Tag Archive | "DTCC"

Prepare to be astounded

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Prepare to be astounded


I’ve got everything ready to go for my next post, save one thing: the most current stock delivery failures data, corresponding to the second half of January, which the SEC was supposed to have made available yesterday.

I’m particularly eager to get that batch, because it has the capacity to confirm or rule-out my ability to predict the future.

See, I believe I know, to within a few percentage points, how some of that delivery failures data — up to this point supposedly known only to the DTCC and SEC — will read.

But instead of going mad waiting for it to be posted, I’m going to very publicly make my prediction here and now, and then follow up with the actual numbers once published. I shall then take my clairvoyant victory lap around the tiny office where I sit.

Therefore, I do predict the following:

With a margin of error of +/-2.5%, Shares of Sears Holdings Corporation (NASDAQ:SHLD) will be shown to have experienced CNS delivery failures of the following magnitudes on the indicated dates:

1/29/2010 879,444
1/28/2010 873,222
1/27/2010 870,570
1/26/2010 851,904
1/25/2010 848,742
1/22/2010 865,266
1/21/2010 857,106
1/20/2010 1,535,508
1/19/2010 1,540,914

Please check back often between today and tomorrow (or whenever the SEC gets around to posting the final numbers) to learn how accurate my predictions turned out to be, how I arrived at them, and why this is very bad news for our capital markets.

(note: on 2/22 at 8:27am MST I adjusted my prediction)

Posted in Featured Stories, The Crime: "Naked Shorts" & Other Insincere IOUs, The Deep Capture CampaignComments (62)

Yet another naked shorting disinformation campaign laid bare

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Yet another naked shorting disinformation campaign laid bare


It’s difficult to overstate the influence of Wikipedia these days, particularly when it comes to informing media coverage. A recent experiment, carried out by a student in Ireland, makes this very clear. So it should come as no surprise that those who wish to minimize the perceived impact of illegal naked short selling on markets and the economy as a whole have made the online encyclopedia a major point of focus.

Recently, yet another effort to infiltrate and alter the content of Wikipedia by a proponent of illegal shorting came to light and was foiled. As before, the infiltrator was former Business Week reporter Gary Weiss (whom a senior contributor recently termed “one of [Wikipedia’s] most slippery sockpuppeteers”), operating for over a year in complete defiance of an edict specifically banning him from the site based on his very well-documented history of abusing Wikipedia for his own conflicted purposes.

In the past (as you can read about here), we know Weiss spread misinformation relating to stock fraud via Wikipedia on behalf of the Depository Trust and Clearing Corporation (DTCC), the Wall Street firm considered a key enabler of illegal short selling. Exactly who’s sponsoring Weiss these days is unclear; however, as the evidence that follows will demonstrate, his concerted effort to whitewash DTCC’s Wikipedia article makes that company the prime suspect.

Now that his ruse has been uncovered – yet again – the focus becomes one of identifying and repairing the damage done. A brief review of some of the thousands of changes made by Weiss will give you a sense of both the scope of the problem and the nature of his motives. I’m organizing the following tiny sampling of Weiss’s Wikipedia edits by topic, with the content as it originally appeared on the left, with Weiss’s changes on the right. Words added or removed appear in red.

As you read what follows, ask yourself two questions:

  1. Which version, be it the left (before Weiss) or the right (after Weiss), better reflects reality and serves readers (particularly journalists) seeking to form an opinion?
  2. What might be Weiss’s motive for obsessively making these changes (and literally hundreds more like them)?
Wikipedia Article Before After
Depository Trust & Clearing Corporation While there is no dispute that illegal naked shorting happens, there is a fight as to the extent to which DTCC is responsible. Some blame DTCC as the keeper of the system where it happens, and charge that DTCC turns a blind eye to the problem. Critics blame DTCC as the keeper of the system where it happens, and charge that DTCC turns a blind eye to the problem.

Depository Trust & Clearing Corporation In 2007, WayPoint Biomedical sued DTCC for DTCC’s refusal to comply with a subpoena request for documents that Waypoint needs to track trades in the company’s shares.

Depository Trust & Clearing Corporation The DTCC has also denied having any relationship with financial journalist Gary Weiss. Weiss is alleged to have manipulated an account on Wikipedia, with assistance from several Wikipedia administrators, to promote naked short selling on the website from January 2006 to March 2008. (added by others and removed by Weiss five times)

Depository Trust & Clearing Corporation DTCC has been sued with regard to its alleged participation in naked short selling. Further allegations about DTCC’s possible involvement have been made by Senator Robert Bennett and discussed by the NASAA and in articles — disagreed with by DTCC — in the Wall Street Journal and Euromoney. DTCC has been sued over alleged participation in naked short selling.

Depository Trust & Clearing Corporation The U.S. Securities and Exchange Commission (SEC), however, views naked shorting as a serious enough matter to have initiated two separate efforts to restrict the practice.

Naked short selling Author and reporter Gary Weiss maintains that the SEC enacted Regulation SHO in part due to pressure from a handful of small and microcap companies. He also cites economic justifications for naked short selling and downplays its significance as a problem for the market.
(note: upon making this change, Weiss also added a link to his book, referring to himself as a source of “notable media opinions.”)

Naked short selling Amidst growing concern in 2008 about the effect of naked short selling on faltering companies, the SEC issued a temporary order restricting short-selling of the shares of 19 financial firms deemed systemically important. Shortly following the failure of Lehman Brothers in September of 2008, the largest bankruptcy in U.S. history, the SEC expanded the temporary rules to remove exceptions and to cover all companies. As part of its response to the crisis in the North American markets in 2008, the SEC issued a temporary order restricting fails to deliver in the shares of 19 financial firms deemed systemically important. In September of 2008, the largest bankruptcy in U.S. history, the SEC expanded the temporary rules to remove exceptions and to cover all companies.

Naked short selling During hearings on the 2008 financial crisis before the House Committee on Oversight and Government Reform, former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. During hearings on the 2008 financial crisis before the House Committee on Oversight and Government Reform, former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. However, Fuld’s testimony was generally derided as self-serving.

Naked short selling Rolling Stone magazine featured naked shorting in an article, “Wall Street’s Naked Swindle” by Matt Taibbi, in October 2009. In the article, it was reported that an unknown investor had shorted $1.7 million worth of Bear Stearns stock through a variety of options. For the item to make a profit, Bear Stearns would have had to have lost half its value or more in less than nine days. When Bear Stearns collapsed, the options were worth $270 million, or 159 times its previous value. Rolling Stone magazine featured naked shorting in an article, “Wall Street’s Naked Swindle” by Matt Taibbi, in October 2009.

Naked short selling Rolling Stone’s Matt Taibbi presentation on Naked Shorting

Naked short selling In an October 2009 article in Rolling Stone magazine, journalist Matt Taibbi wrote that there had been an attack on Bear Stearns and Lehman Brothers in March 2008 employing “naked short-selling”.

Naked short selling Effective September 18, 2008, amid claims that aggressive short selling had played a role in the failure of financial giant Lehman Brothers, the SEC made permanent and expanded the rules to remove exceptions and to cover all companies. Effective September 18, 2008, the SEC permanently removed an exemption for market making in options on stocks, and making an explicit anti-fraud regulation relating to that activity. The stringent delivery requirement is temporary.

Naked short selling https://www.deepcapture.com/ Blog devoted to naked shorting practices

Robertson v. McGraw-Hill Co. In the article, Weiss described…Weiss claimed…Weiss told how…Weiss described…Weiss’ report was distributed…Weiss’ predictions… The article described…it claimed…The article told how…it described…the article was distributed…the article’s predictions

Robertson v. McGraw-Hill Co. In the suit, Robertson requested $1 billion in damages for, in Robertson’s words, “false and defamatory statements” contained in Weiss’ article. Media response to the suit noted the unusually high damages demanded for a libel suit and speculated that the case would be watched with concern by the publishing industry. The suit was subsequently settled without payment of damages, and Robertson’s fund closed in March 2000.

Michael Milken Starting in June 2009, a series of articles by Mark Mitchell were published on a website called Deep Capture about Milken’s ties to a select group of hedge funds and the stock manipulation of a company called Dendreon (NASDAQ:DNDN). Dendreon has developed a drug called Provenge that enables the human body’s immune system to better fight prostate cancer. (removed by Weiss and replaced by others at least three times)

If there is a silver lining to this cloud, it’s the following: Wikipedia’s current ruling Arbitration Committee, which has the unenviable task of, among other things, dealing with Weiss and his continued efforts to subvert their authority, is genuinely interested in doing the right thing in this situation. Though you might take that for granted, I can assure you that this has not always been the case. Indeed, at one time, Wikipedia’s ArbCom seemed to go out of its way to enable Weiss’s abuse of this most important social media platform, resulting in (if you can believe it) an even greater number of yet more dramatically skewed and self-serving changes to these articles by Weiss.

Wikipedia has come a long way since then.

Finally, it seems unlikely that Portfolio.com, where he authors a business column, is aware of Gary Weiss’s actions. They would probably appreciate knowing more. If you agree, consider sending a brief and informative note to Condé Nast Publications Group President David Carey: David_Carey@condenast.com.

Postscript: If you’re at all unclear on why you should be bothered that DTCC seems to have hired former journalist Gary Weiss to cover-up the crime of illegal of naked short selling, I strongly suggest you check out Lila Rajiva’s recent post on the composition of that company’s board of directors.

_____________________

And now, for what long-time readers of DeepCapture.com will recognize as my favorite part of writing about Gary Weiss: a little running up of the score (piling on with additional insights that don’t necessarily make the case on their own, but certainly make the case much more entertaining).

After discovering the Wikipedia edit placing Gary Weiss within the Fort Knox-like DTCC (see this for the explanation, if you didn’t already follow the link above), I sent DTCC spokesman Stuart Z. Goldstein the following email:

From: Judd Bagley
To:
Stuart Goldstein
Sent:
Wed, 31 Jan 2007 10:24 PM
Subject:
media inquiry
Mr. Goldstein,
Yesterday I received some information suggesting Gary Weiss either is or has been hired or retained by the DTCC (or DTC or NSCC). Can you confirm the existence of a professional relationship between Gary Weiss and your organization?

More than two days passed with no response. Finally, I received the following:

From: Stuart Goldstein
To: Judd Bagley
Date: Fri, Feb 2, 2007 at 12:00 PM
Subject: your inquiry

*** Body Not Included ***

That’s right…the body of the email read only “*** Body Not Included ***”

With that, I responded:

From: Judd Bagley
To: Stuart Goldstein
Date: Fri, Feb 2, 2007 at 1:20 PM
Subject: Re: your inquiry

Mr. Goldstein,
Thanks for your reply, though the body appears to be missing…may I trouble
you to re-send your reply?

Goldstein’s record-breaking response (especially considering his earlier reply took two days to arrive) hit my inbox three minutes later:

From: Stuart Goldstein
To: Judd Bagley
Date: Fri, Feb 2, 2007 at 1:23 PM
Subject: Re: your inquiry

My response to your question is no.

On the surface, this would seem to be Goldstein denying a relationship between DTCC and Weiss. The problem is, I didn’t ask a yes or no question. I asked him to confirm something specific, to which he responded “no.” The answer didn’t fit.

I twice asked Goldstein to clarify his response, and was twice ignored.

That’s when I realized I’d been played.

Goldstein’s quick reply of “My response to your question is no” was probably calculated beforehand as his response to my inevitable request that he re-send the reply which read only “*** Body Not Included ***”.

He got me.

Here’s how this applies to Weiss.

Weiss’s most recently-banned Wikipedia sockpuppet, known as JohnnyB256, generally began to arouse suspicion in September, following a series of extremely slanted edits to the Wikipedia article on DTCC. At that time, multiple Wikipedia editors asked JohnnyB256 if he had a relationship with Gary Weiss. JohnnyB256 avoided answering the question (other than to dismiss it as “unmitigated gall”) until a senior Wikipedia administrator known as Lar inserted himself into the conversation to say he felt it was a “reasonable question.”

JohnnyB256 then responded, in a way that was unambiguously directed to Lar alone, saying, “The answer to your question is ‘no’.”

Only problem is, Lar was the one person who never asked him the question. Unfortunately, nobody picked up on this serpentine strategy at the time, allowing JohnnyB256 to claim he’d already answered the question of  a link to Weiss when it came up from time to time.

Anybody else suspect Weiss and the DTCC are using the same playbook?

Posted in AntiSocialMedia with Judd Bagley, Featured Stories, The Deep Capture Campaign, The Hijacking of Social MediaComments (64)

Three short hours inside the SEC

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Three short hours inside the SEC


I’m usually a real optimist. Sometimes to a fault, according to my more balanced wife. But when it comes to financial market reform, I’ve devolved into a deeply cynical pessimist.

Too many stinging disappointments, I suppose.

Too many instances of people behaving badly, to be certain.

But as they say, there’s some value in expecting the worst…you’ll never be disappointed.

And so it was with today’s second and concluding session of the SEC’s roundtable on securities lending and short selling: I expected the absolute worst, but in the end was pleasantly surprised to find that it wasn’t quite as bad as I feared.

That’s not the same as proclaiming it a good thing, because it was not. Indeed, I stick by yesterday’s characterization of the event as farce with a pre-determined outcome.

Having said that, I was deeply impressed by two surprises I clearly had not anticipated. And I’ll get to those in a moment.

But first, an overview.

There were two panels. The first examined proposed pre-borrow and hard locate requirements — keys to closing two of the most dangerous remaining loopholes in the US stock settlement system. The second panel examined proposals requiring enhanced disclosure of short selling data — a good idea but ultimately one that would be much less necessary were the proposals discussed in the first panel enacted.

I’ll start with the second panel, which surprised me by coming down overwhelmingly in favor of more transparency in short selling.

Georgetown University Professor James Angel pointed out that greater disclosure would essentially be doing legitimate short sellers a favor, by vindicating them in cases when they are incorrectly accused of manipulation in response to stocks dropping in value.

David Carruthers, of short selling analytics firm Data Explorers, supported greater transparency in short selling where the goal was to “prevent market abuse and prevent the development of a false market, or to prevent situations where market participants take advantage of a vulnerable company.”

Richard Gates, founder of short selling hedge fund TFS Capital, denied that shorting exacerbated the onset of the current financial crisis, but went on to concede that there should be greater disclosure parity on the short and long sides of market activity.

Michael Gitlin of investment manager T. Rowe Price echoed the position of Professor Angel in saying real time reporting of short versus long sales would result in the “demystification of short selling,” adding, “The ongoing debate of what caused an individual security to decline would largely disappear with this added level of transparency.”

As the lone issuer represented on the panel, Jesse Greene, Vice President of Financial Management at IBM, was enthusiastically in favor of a general overhaul of the SEC’s short selling regulatory framework, including public disclosure of short positions, in order to “improve market stability and restore investor confidence.”

Joseph Mecane, Executive VP at NYSE, noted that market fragmentation has made it more difficult to detect manipulation, requiring regulators have access to more short selling data in order to better conduct market surveillance.

In other words, the second panel was a slam dunk in the right direction.

The first and ultimately more meaningful panel, on the other hand, was the Yin to the second panel’s Yang.

Appropriately enough, Managing Director of the Equities Division at Goldman Sachs (NYSE:GS) William Conley kicked things off, lamenting that “both the pre-borrow and hard locate requirement would require significant infrastructure builds on the part of the industry as well as its participants.”

By “infrastructure builds”, Conley is referring to the development of new software able to track down real shares for short sellers to borrow. He seems to have forgotten three things:

  1. When there’s money to be made, Goldman Sachs has a rare talent for developing extremely complicated software. Could it be that Conley never met former co-worker Sergey Aleynikov?
  2. LocateStock.com, then a bootstrapping startup, developed software that accomplishes precisely the same task Conley regards as so burdensome, on a shoestring budget.
  3. If Goldman Sachs has enough cash on hand to spend nearly $12-billion in employee bonuses this year, it can probably set a couple hundred thousand aside to write some crumby software.

As I predicted yesterday, much of the balance of Conley’s mic time was spent echoing the anti-reform talking points currently being circulated on Capitol Hill by his employer’s army of lobbyists — in some cases, verbatim.

William Hodash, Managing Director at DTCC, took us on a trip to his organization’s mindset circa 2005 by pointing out that fails to deliver are not necessarily evidence of naked short selling. With one foot remaining firmly in 2005, another in 2009 and a third in a pile of his own illogic, Hodash then said that the reduction in fails observed before and after the SEC’s implementation of Rule 204 “may be relevant to the discussion of whether naked short selling remains a problem.”

No, you didn’t miss anything. That’s what he said, with all remaining panelists basically pleading some variation of the on his and Conley’s approaches.

With one very prominent exception: Dennis Nixon, Chairman of International BancShares Corporation (NASDAQ:IBCA).

Looking at the program, I had assumed that IBCA’s role on the panel was that of a broker or other market intermediary. Well I was very wrong. IBCA was there in the role of an issuer targeted by naked short sellers, and Nixon very poignantly expressed the anguish of someone in his position, after a 45-day long bear raid removed $1.2-billion in IBCA shareholder value.

“And I think it was all attributed to this predator-type short selling that goes on in this market today that’s uncontrolled. It’s unbelievable,” Nixon said.

That was the first surprise.

The second surprise came from an even less likely source: Commissioner Elisse Walter.

Mostly silent throughout the previous day’s panels, today Walter made it clear that she’s not buying the excuses offered by industry representatives insisting this problem is too much for them to tackle.

“I’m sort of surprised that the industry hasn’t come up with a solution, particularly as this controversy has continued to swirl and does not go away,” Walter said, adding that by failing to address the issue, the industry is essentially passing the cost of non-compliance on to the SEC’s own Division of Enforcement.

I think she’d make a stronger case had the Enforcement Division brought more than two cases against naked short sellers in its entire history, but that’s a topic for another post.

The bottom line is, this panel was undeniably stacked against any additional meaningful steps to limit illegal naked short selling, but the contributions of Dennis Nixon and Elisse Walter were as welcomed as they were unanticipated.

The entire affair could have been much better, but also could have been much worse.

Posted in Featured Stories, The Deep Capture CampaignComments (22)

The Pendulum Swings

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The Pendulum Swings


Pendulum_animationBack in college, where the combination of free time and that university mojo so often lend themselves to this sort of thing, a friend and I challenged each other to cram the most undeniable truth into complete sentences of the fewest possible words.

In the end, we settled on the following:

“Entropy increases” and “The pendulum swings.”

The first sentence is a reference to the Second Law of Thermodynamics.

The second sentence is a reference to the fact that cultural trends will always increase in pervasiveness and acceptance until some limit is broached, at which time opposing forces will be applied that cause society to respond with increasing negativity toward that trend. And, as with an actual pendulum, the higher the upswing, the more forceful the push back will be.

How true both are.

I first encountered the market reform movement near the end of 2005. Over the months that followed, I witnessed the following:

  1. An SEC staffer in San Francisco subpoenaed the communications of Jim Cramer, Herb Greenberg, Bethany McLean, Carol Remond and a handful of other “journalists” suspected of colluding with Gradient Analytics and short selling hedge fund Rocker Partners, only to have SEC Chairman Chris Cox personally sabotage the effort. This was followed up almost immediately by the SEC vindictively subpoenaing Patrick Byrne.
  2. FOIA requests filed with the SEC intended to give some sense of the scope of the delivery failure problem were regularly denied or spitefully filled with minimal accompanying explanation.
  3. Numerous brutal articles were published attacking opponents of naked short selling – Byrne primarily among them – under the bylines of (surprise) Jim Cramer, Herb Greenberg, Bethany McLean, Carol Remond, Joe Nocera, and Roddy Boyd.
  4. Audio tape captured by a market reform operative who covertly accessed a panel discussion featuring Herb Greenberg, Joe Nocera and Dan Colarusso (then Roddy Boyd’s editor) hosted by the Society of American Business Editors and Writers. The theme of the discussion was essentially “How do we deal with these lying anti-naked short selling bloggers who are so critical of us?” Among other things, the tape caught Joe Nocera saying (to loud applause) he felt life was too short to bother understanding whether naked shorting is actually a problem, and Dan Colarusso saying he and his newspaper had the capacity to “crush” Patrick Byrne.
  5. An all-out PR offensive launched by the Depository Trust & Clearing Corporation (DTCC) attacking opponents of naked short selling.
  6. The emergence of Gary Weiss, an ostensibly credible former business journalist and blogger, bursting onto the scene, proclaiming naked short selling beneficial and its opponents crazy.
  7. The hijacking and distortion of the Wikipedia article on naked short selling by whom we would soon learn was none other than Gary Weiss. Given journalists’ well-documented over-reliance on Wikipedia, this was undoubtedly a key factor in our difficulty getting them to provide more balanced coverage of the issue.
  8. A special session of the Utah Legislature which, catching the banks flat-footed, resulted in passage of a law requiring brokerages with operations in Utah to promptly disclose stock delivery failures. But before it could go into effect, and after the prime brokers managed to rally their armies of lobbyists, the law was handily repealed.
  9. Unprecedented growth of companies on the Reg SHO Threshold Securities list, indicating that, contrary to the intended aim of Regulation SHO, naked shorting was becoming increasingly prevalent.

On balance, it was a very dark time for the market reform movement, as every charge was followed by a blistering counter-charge, and every lunge answered by a quick parry. More than once, I recall hearing even the staunchest market reformers openly question the capacity of a rag-tag band of revolutionaries to counter the enormous influence and resources brought to bear by the hedge funds and prime brokers who were getting rich from the practice of manipulative naked short selling, and I couldn’t help but wonder whether I’d picked the wrong battle.

That’s not to say I ever doubted the correctness of the cause – only the correctness of my decision to join a fight that sometimes seemed impossible to win and certain to result in damage to my reputation as it had to Patrick Byrne’s and so many others’.

But in those moments of doubt, I’d remind myself of an eternal truth: the pendulum swings.

In other words, as dark as those days were, there would invariably be restraining forces applied to help slow – and eventually stall and even reverse – the momentum built up by decades of Wall Street villainy and the deep regulatory capture of the institutions intended to counter it.

What we could not have realized – as such perspective only comes with time – is that we (meaning, you, me, and everybody else who’s taken steps to do something about illegal naked short selling) were in fact the very restraining forces so many of us were expecting to arrive, cavalry-like, from some unknown quarter, and that as dark as those days seemed, they appeared quite bright to those who had endured the 1990s and early part of the current decade, when the practice persisted, without restraint, like a drunken orgy.

Of course, the event that finally brought the pendulum to a decisive halt and reversal was the current economic crisis, which saw the term “naked short selling” dragged into the popular lexicon (as determined by Yahoo! listing it as one of its five most popular search terms in September of 2008).

Since then, as the link between naked short selling and the beginning of the crisis itself has been solidly established, valiant members of Congress – most notably Delaware Senator Ted Kaufman – have dragged the issue of naked short selling into the political lexicon, as well.

Where are we today?

  1. The SEC recently enacted permanent restrictions on illegal naked short selling, which include greatly enhanced disclosure of delivery failures and shorting activity.
  2. Today, the SEC brought its first enforcement cases against illegal naked short selling.
  3. Also today, FINRA expelled a member firm for engaging in illegal short selling.
  4. Jim Cramer has been deeply and publicly shamed. Herb Greenberg is now a ‘consultant’. Bethany McLean has left business journalism. Dan Colarusso continues looking for steady employment. Roddy Boyd, Carol Remond and Joe Nocera all retain their former positions, but seem to steer clear of anything resembling the issue of naked shorting.
  5. The DTCC is mum on the issue as well.
  6. Gary Weiss – since abashed and banned from Wikipedia – sinks ever deeper into obscure irrelevance while the Wikipedia article on naked short selling that he once controlled has been liberated and made to read nearly as it should.
  7. Substantive legislation with the capacity to end illegal naked short selling and other short-side market abuses once and for all is currently working its way through Congress.
  8. As of today, the Reg SHO Threshold Securities list is 23% shorter than it was on the day I met Patrick Byrne (and 90% smaller than it was at its height in July of 2008), and is nearly devoid of the kinds of promising, well-capitalized companies whose inclusion used to be a sure sign of an impending bear raid.

These are all developments that seemed impossible in the dark days of 2006.

But here we are.

Yes, the pendulum is now unambiguously swinging in our direction, but the job is not done. Indeed, we can only be assured of progress to the extent that we each recognize our responsibility to continue pushing.

Posted in Featured Stories, The Deep Capture CampaignComments (59)

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It Only Hurts When I Laugh


The Congressional Research Service is a Library of Congress think-tank with just one client: Congress.  A member of Congress requests a study on a subject of interest, and CRS researchers generate it. The CRS is one of the most respected institutions in Washington, DC, and its output is universally considered non-partisan, objective, and thorough.

Last Tuesday, February 24, 2009, the Congressional Research Service published a 40 page report, “Who Regulates Whom? An Overview of U.S. Financial Supervision” (Mark Jickling, Edward Murphy, CRS, February 24, 2009)  As the title suggests, the report is a primer on the parts of the US financial system, and who regulates which part.  As the Summary section puts it:

“This report provides an overview of current U.S. financial regulation: which agencies are responsible for which institutions and markets, and what kinds of authority they have….This report does not attempt to analyze the strengths and weaknesses of the U.S. regulatory system. Rather, it provides a description of the current system, to aid in the evaluation of reform proposals.” (Page 2)

And in the Introduction:

“A number of studies and reports have already proposed broad changes to the division of supervisory authority among the various federal agencies and in the tools and authorities available to individual regulators. This report provides a basis for evaluating and comparing such proposals by setting out the basic structure of federal financial regulation as it stood at the beginning of the 111th Congress.” (Page 5)

And describe the basic structure of the the financial system, its regulators, and their regulatory principles, it does, thoroughly, in 35 more pages of clear and informative, if not exactly gripping, prose. It covers US banking regulation and federal securities regulation, the regulation of derivative trading and of GSE’s such as Freddie Mac and Fannie Mae, and the non-regulation of foreign exchange and US Treasuries, nonbank lenders, hedge funds and venture capitalists. I confess it answered every question I could think to ask regarding the parts of the US financial system and which office of government regulates each part. I commend Messiers Jickling and Murphy for so thorough and well-organized a review of that subject.

There’s just one thing: it does not mention the Depository Trust and Clearing Corporation. In fact, it does not mention securities settlement.

Does that seem strange?

Consider this: The regulatory structure of the US capital market was set in the Secuties Exchange Act of 1934. It devoted a section (immediately after the section on Directors, Officers, and Principle Shareholders, and the section establishing the need to keep records), to describing the need for a “National System for Clearance and Settlement of Securities Transactions” (Section 17a). Its opening is instructive:

“a. Congressional findings; facilitating establishment of system

“1. The Congress finds that–

“A. The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.

“B. Inefficient procedures for clearance and settlement impose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.

“C. New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.

“D. The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.”

It seems that in 1934 Congress thought having securities transactions clear and settle promptly was pretty important.

Which makes it especially odd that in 2009, in the Congressional Research Service’s admirably thorough report on the parts of the US financial system and the regulators who oversee them, no mention is made of that “”National System for Clearance and Settlement of Securities Transactions”  whose establishment Congress in 1934 found “necessary for the protection of investors.”

I am reminded of an event from early 2005. It was the early days of the Mitzvah. I was having trouble synthesizing the data. It would be more honest of me to say: the data suggested that our settlement system was Swiss Cheese, an enormous derivative risk was building up that no one understood, the same SEC to which I had spent a lifetime looking up in awe and fear was actually lapdog to a tight circle of Wall Street crooks, the savings of America were being looted, and it was all going to end in systemic collapse.  But clearly, I thought, that’s crazy. So I was having trouble forming a hypothesis to fit the data, other than a crazy one.

I decided to find out who regulated the DTCC. Listen to what they had to say. No doubt I’d learn some piece of the puzzle that I was missing, something that would cause the light bulb to go on and me to say, “Oh, that’s where this is coming from. Oh, I see, there’s nothing to worry about after all.”

The problem was, I could not find out who regulated the DTCC. It was not on their website. I couldn’t find any government agency that claimed to regulate the DTCC, or any news story that mentioned the subject of DTCC regulation. A core finding of Congress in 1934, in the foundational document of modern regulation, established that something had to be done, but 71 years later I could find no evidence that it was the job of anyone in the federal government to do it. And that’s odd because usually government agencies fight turf wars over who gets to regulate this or that. But here was a great vital section of the Securities Exchange Act of 1934, authorizing the establishment of a crucial component of the system, yet no one seemed to be doing it.

That can’t be right, I thought. Clearly just another moment of bad craziness.

So I went to see two securities lawyers whom I knew socially. I asked them if they would research something for me, that I would be willing to pay them for their time, and that they did not have to worry about writing anything formal. I just needed from them one simple sentence of the form, “The DTCC is regulated by _____ .” They agreed to produce it.

A week later I went to visit them. For some time they sat hemming and hawing and scratching their heads, until finally they told me: “We can’t seem to find anything that establishes who regulates the DTCC, or even if it is regulated. We found one mention of the subject, in a footnote in a GAO report from a couple years ago. They say they think the SEC regulates the DTCC, but they don’t sound very sure.”

From the looks of it, neither is the Congressional Research Service.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?

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Lecture on abuse of social media by stock manipulators


I recently lectured business students at the University of Texas, on the topic of abuse of social media by stock manipulators. I’ve merged the recording of the lecture with my slide presentation and converted it to video below. For the larger, interactive slideshow version, click here.



As a post-script, I found this experience to be a very positive one, and would welcome similar opportunities in the future. Please contact me via email at: antisocialmedia@gmail.com
If the information contained in this presentation concerns you, and you wish to help, then:
1) email it to a dozen friends;
2) go here for additional suggestions: “So You Say You Want a Revolution?

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Mr. President, Settle the Trades


If President-elect Obama is serious about pulling the economy out of its death spiral, he must urgently appoint a task force to investigate our nation’s clearing and settlement system. Specifically, the American people need to know how it has come to be that a black box outfit on Wall Street is empowered to handle (or, rather, completely fumble) securities transactions worth more than $1.5 quadrillion – that’s 30 times the gross product of the entire planet – without any real government oversight.

This black box organization–the Depository Trust and Clearing Corporation (DTCC)–claims to “centralize, standardize and streamline processes that are critical to the safety and soundness of the capital markets.” In other words, if somebody sells a security, the DTCC is supposed to make sure that a real security is cleared, settled, and delivered to its purchaser.

But it does not do that. We have long known that the DTCC enables brokers to routinely fail to deliver the stock that they have sold on behalf of their hedge fund clients. All the while, the DTCC has waged a fierce and grossly misleading public relations campaign aimed at convincing the public that illegal naked short selling (which results in extended failures to deliver) is not a problem.

This is appalling given that even the exchanges’ limited data show that failures to deliver peaked at more than 2 billion shares last summer, just before the SEC issued its temporary “emergency order” protecting 19 financial companies from naked short selling. That is, on most days in June, there were more than 2 billion phantom shares circulating in our markets.

In fact, the problem is much larger than that. Many fails occur “ex-clearing” and in other parts of the system that are not monitored by the exchanges. But we do not know precisely how large the problem is because the DTCC has refused to release complete data.

What is certain, though, is that 70% of those failures to deliver were concentrated on no more than 100 companies – driving down the companies’ share prices, and making it difficult for them to raise the capital they needed to survive. The affected companies included Bear Stearns, Lehman Brothers, Washington Mutual, Merrill Lynch and several dozen other now-defunct financial firms.

And it is not just stock that isn’t getting delivered. Euromoney, the most respected financial publication in Europe, has revealed that there are massive failures to deliver even of U.S. Treasuries. “Failures in U.S. Treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007,” Euromoney reported last week. “That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October – more than 20% of the daily treasuries trading volume.”

More than $2 trillion worth of phantom Treasuries – that cannot be good for the economy.

Bloomberg Newswires, meanwhile, recently reported that investors are complaining that Goldman Sachs is routinely failing to deliver corporate loans that it sells. According to the complainants, Goldman’s traders are selling debt that they do not own in order to further the destruction, and profit from the short selling, of public companies that are its own clients.

This is not surprising. Goldman is the proud owner of what used to be called Spear, Leeds & Kellogg – a brokerage that was long known as the most egregious perpetrator of naked short selling. Goldman has, of course, joined the DTCC and few miscreant hedge funds in trying to cover up the problem.

A similar outrage is occurring in the market for credit default swaps (bets that borrowers will default on their debt). Hedge funds and brokers are selling (quite often to themselves) virtually unlimited numbers of these swaps, even when they do not correspond to any real underlying debt. These are phantom swaps – and the increased volume creates the perception that target companies are on the verge of collapse, which of course, benefits the hedge funds, which are simultaneously short selling the phantom stock..

The DTCC has the authority to crack down on delivery failures. It has the power to tell us who, exactly, is committing the crimes.

Unfortunately, the government has no power over the DTCC. Officials from the Securities and Exchange Commission, which has limited oversight, admit that they have no clue how the DTCC operates and that they visit the organization only once a year.

So, of course, the DTCC protects the criminals. It protects the criminals because it is owned by the criminals. That is, the DTCC is a quasi-private organization owned by Wall Street brokers – the very same people who serve the hedge funds who seek to profit from the destruction of our economy.

This seems to me like a pretty big scandal.

And yet, aside from the excellent but sporadic reports from Bloomberg and Euromoney, the media continue to act as if there is nothing to see. The financial crisis, we read over and over in The Wall Street Journal, was caused by those bad subprime mortgages—end of story.

This is what we read because too many journalists have only two kinds of sources: hedge fund managers and people who do nothing more than repeat what they hear on CNBC. And CNBC has two kinds of sources – those same hedge fund managers and people who do nothing more than repeat what they read in The Wall Street Journal.

And thus is the conventional wisdom woven from a vicious cycle.

We can only “hope” that the new president’s economic advisers are honest people who know that truth resides in the details – not in the noise, not in a black box, and not in the tacky mansions of Greenwich, Connecticut.

* * * * * * * *

P.S. One encouraging sign is that former Deputy Secretary of Commerce Robert Shapiro has been named to Obama’s transition team. Shapiro is one of the world’s foremost experts on naked short selling and failures to deliver. He has plowed through the data — he knows all the details – and he understands the seriousness of the problem. Maybe he can make the president understand, too.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?

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Emails show journalist rigged Wikipedia's naked shorts


For anybody familiar with this site, the following, published today in The Register, will be a reprise of a well-worn tale. But believe me…it’s still well worth the read…

Two and a half years ago, Overstock.com CEO Patrick Byrne penned an editorial for The Wall Street Journal, warning that widespread stock manipulation schemes – including abusive naked short selling – were threatening the health of America’s financial markets. But it wasn’t published.

“An editor at The Journal asked me to write it, and I told him he wouldn’t be allowed to publish it,” Byrne says. “He insisted that only he controlled what was printed on the editorial page, so I wrote it. Then, after a few days, he got back to me and said ‘It appears I can’t run this or anything else you write.'”

The Journal never changed its stance. But last week, the editorial finally saw the light of day at Forbes – after Byrne added a few paragraphs explaining that naked shorting had hastened what could turn out to be the biggest financial crisis since The Great Depression. (get the rest here)

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Emails show journalist rigged Wikipedia’s naked shorts


For anybody familiar with this site, the following, published today in The Register, will be a reprise of a well-worn tale. But believe me…it’s still well worth the read…

Two and a half years ago, Overstock.com CEO Patrick Byrne penned an editorial for The Wall Street Journal, warning that widespread stock manipulation schemes – including abusive naked short selling – were threatening the health of America’s financial markets. But it wasn’t published.

“An editor at The Journal asked me to write it, and I told him he wouldn’t be allowed to publish it,” Byrne says. “He insisted that only he controlled what was printed on the editorial page, so I wrote it. Then, after a few days, he got back to me and said ‘It appears I can’t run this or anything else you write.'”

The Journal never changed its stance. But last week, the editorial finally saw the light of day at Forbes – after Byrne added a few paragraphs explaining that naked shorting had hastened what could turn out to be the biggest financial crisis since The Great Depression. (get the rest here)

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Gary Weiss and DTCC: Roddy Boyd Responds


In an earlier item, I noted that perhaps one of the strangest things I’ve experienced as a reporter is having Depository Trust & Clearing Corporation (DTCC) spokesman Stuart Z. Goldstein ignore my request for comment for several days, only to receive an answer not from Goldstein, but from then-New York Post business writer Roddy Boyd.

Like any responsible journalist, it’s my policy to allow the subjects of my reporting an opportunity to respond when they are cast in a critical light. However, when approached for comment on something I wrote about him one year ago, Boyd made it quite clear that he would rather I not contact him for any reason, ever again.

Based on that exchange, I did not ask Roddy for comment when I recently wrote about what I perceive is his role in DTCC’s January 2006 PR campaign aimed at deflecting criticism of the organization’s role in enabling illegal naked short selling.

Recently, Roddy contacted me to take issue with four points I made in that piece:

  1. While I reported that Boyd appeared to be running interference for DTCC’s Goldstein when answering – on Goldstein’s behalf – my long-ignored request for comment on Gary Weiss’s apparent use of a DTCC computer, Boyd insists he was merely doing us both a favor by personally conveying to me Goldstein’s comments on the issue.
  2. While I suspect Gary Weiss has had an extensive relationship with DTCC, Boyd says DTCC’s Goldstein has personally denied as much to him on multiple occasions.What remains unclear is why, for 18 months, Goldstein has insisted on answering my questions through Roddy Boyd.
  3. While I reported that the publication of Roddy’s review of Gary Weiss’s second book appeared to be timed to support the launch of DTCC’s January, 2006 PR initiative targeting critics of naked short selling, Boyd denies this.Indeed, it is reasonable to consider the possibility that instead of Roddy timing the publication of his review of Weiss’s book to coincide with the launch of DTCC’s January 2006 PR initiative, the initiative itself might have instead been timed to coincide with the publication of Roddy’s review. This is a likely explanation, given Weiss’s apparent foreknowledge of the review’s publication date.
  4. While I reported that Boyd and Weiss had a relationship that predates Boyd’s review of Weiss’s book, Boyd says he and Weiss didn’t connect until just before January 22, 2006, and that Boyd received the book not from Weiss himself, but from the publisher sometime in early December, 2005.I based my original reporting upon an email exchange between Roddy and Floyd Schneider (read this to learn how I came to posses emails between the two) which leaves no doubt that by at least January 15, 2006, Boyd knew enough about Weiss know he and Schneider were friends, and that Boyd could confidently ask Schneider to dig up negative information about public companies featured in stories Boyd was working on at the time. Boyd insists that knowledge came not from his relationship with Weiss, but from reading Weiss’s book, which does prominently mention Schneider.

Though Roddy and I may not completely agree on our respective interpretations of the facts surrounding this episode, I appreciate his willingness to address them with me on the record.

Finally, I would suggest that anyone entertained by DTCC’s bizarre approach to public relations read this exchange between Stuart Goldstein and Fox Business News host Alexis Glick, to see that I’m far from the only person receiving inadequate responses to reasonable requests for comment made of Stu Goldstein.

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