SEC brings another case against naked short sellers

Far from over, for Rhino Trading founder Damon Rein, the party is only mildly dampened.

You can hardly blame Fat Squirrel Trading Group (FSTG) and Rhino Trading, LLC.

After all, it was 2007, and illegal short selling was almost the norm. The SEC, in passing a toothless Regulation SHO, had demonstrated that it didn’t care much. With just a few exceptions, America’s financial press had made it clear that the shorts were to be believed and their targets attacked or ignored.

And, in the midst of what history would eventually show to be the high-water mark of the greatest bull market of all time, how could a self-respecting short seller possibly be expected to do business in any other way?

What FSTG and Rhino couldn’t have known is that four factors were working against them:

1- In December of 2007, the SEC would appoint a true inspector general, in the form of David Kotz, and that Kotz would hear the cries of untold thousands of shareholders certain that the SEC had ignored their untold thousands of complaints of illegal naked shorting of companies in which they had invested untold millions of dollars, and that before too long, Kotz would issue a scathing report confirming as much, and…

2- In September of 2008, naked short selling would provide the spark that lit the fuse that ignited the greatest financial collapse of all time, and…

3-  In January of 2009, Joe Biden would leave the Senate for the Vice President’s mansion and Ted Kaufman, Biden’s successor, would make a major issue out of demanding the SEC start enforcing long-ignored prohibitions on illegal naked short selling, and, perhaps most unjustly…

4- By November of 2009, FSTG and Rhino would remain small and inconsequential firms (FSTG is headquartered at the end of a dirt road 90 miles from NYC), not at all the kinds of major players with deep payrolls into which SEC staffers hope the revolving door will eventually thrust them.

Rhino Trading Founder Damon Rein
Rhino Trading Founder Damon Rein (on right)

Except for the “small and inconsequential” part, how could FSTG and Rhino Trading have possibly known that these factors would conspire to hold them to account in 2009 for their participation in an illegal and manipulative trading strategy that was de rigueur in 2007?

But it happened.

In fact, it happened yesterday.

Yes, the SEC has opened the second (or possibly third, depending on how you count an abortive 2005 case against the unrelated hedge fund Rhino Advisors) administrative proceeding alleging illegal naked short selling in its storied history. And we should be very happy about that. I know I am!

But I’m also bothered by the above alluded-to fact that Rhino Trading and FSTG are really just insignificant patsies, cast, like a pair of white-robed virgins, into a fiery volcano to appease the angry gods in Congress intent on forcing the SEC to do what it would really rather not (it’s job).

In the complaint, FSTG and Rhino are accused of illegally shorting such long-time threshold listees as USANA, iMergent, Medis Technologies, and NovaStar: all companies that experienced extreme levels of naked shorting for much longer periods of time than those described in the SEC’s action, and on a level unattainable by a firm headquartered at the end of a dirt road 90 miles from NYC.

In fact, certain very reliable sources confirm that a major hedge fund – one which has received much more than its fair share of coverage on this site – was coordinating media and message board attacks on one of these targeted companies during precisely the same period.

And yet the wrist slap (in the form of a $45,000 fine and firm instructions not to naked short any more) goes to the guys set up in a converted barn with dial-up internet access.

Brilliant.

The SEC was a bit tougher on Rhino Traders. The company and principals Damon Rein and Steven Peter will pay several hundred thousand dollars between them, in addition to promising to mend their naked short ways. They will also consider themselves officially censured.

Take that!

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11 comments
  1. what would it take to show a list of the companies these folks illegally shorted?
    trading tapes or something?
    might be useful to show who was hit by these folks and see if any of our investments were a part of it.

    just a babblin on

    shawn

    1. Shawn,
      This appears on page six of the administrative action:

      During the relevant period, FSTG engaged in a large volume of reverse conversions and reset transactions in numerous threshold securities, including, but not limited to, iMergent, Inc., American Home Mortgage Investment Corp., and NovaStar Financial, Inc. As a result of FSTG’s repeated violation of Regulation SHO’s close-out requirement, it received ill-gotten gains of $45,000.

      During the relevant period, Rhino engaged in a large volume of reverse conversions and reset transactions in numerous threshold securities, including, but not limited to, Medis Technologies Ltd., NovaStar Financial, Inc., and USANA Health Sciences, Inc. As a result of Rhino’s repeated violation of Regulation SHO’s close-out requirement, it received ill-gotten gains of $350,000.

      1. thank you judd i wanted to know because of what happened to me with wells fargo.
        there was a reverse split on gold stock i bought into and wells fargo suspend my access to this stock and when i called them they told me i did not own the stock. my question was then if i dont own what is it doing in my account and what are these documents you sent me in the mail detailing my purchase?
        all i could do is watch thisinvestment go from 154k to zero
        so it would be interesting to know all their involvement in trading of nefarious nature. i cant give this up with wells fargo what they did to me was wrong. not only did they STEAL my money they caused us to file bankruptcy as a result of that loss not to mention the other aspects that this has caused me personally and my family.the last letter i got from wf was “as far as they are concerned the matter is closed” well i replied with yet another complaint to the sec with a letter saying i will pursue this till the day i die. also the main reason i am taking computer forensics. i intend to get to the bottom of this one way or another.
        they cannot treat people is this manner and get away with it wit impunity.
        thank you dc team for all your hard work.

        shawn (harveydawabbitt)

  2. harveydawabbit

    Looks to me you have a valid lawsuit against WF for recovery of the value of your shares on any day you could not access them

  3. It’s like when Mark Valentine, the kid, made $750 million dollars clear after all costs, was arrested by the FBI in Operation Bermuda Short in 2000

    http://network.nationalpost.com/np/blogs/fpposted/VALENTINE.jpg

    then got to keep all of his money and serve a few months of house arrest in his Florida mansion before returning to his Toronto mansion.

    The running joke in the industry is that when the brokerage he owned (Thompson Kernaghan) went bankrupt for screwing everyone, he wrote off his loss and collected $15 million in tax refunds from the Canadian tax payers because his hundreds of offshore accounts where the screwing originated were anonymous.

    The bottom line is it isn’t so bad to pay a $45,000 speeding ticket if the crime fills your bank account with money.

    Investors are programmed to think “I lost money because the economy is bad” without understanding that their money went into someone else’s wallet.

    If they could just understand the scams that transfer money illegally from their wallet to someone else’s, they might, just finally get pzzed off.

  4. Bravo Judd, well done, thx! I especially appreciate the clarification about the diff rhinos & the wrist slap mention verified by a search of rhino regulatory actions at the sec website which is very informative, as are you!

    Corrected – Conforming to Federal Register Version
    SECURITIES AND EXCHANGE COMMISSION 17 CFR PARTS 200 and 242 [Release No. 34-60388; File No. S7-30-08] RIN 3235-AK22 Amendments to Regulation SHO
    AGENCY: Securities and Exchange Commission. ACTION: Final rule….
    EFFECTIVE DATE: July 31, 2009…..
    http://www.sec.gov/rules/final/2009/34-60388.pdf
    17 In 2003, the Commission settled a case against certain parties relating to allegations of manipulative short selling in the stock of a corporation. The Commission alleged that the defendants profited from engaging in massive “naked” short selling that flooded the market with the stock, and depressed its price. See Rhino Advisors, Inc. and Thomas Badian, Lit. Rel. No. 18003 (Feb. 27, 2003); SEC v. Rhino Advisors, Inc. and Thomas Badian, Civ. Action No. 03 civ 1310 (RO) (S.D.N.Y); see also Exchange Act Release No. 48709 (Oct. 28, 2003), 68 FR 62972, 62975 (Nov. 6, 2003) (“2003 Regulation SHO Proposing Release”) (describing the alleged activity in the case involving stock of Sedona Corporation); 2004 Regulation SHO Adopting Release, 69 FR at 48016, n.76; Exchange Act Release No. 58774 (Oct. 14, 2008), 73 FR 61666 (Oct. 17, 2008) (“Anti-Fraud Rule Adopting Release”).

    61666 Federal Register / Vol. 73, No. 202 / Friday, October 17, 2008 / Rules and Regulations
    http://www.sec.gov/rules/final/2008/34-58774fr.pdf
    SECURITIES AND EXCHANGE
    COMMISSION
    17 CFR Part 240
    [Release No. 34–58774; File No. S7–08–08]
    RIN 3235–AK06
    ‘‘Naked’’ Short Selling Antifraud Rule
    AGENCY: Securities and Exchange
    Commission.
    ACTION: Final rule….
    …8 In 2003, the Commission settled a case against
    certain parties relating to allegations of
    manipulative short selling in the stock of a
    corporation. The Commission alleged that the
    defendants profited from engaging in massive
    ‘‘naked’’ short selling that flooded the market with
    the stock, and depressed its price. See Rhino
    Advisors, Inc. and Thomas Badian, Lit. Rel. No.
    18003 (Feb. 27, 2003); see also SEC v. Rhino
    Advisors, Inc. and Thomas Badian, Civ. Action No.
    03–civ–1310 (RO) (S.D.N.Y) (Feb. 26, 2003); see
    also Securities Exchange Act Release No. 48709
    (Oct. 28, 2003), 68 FR 62972, 62975 (Nov. 6, 2003)
    (‘‘2003 Regulation SHO Proposing Release’’)
    (describing the alleged activity in the settled case
    involving stock of Sedona Corporation); 2004
    Regulation SHO Adopting Release, 69 FR at 48016,
    n.76. …

    a search of rhino regulatory actions at the sec website is very informative

    1. So, the question is can all of us that lost money invested in the targeted company’s persue civil actions against rhino et al now?

  5. Keep up the good research. We’ll all march if they don’t listen.

    I’m hopeful of some real change. This administration can still do it.

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