Apparently Carol Remond’s piece of creative fiction for DJ didn’t get any traction, so the piece has been repeated with a few minor alterations and been put out by the DTCC. It is equally incorrect and misleading, and not surprisingly contains many of the same obvious inaccuracies, along with some new fish tales.
I already debunked Carol’s novella, so I won’t belabor the point too much, but will rather take chunks and do short debunkings for those that haven’t seen my previous work.
First, let's look at the obvious - The DTCC is paying for "publications" to assure investors that "regulators" think Reg SHO is working. Let's put aside that the term "working" isn't really defined, and is more of a feel good term. The real question centers around the DTCC's releasing this PR puff piece - why, one could ask? Why do they care, given that they are taking the position that there is no naked short selling liability at the NSCC or DTCC? I mean, it could be that someone at the DTCC just figured that it would be good for God and Country to clear things up, carefully parsing regulator statements to kluge together a semblance of concurrence from the regulators that Reg SHO is "working." But doesn't that strike one as odd? Anyhow, here's the meat of the piece with some of my comments...
“Regulators Say Reg SHO is Working
Business Wire - January 24, 2006 14:02
NEW YORK, Jan 24, 2006 (BUSINESS WIRE) -- Despite extensive examinations by the SEC and the markets, there has been little or no evidence of extensive "naked short selling" to date, according to comments made at a recent forum held by the North American Securities Administrators Association (NASAA).”
Huh. How about the FOIA requests showing hundreds of millions, and on some days billions of FTDs? They are viewable in the FOIA Request section of the COMPLAINT RESOURCES section of this site. That would be trades where investors paid their real dollars, the trade was booked, but no shares were ever delivered. Or how about Dr. Byrne’s on-record saga of failing to receive hundreds of thousands of shares of OSTK for months? Or even Craig Cunningham’s recent and ongoing failure to receive shares he held in a cash account – shares off limits for lending, and for which he has still not received one share? I guess all that escaped the filter…
“The forum was designed to examine how well Reg SHO, a regulation designed to modernize rules on short selling, had performed.
James Brigagliano, assistant director of market regulation at the SEC, said, "While there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without incident."
Which is either $1.2 billion, or $20 billion per day that don’t settle on time, depending upon which numbers you use. Concentrated in mostly a few companies on the Reg SHO list. Again, for which real dollars are paid by investors every day, and for which no product is delivered. I wonder why all the fancy dancing from Brigagliano – why doesn’t he just tell us the dollar amount per day? Or why doesn’t he tell us the number of FTD’s per day, and total? Why all the slippery rhetoric? And why is a 1% failure rate in these days of Six Sigma fault tolerance acceptable, much less a success? As discussed before, what if 1% of the population of a city was murdered every day – would that be good? Or what if you failed to deliver 1% of the computers you took money for on EBAY every day – would you be arrested? What if 1% of the blood supply had HIV slip into it, PER DAY?
This is a pretty standard technique we see day in and day out in this discussion, where the regulators and the DTCC try to make it seem that this is a small problem - by avoiding the obvious: this is a problem which is not spread evenly across many thousands of stocks - it is highly concentrated in a handful, thus is hugely destructive to the few that are the recipients of that $1.2 billion of fails per day. It isn't all companies, but rather just a few, who have the lion's share of these fraudlent trades. We could speak more accurately to this, but we don't have the data - the SEC keeps it secret from us. At 1% it can be made to seem that it is a small issue, however if that 1% of dollars is largely in 30 to 50 companies, and could well represent the majority of their trading for months at a time, it is a catastrophic issue for those companies. I wonder why the SEC avoids that simple and obvious truth?
“Brigagliano said the SEC conducted examination at 45 broker/dealers and asked the markets to look into the trading of securities in which large amounts of "fails to deliver" have been registered.”
Would that be the same Brigagliano that clearly indicated that any opinions he advanced at the forum were his own, and NOT those of the SEC, necessarily?
Huh. I wonder if REFCO was one of those investigated – and I wonder if they were subjected to the same level of scrutiny wherein the SEC failed to discover the mutual fund front-running that was ESTABLISHED POLICY at a number of the funds later charged with abuse, or the analyst abuse that remained undiscovered by the SEC for years, or the Specialist misconduct that they failed to catch? Is it just me, or does this mean less than nothing?
“Anand Ramtahl, vice president in the New York Stock Exchange's division of member regulation, told panelists that the exchange was conducting rigorous examinations of its members to make sure they are complying with Reg SHO.
NYSE officials noted later that when Reg SHO went into effect in January 2005, the exchange had 78 issues on the threshold list. (The threshold list contains the names of issues that have more then one-half of one percent of their shares failing to be delivered.) As of early January 2006, the number of NYSE issue on the list had dropped to 37 issues.”
I wonder how many dropped off the list because they went BK? Like Delta? Or were delisted? Or even better, how many simply had their FTDs transferred into the ex-clearing system to be hidden from view? I would ask, but nobody will tell. Odd, that.
“Cameron Funkhouser, NASD's senior vice president of market regulations, told the forum that NASD had found no evidence of rampant naked short selling. He also noted that although a number of companies have in the past alleged their shares have been manipulated through the listing of their stocks on foreign stock exchanges, he had found no evidence of such activity.
"We took (these allegations) very seriously," Funkhouser said. "We have seen not one instance of naked short selling or any abusive short activity" through foreign exchanges."
Acutally, if you look at the NASAA transcript, he didn't say that. He didn't tell the forum that NASD had found no evidence of rampant naked short selling - he just did not say that - I read the transcript word for word, and that is pure invention. It is a mis-statement of another quotation that Cam made regarding Berlin, not the US markets, thus is beyond misleading in the context they use it. Why would the DTCC distort this in this blatant a manner?
He also didn't say they hadn't seen one instance of naked short selling or any abusive short activity through foreign exchanges - he said that he had gone to Berlin, and found not one instance of naked short selling or any other manipulative activity involving the Berlin issues. That is a huge difference, and I am amazed that the DTCC attributes quotations that don't exist in the record to Cam. It speaks to a general facility with bending the truth that is disturbing from the DTCC, especially with respect to the statement that the NASD had found no evidence of rampant naked short selling - I challenge anyone to find that global, all-encompassing statement about our market, which in the context of the DTCC's release is how it reads.
Bud Burrell can speak to Cam's Berlin trip, given that prior to their trip to Berlin he sent Cameron’s boss, Mary Shapiro, a detailed letter explaining precisely how the exchanges had been used by manipulators to fraudulently justify their international arbitrage claims (a loophole) – and that it did NOT have anything to do with short selling through the exchanges, or hedging. So Cameron’s statement is akin to the agency being told that the neighbor’s dog has bitten hundreds of people, and responding that he had investigated, and found that there were no incidences of the neighbor’s pet (their cat, of course) abusing (scratching) anyone (not mentioning that he never asked about the dog). It is simple dishonesty hiding behind a carefully crafted statement that is defensible as “technically correct” after the fact – in much the same manner that Clinton’s famous Cigar and BJ adventures with Lewinsky were hidden by his “technically correct” insistence that they didn’t constitute “sexual relations” – because of carefully parsed distinctions made in his mind…Is anyone fooled by this stuff?
“The Depository Trust & Clearing Corporation was not invited to attend the NASAA forum, but officials noted that 85% of all fails were resolved within 10 business days (i.e., before any buy-in would be allowed under current rules), and 90% resolved in 20 business days. DTCC does not regulate short selling, naked or otherwise. However, it compiles lists of fails each day and provides that data to the market regulators.”
A flat-out falsehood.
The DTCC was invited to attend, and declined, per Dr. Suzanne Trimbath's comments during the NASAA meeting, in an exchange with Ralph Lambiase, on page 46 of the NASAA transcript. As to their numbers, they are saying that 85% of the unknown numbers of FTDs were “resolved” within TWO WEEKS, and another 5% took a FULL MONTH. The remaining 10% went on longer. Of course, no clarification for the word “resolved” is offered.
Is “resolved” where the Stock Borrow Program lends the shares to the NSCC, and the failed seller still hasn’t delivered, but it is “resolved” because the buyer got a share from the Borrow Program? Or is “resolved” when the trade is moved ex-clearing so that delivery is never tracked from that point on? Or is it “resolved” when it is “bed and breakfasted” at a compliant broker just in time to avoid scrutiny from Reg SHO?
Dave Patch of InvestigatetheSEC points out that "wash sales" can easily be used to game these statistics: 1.) Execute a Trade that results in a fail, cover that trade with yet another FTD. The initial FTD is closed and a new one opened. The aggregate FTD does not change, the clock is just restarted.
One could easily ask, where are the regulators on those 10% that are failed for more than a month? There is NO LEGAL justification on these FTD's (Dave's emphasis).
Now, back to "resolved" - note that English is simple to use. Words have specific meanings. Take “delivered” for example. Delivered means the product was delivered. “Resolved” doesn’t mean delivered. It means that a resolution was achieved – we don’t know what that resolution is, but if it was “delivered” I’ll bet we would have been treated to that word.
We weren’t. Wonder why?
So we have mis-statements, half truths, incomplete descriptions, and flat-out prevarications.
And these are our regulators, who are keeping the data secret, and who are saying “trust us.”
And note that none of the foremost experts in the field, who commented on the problem for hours, are cited in the release - it is as though the only words spoken were the official position statements by the SEC, NYSE and NASD, along with a post hoc slice of heaven from the DTCC. So why is all this spinning going on, with hours of testimony ignored (available here in the Library section under NASAA Transcript) in favor of highly misleading propaganda?
So here we have the DTCC lobbying to convince one and all that the regulators believe that SHO is working, and playing fast and loose with the truth in order to help their case. Wonder why that is? Why do they care enough to issue forth press releases/publications citing comments from a meeting that occured in NOVEMBER, and inventing quotes from the meeting?
Can this get any stranger?