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A comment to the
SEC explains the abysmal failure of Regulation SHO to
date.
(emphasis mine) [my
comment]
OT..Subject:
File No. S7-12-06
Subject:
File No. S7-12-06
From: Lynn Keith
September 15, 2006
Ms. Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-0609
Re: Amendments to Reg SHO Release No. 34-54154
File No. S7-12-06
Secretary Morris:
Thank you for the opportunity to comment on the abysmal failure of
Regulation SHO to date, and specifically on the amendments the SEC is proposing
to fix it.
As other commenters have pointed out, Section 17A of the 1934 Securities
Exchange Act is very clear in mandating "prompt and accurate clearance
and settlement of securities transactions, including the transfer of record
ownership..."
Wall Street has become very adept at the "clearance" part of the
transaction -- that is, the taking of a customer's money for the purchase of
securities and the charging of commissions and fees for the purchase of
securities. But Wall Street has more and more ignored its fiduciary duty in
completing the "settlement" part of the transaction that is, delivering
the securities the customer has paid for...even though non-delivery of stock
is expressly forbidden by Section 9 of the Securities Exchange Act. More
often than not, what is "delivered" is an electronic entry in the
customer's account representing an IOU for the security they purchased -- an
IOU the customer is completely unaware he holds, and which too often is
unsupported by any underlying share certificate.
This delinking of the clearance and settlement of transactions has
resulted in hundreds of millions of undelivered equity securities being
outstanding on any given day in the U.S. equities markets. This is blatant
and outright fraud -- the taking of money for a product which is never
delivered. [Agreed]
As far as elimination of the Grandfather Exception to Reg SHO, I find it
ironic that the SEC would even ask for comment on something which is so
clearly illegal and in such obvious violation of Section 17A of the 1934
Securities Exchange Act to begin with. The SEC does not now, nor has it ever,
had the authority to exempt illegal behavior. Period. What on earth was the
SEC thinking when it allowed implementation of the Grandfather Exception? [The
SEC can think? I see no evidence of that in the last 20 years] Section 36 of
the 1934 Act specifically prohibits the SEC from creating any exceptions to
the 1934 Act except "...to the extent that such exemption is necessary
or appropriate in the public interest, and is consistent with the protection
of investors."
Allowing Wall Street firms to continue to NOT deliver the securities their
customers have already paid for--which is what the Grandfather Exception to
Reg SHO does--is nothing more than condoning and institutionalizing
fraudulent activity and theft which has already taken place [Absolutely
agreed]. The Grandfather Exception must be eliminated. DTCC participants and
options market makers have had well over a year and half to close out the
fails which existed when Reg SHO was first implemented. If they have
not done so by now, they obviously don't intend to, and these fails should be
immediately bought-in. That the grandfathered fails have not been closed out
by now is testament to the confidence naked short sellers and their
facilitators have that their powerful allies at the DTCC will continue to
protect them from any enforcement of SEC delivery rules.
It is noted that this blatantly illegal "grandfathering" provision
was NOT part of the proposed Reg SHO language which was originally put out
for public comment prior to Reg SHO implementation [SEC = corrupt]. No
wonder. I guess even the SEC was too embarrassed to risk doing that.
One can only assume that the SEC was convinced by DTCC participants--i.e.,
powerful Wall Street interests--that the fail-to-deliver problem was so
pervasive and so systemic in the U.S. markets that there was risk of a market
meltdown if they were actually forced to deliver all the securities they had
fraudulently created out of thin air and "sold" to their
unsuspecting customers over the years [Wall Street sold billions, if not
trillions, of imaginary securities. If the SEC forced them to buy real
securities to replace these imaginary/fraudulent ones, the US financial
system would collapse. The US financial system apparently can’t operate
absent theses fraudulent sales of these imaginary securities]. And as they so
often have over the last 35 or so years, the SEC caved in and did what Wall
Street wanted -- which was to NOT upset Wall Street's very profitable
applecart. [The urge to throttle a regulator returns.]
In 2005, the average diversified stock fund returned 6.7%, the average
stock rose just 3%, and the small slice of the country known as Wall Street
paid its employees $21.5 BILLION just in BONUSES [what annoys me by far the
most is just how much money the Wall Street executives were paid to drive the
US financial system into a ditch.] -- over and above their normal salaries.
Bloomberg reports Wall Street's 2006 profits are on track to exceed last
year's bonus amounts by at least 15 per cent. As these massive and
unconscionable bonuses reflect, when the 11,000 DTCC participants are able to
loan out over and over and over again the same shares, and are able to sell
shares which don't exist, much of the time never delivering to buyers the
securities they thought they had bought, but instead are allowed to
deceitfully mark their customer account statements as if they had delivered
the shares ...well, this obviously has been extremely profitable for Wall
Street firms...to the clear detriment of investors' retirement and investment
accounts. [Agreed]
In a related matter, the Cayman Islands has just announced that it now has
more than 8,000 registered hedge funds, an increase of more than 2,000 funds
compared to the beginning of 2005. The announcement was quick to point out
that the Cayman Islands provide hedge funds--with estimated assets of over a
trillion dollars--with a "no tax" jurisdiction, and therefore the
ability to achieve "measurable savings."
So we have 8,000 hedge funds paying no taxes on the massive profits they
make from defrauding investors by taking their money and refusing to deliver
the product they paid for. And the recently passed 2006 Pension Reform Act
will automatically funnel even more retirement money to Wall Street to be
"redistributed" from the retirement accounts of American citizens
to the coffers of off-shore hedge funds. [Learning how Wall Street works is
like sinking into a bottomless toxic swap]
By whatever name you call it--market manipulation, naked short selling,
failing to deliver, or stock counterfeiting [selling imaginary shares] --it
all describes fraudulent stock trades that have become a spreading cancer in
the system -- a malignancy that threatens to bring down the entire U. S.
equity market.
As a long-time observer and investor in the U.S. markets, it appears to me
that the "...prompt and accurate clearance and settlement of security
transactions..." mandate of the 1934 Securities Exchange Act began to
unravel about the time of the formation of the DTC and the NSCC--and later,
the DTCC. These organizations, formed in response to the paperwork crisis of
the late Sixties, were staffed and advised by people who had Wall Street's
best interests at heart -- not investors. If one puts a charitable face
on it, one could say that the SEC was simply naive at the time these
organizations were formed, and trusted them to "do the right thing"
in exercising their fiduciary duties and complying with the Congressional
mandate of protecting investors. If one is not charitable--and any number of
recent incidents, including the Aguirre firing, the SEC's refusal to
cooperate in the investigation of that firing, the Refco debacle, the Vonage
scandal, the revolving door of SEC employees leaving that agency and
subsequently landing high-paying jobs at Wall Street firms and law firms
representing Wall Street firms [this “revolving door” is a
travesty], and a general lack of enforcement of securities laws linking clearance
and settlement over the past 35 years are certainly disturbing in this
regard--one is forced to conclude that the SEC has been corrupted from its
original mission of protecting U.S. investors and has shifted its focus to
protecting the profits of Wall Street firms and hedge funds [Agreed. The SEC
only cares about “saving the financial system” (ie: Wall Street)].
This latter conclusion is unfortunately borne out by comments made by the
likes of Annette Nazareth while she was Director of Market Regulation at the
SEC. With more and more evidence of market manipulation due to naked short
selling and the non-delivery of shares coming to light every day thru FOIA
data and otherwise, this ill-informed bureaucrat had the arrogance and
audacity to make the statement that companies and shareholders who complained
about their stock being manipulated were just 'annoyed' because they 'wanted
their stocks to go up.' That a person displaying this kind of attitude was
later promoted to the SEC Commission is extremely troubling, and as long as
this obviously ignorant and totally incompetent individual is on the SEC's
payroll, it will be difficult for the agency to regain any credibility at all
among investors.
For the SEC to remain true to its Congressionally mandated mission, it
must realize that the DTCC is not its friend. It is not the friend of
investors. Its sole motivation is to increase and protect the profits of its
11,000 participant firms. Asking--or assuming--that this organization
will adhere to the investor protection mandates of the 1933 and 1934
Securities Exchange Act on the "honor system" will not work.
Because it has become more and more clear that exempting options market
makers from Reg SHO provisions has rendered Reg SHO completely useless in
controlling naked short selling, the SEC is finally proposing to limit the
options market maker exception [Never happened]. This obvious loophole in Reg
SHO was pointed out in numerous comment letters to the SEC prior to Reg SHO
implementation, and one can only surmise that, again, the SEC was persuaded
by DTCC participants to overlook its Congressional mandate to protect
investors because it might impact negatively on Wall Street profits. [When
the dollar collapses and the full extent of the SEC/fed/Wall Street
corruption comes to light, there will be violence. Millions of Americans are
going to die (elderly who can’t afford medical care with their savings
wiped out). If you think Main Street is mad at Wall Street now, just wait.
You haven’t seen nothing yet. I would advise regulators, past and
present, to either start doing their job or get out of the country before it
is too late.]
Ever since the CBOE was founded in 1973 and trading began on options
(prior to that, the only way to realize the value of a purchased option was
to buy the stock from the options dealer, and then sell the shares on the
exchange), options market makers have been enjoying windfall profits while
being subsidized by equity investors. Apparently, though, at the time
options trading began, there was some realization how negatively option
activity could impact share prices and cause problems with prompt clearance
and settlement of trades, since it took four years for Wall Street to
convince the SEC to allow trading in put options.
The massive downward pressure on share prices by manipulative put option
activity is harmful to many, many stocks but is particularly acute with the
Reg SHO Threshold stocks. With these heavily-shorted stocks, short sellers
have found they can easily circumvent high borrow fees by instead buying
large numbers of put options, thereby letting the options market makers do
the naked short selling for them as they hedge their positions. This is being
done for the sole purpose of allowing the hedge funds to engage in activities
which Reg SHO was supposed to prevent. With their Reg SHO
"exception" from prompt delivery rules, the options market makers
create millions of counterfeit shares, enabling and facilitating the
shortsellers in their manipulative schemes to drive down the price of their
targeted stocks.
If the SEC is truly interested in investor protection, it must eliminate
the market maker exception in Rule 203 of Reg SHO completely [Agreed], and
require a pre-borrow on the part of ALL market makers and specialists.
I note with shame--as should the SEC--the comment letter from Research
Capital Corporation (RCC), a Canadian brokerage firm that has tried to
"buy-in" failed deliveries of Overstock.com on 39 separate
occasions. In each attempted buy-in, the failed delivery has simply been
replaced by another delivery commitment which also fails. ["buy-in"
refers to a process by which the buyer of securities, whose seller fails to
deliver the securities contracted for, can 'buy in' the securities from a
third party with the defaulting seller to make good.]
This brokerage firm also states it has requested proxies for its clients
which it is not receiving -- which reveals another problem engendered by
naked shortselling. That is, the massive over-voting of proxies. A number of
independent studies, as well as work done by the Securities Transfer
Association, has revealed that over-voting has taken place in every single
company studied. Such over-voting means only one thing: That there are far
more people and institutions who think they own shares than there are
legitimate shares to go around [Key point. Over-voting can only be explained
by the widespread presence of imaginary/fake shares], and that there are
millions of "phantom" or "counterfeit" shares in clients'
accounts -- IOU's with no underlying stock certificates supporting them. ADP
actually has an algorithm that "adjusts" shareholder votes by
throwing out votes, making a mockery of the shareholder rights which are
supposed to attach to share ownership.
As Frank Partnoy, law professor at the University of San Diego, has noted,
"It might seem incredible, but shareholder voting in developed countries
is more tainted than voting in undeveloped ones. Some shareholders' votes are
counted, others are not."
Since the clearance and settlement system of the U.S. securities markets
has been so badly corrupted and is currently dysfunctional, RCC suggested in
its comment letter that the SEC review the buy-in rules of other countries,
including those used in Canada. They could also have suggested Australia,
Japan, Euronext, the London Stock Exchange, Singapore, Austria, and Germany.
All of these countries and exchanges have strict share delivery requirements,
and all function very well without the numerous delivery "exceptions"
allowed by the SEC for certain favored Wall Street groups.
Is it not embarrassing that the capital markets of all these other countries
are more honest in their clearing and settlement processes than the United
States?
Unfortunately, RCC is not the only foreign company to see the U.S.
securities market for the way it is. While Wall Street/DTCC interests have
been successful in having most New York financial publications--which they
largely control--downplay the magnitude of the fail-to-deliver problem, a perusal
of foreign media and investor message boards and internet blogs, all with an
international audience, clearly shows that the perception is growing all over
the world that the U.S. equity securities markets are as crooked, corrupt and
manipulated as those of any third world country...and that the SEC is doing
nothing about it. [US media = mostly useless]
This is truly shameful and humiliating...and should not be the case for
the most powerful nation on earth. [The US is not worthy of the title
“most powerful nation on earth”. It is only an empty shell of its
former self, living on borrowed time.]
There have been many thoughtful suggestions made in a number of the
submitted comment letters for ways to eliminate current short selling abuses
and correct the fail-to-deliver problem. It won't be easy [There
is no way to “fix” a ponzi scheme. The only choices is to trying
to hide the truth or facing reality]. For while the DTCC has sought to
minimize the perceived size of the problem, the reality is that it is a large
and growing one, and it will require courage and fortitude on the part of the
SEC to fix it. Selling non-existent shares, and loaning out the same
shares over and over again for high borrow fees have been immensely
profitable activities for Wall Street interests -- and you can be sure they
will object strenuously to giving up those easy, albeit illegal, profits.
[Agreed]
I hope Chairman Cox and his Commission are up to the task of bringing back
market integrity, investor protection, and investor confidence in the U.S.
securities markets...because if they are not, they will no doubt go down in
history as being the regulators on whose watch this century's first great
Stock Market Crash took place. The problem is that serious...and that close
to the tipping point.
Edmund Burke observed that: "The only thing necessary for evil to
flourish is for good men to do nothing." [Agreed]
The SEC has done nothing for too long about the fraudulent and illegal
practice of naked short selling. It's time now to act decisively to stamp out
this evil once and for all.
Sincerely,
Lynn Keith
Individual Investor
cc:
Senator Chuck Grassley
Senator Arlen Specter
Senator Orrin Hatch
My reaction: I am
really happy to have found this email. It expresses my opinion and outrage
about naked short selling.
1) The clearance and settlement system of the US securities markets has been
so badly corrupted that it is currently dysfunctional.
2) Wall Street has increasingly ignored its fiduciary duty in completing the
"settlement" of its client’s trades (ie: delivering the
securities the customer has paid for)
3) More often than not, what is "delivered" to customers is an
electronic entry in the customer's account representing an IOU for the
security they purchased (called “share entitlements”).
4) Selling Non-existent Shares is blatant and outright fraud: the taking of
money for a product which is never delivered.
5) Despite not having the authority to exempt illegal behavior, The SEC has
grandfathered past sales of imaginary shares, allowing Wall Street firms to
continue to NOT delivering said securities (which their customers have
already paid for).
6) DTCC participants and options market makers have had years to close out
the fails which existed prior to Regulation SHO. Since they have not done so
yet, they obviously have no intention of ever doing so.
7) The SEC has failed to protect investors by allowing brokerages to
deceitfully mark their customer account statements as if they had delivered
the shares.
8) exempting options market makers from Reg SHO provisions has rendered Reg
SHO completely useless in controlling naked short selling.
9) short sellers have found they can easily circumvent high borrow fees by
instead buying large numbers of put options, thereby letting the options
market makers do the naked short selling for them as they hedge their
positions.
10) Research Capital Corporation (RCC), a Canadian brokerage firm, has tried
to "buy-in" failed deliveries of Overstock.com on 39 separate occasions,
and, in each attempted buy-in, the failed delivery has simply been replaced
by another delivery commitment which also fails.
11) Over-voting has taken place in every single company studied. Such
over-voting means only one thing: That there are far more people and
institutions who think they own shares than there are legitimate shares to go
around.
12) ADP actually has an algorithm that "adjusts" shareholder votes
by throwing out votes, making a mockery of the shareholder rights which are
supposed to attach to share ownership. Shareholder voting in developed
countries is more tainted than voting in undeveloped ones.
13) Wall Street/DTCC interests have been successful in having most New York
financial publications downplay the magnitude of the fail-to-deliver problem.
14) Selling non-existent shares and loaning out the same shares over and over
again for high borrow fees have been immensely profitable activities for Wall
Street. They are unlikely to give up those easy profits without a fight.
Conclusion: At
this point, I would advice owning US stocks through a Canadian brokerage
firm. Owning shares through a US institutions must be considered unsafe,
given the complete lack of regulation.
Eric
de Carbonnel
Market Skeptics
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