders driving the share price down. Now that’s one meticulously-designed “fraud on the market”.

    34. Ted says:

      What are the implications when every commodity, debt instrument and equity instrument is priced by supply and demand of Wallstreet contracts instead of the supply and demand of the real good?

      It’s the reason you could fish the last Cod in the Atlantic before the fishery collapsed and the price of fish didn’t go up to help conserve the resource.

      Here’s naked shorting of gold:

      http://seekingalpha.com/article/129128-did-the-ecb-save-comex-from-gold-default

    35. iStandUp says:

      Patchie,

      Thank you for the link…..

      Here is a text copy of the letter vis OCR:

      United States Senate
      WASHINGTON, DC 20510

      April 1, 2009

      The Honorable Mary L. Schapiro
      Chairman
      U.S. Securities and Exchange Commission
      100 F Street, NE
      Washington, DC 20549

      Dear Chairman Schapiro:

      We were pleased to hear in January of this year that you were committed to a review of the uptick rule. More than two months have passed, and while we understand that the SEC has begun its review, the financial markets are still waiting to know if the SEC will restore an uptick rule, and whether it will take additional steps to address abusive short selling practices.

      American investors are looking to the SEC’s meeting on April 8 to address these issues. It is urgent that we restore the integrity, efficiency and fairness of our securities markets by preventing manipulative short selling. Investors need to know that the market fairly values the actual shares issued by a company and that their transactions will not be distorted by manipulative naked short sellers creating “phantom shares.”

      Because of our concern about abusive short selling practices, we were especially troubled by the response of the Division of Enforcement (the “Division”) to a recent report from the SEC’s Inspector General (the “IG”) entitled “Practices Related to Naked Short Selling Complaints and Referrals,” which detailed the results of an audit of the Division’s policies, procedures, and practices for processing complaints about naked short selling.

      In the report, the IG found that despite receiving more than 5,000 complaints about abusive short selling, the Division had brought no enforcement actions. Further, the IG made eleven suggestions for improvements in processing and analyzing naked short selling complaints, yet the Division agreed with only one of those eleven recommendations.
      Equally troubling is the Division’s reluctance to agree with the IG and the Commission itself that naked short selling is harmful. As the IG notes, the “SEC has repeatedly recognized that naked short selling can depress stock prices and have harmful effects on the market. In adopting a naked short selling antifraud rule, Rule 1Ob-21, in October 2008, the Commission stated, `We have been concerned about ‘naked’ short selling and, in particular, abusive ‘naked’ short selling, for some time.”

      In response to the IG report, however, the Division stated “there is hardly unanimity in the investment community or the financial media on either the prevalence, or the dangers, of `naked’ short selling.”

      As the new leader at the SEC, you have an opportunity to clarify the Commission’s commitment to end abusive short selling. We hope that your April meeting produces an unambiguous commitment to promulgate and enforce regulations that put an end to naked short selling. At a minimum, those regulations should address the need for an uptick rule, as well as a pre-borrow requirement to prevent naked short sellers from artificially depressing or diluting stock values.

      To be clear, we are not opposed to short selling itself, which can enhance market efficiency and price discovery. But naked or abusive short selling has gone unaddressed for too long and simply must end if the SEC is to restore investor confidence in the markets. In the absence of a strong message from the SEC, we believe Congress will need to consider legislation that directs the SEC to do so.

      Thank you for considering our views.

      Sincerely,

      EDWARD E. KAUFMAN
      United States Senator

      JOHNNY ISAKSON
      United States Senator

      JON TESTER
      United States Senator

      SAXBY B. CHAMBLISS
      United States Senator

      CARL M. LEVIN
      United States Senator

      ARLEN SPECTER “uptick rule”
      United States Senator

    36. iStandUp says:

      Dr. Jim DeCosta,

      Eureka!

      You have found the irrefutable statement for all to read and understand!!!!!!!!!!!…..

      “What are we left with in these attacks? We’re left with the anomaly that BOTH buy and sell orders driving the share price down. Now that’s one meticulously-designed “fraud on the market”.”

      Thank you!

    37. iStandUp says:

      I suggest that anyone concerned with Naked Shorting (Counterfeiting) should contact your Senators and Representative to suggest they add their name to the letter above written to the SEC by six US Senators:

      House Website:
      https://writerep.house.gov/writerep/welcome.shtml

      Senate Website:
      http://www.senate.gov/general/contact_information/senators_cfm.cfm

      Congress and State Officials can be contacted via this website:

      http://www.usa.gov/Contact/Elected.shtml

    38. sabretache says:

      First comment here.

      Very, VERY impressed with what Patrick, Judd et al have achieved to date.

      No surprise whatever at the grossness of the corruption revealed either.

      On the analysis of naked short selling and proposed measures to prevent it whilst allowing for ‘non-abusive’ short sales, for want of a better term. I’m just a simple soul, so forgive the simplicity of my proposed solution:

      It is simply to make FTD analogous to any other type of contract default. No exceptions. Anyone defaulting is barred from further market participation until the default is settled to the satisfaction of the contracting parties.

      I fully appreciate the horrendous complexity of the present interlocking clearing system – aggravated by cross-jurisdictional issues too – but ANYTHING that cannot be adjusted to accommodate that simple readily understood principle has no place in the system.

    39. Rob says:

      DeCosta’s 8:49 post is good at showing how nakeds create duplicates although his last paragraph undermines his post a bit. I’m convinced that regular/legal shorting also has a duplicative effect in that two owners have an interest in the same shares – even though one is in theory a lender, i think the reality is that only large institutions (mutual, pension funds) are lenders and that THEIR unitholders (you and me) are the real suckers. We THINK we hold ABC in our mutual fund therefore we “hold” the shares in our minds even if they, technically, are lent out. Ergo, two holders of the same shares. For this reason i say “Neca eos omnes. Deus suos agnoset” (shoot all shorters, let God sort them out)! Have your say at
      http://www.petitionspot.com/petitions/AbolishShorting

      I’m also surprised at DeCosta’s definition of buyin. I thought buyin could only refer to a borrowed share which the owner demanding the return causing a buyin. Who else would demand a buyin?

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