My "version" of stock manipulation comes from a former SEC employee who wrote the following report. Are you saying this is not compelling evidence?
Excerpted from report of Robert W. Lowry dated January 31, 2001, RL Consulting Services, Inc., rendered on behalf of the plaintiff in Hemispherx Biopharma Inc. v. Manuel P. Asensio, et al.
Qualifications
... I have more than 28 years of experience with the Securities and Exchange Commission (“SEC”), including 23 years in the Division of Market Regulation. I have conducted numerous broker dealer examinations and self-regulatory oversight inspections of the National Association of Securities Dealers, Inc. (“NASD”) and the New York Stock Exchange (“NYSE”), while working in the Division of Market Regulation. ... My enforcement experiences included taking investigative testimony, analyzing trading data, preparing affidavits and schedules, and giving factual and expert witness testimony in federal court...
I have provided training to the Department of Justice, the NASD, the North American Securities Administrators Association, and the SEC on subjects relating to broker dealer regulation, underwriting and trading in the over the counter market (“OTC Market”).
Engagement with Litigation/Compensation
On April 29, 1999, I was engaged by the plaintiff to analyze the trading activity in Hemispherx Biopharma Inc. (“HBI”) beginning on July 1, 1998 (“trading period”). I was asked to render an expert opinion on whether the trading activity and the rice of HBI stock was the product of 1) the free economic forces of supply and demand, or 2) the manipulative short selling and defamatory statements by defendants and others. ...
In connection with this case, I performed an examination of the trading records of more than 25 broker dealers which traded in HBI common stock for the review period (i.e., order tickets, blue sheets, customer and broker dealer account statements), records of the American Stock Exchange (“AMEX”) and other Exchanges, records of the National Securities Clearing Corporation (“NSCC”), Plaintiff’s Second Amended and Supplemented Complaint, ACI [Asensio & Company, Inc.] press releases, depositions listed on Appendix A, price and volume reports, HBI news articles, HBI’s filings with the SEC, and reports concerning securities location and affirmative determination.
My examination was designed to identify and, if found, to assess the impact of 1) naked short selling (i.e., where HBI shares sold by sellers who did not own the security and could not deliver the security to the purchaser by the settlement date) and 2) trading ahead of research reports. The opinions expressed in this report are based upon my review of the referenced date, my review of the trading records, and the conclusions I draw from 1) trading patters; and 2) the actions of defendants in connection with HBI trading. These opinions are based on a reasonable degree of certainty in the field of securities regulation and securities industry customs and practices.
Opinion
... My examination in this case tested whether broker dealers, including ACI, complied with the SEC and NASD short sale rules. For a broker dealer to effect a short sale, it must sell at or above the last reported sales transaction price, and make an affirmative determination that it can borrow the security or otherwise effect delivery by settlement date. The NASD’s affirmative determination rule is designed to ensure the settlement of short sale transactions and to prevent short sellers from selling an unlimited supply of a security into the market (i.e., over supplying the market). If broker dealers do not comply with the short sale rules, the illegal short selling alters the economic forces of supply and demand by creating an oversupply of stock in the market, and dilutes the value of the shares in the public float.
...
ACI’s “Naked” Short Selling
My review of ACI’s activities found that between August 28, 1998 and September 17, 1998 ACI sold short more than 130,000 HBI shares into the market for its own accounts and the accounts of its customers. ACI did not deliver any of these shares to its clearing broker dealer, Spear Leeds and Kellogg (“SILK”). SILK produced records that demonstrated it was not contacted by ACI to borrow HBI shares during this period, and it did not lend any HBI shares to ACI. SILK has no record that it made any affirmative determinations on Asensio’s behalf or it’s short sales. However, ACI stamped on a photocopy of each ticket it produced in this Case that it made an affirmative determination it could borrow the securities. However, ACI stamped on a photocopy of each ticket it produced in this case that it made an affirmative determination it could borrow the securities.
It is my opinion that the stamps on the photocopies of the order tickets are not reliable evidence that ACI made affirmative determinations. My review of the copies of order tickets produced by defendants reflect that the “affirmative determination made” legend was stamped on the copies rather than the original order tickets. ... One employee, Chehrazad Mamri, testified that she wrote the words “affirmative determination made” or “okay to borrow” on the original order tickets, but she could not testify when those notations were placed on the order tickets. She also testified that Asensio directed her to make these notations sometime after the trades had been placed and that she was never involved in contacting any broker dealer to make such affirmative determinations. The original order tickets produced for inspection in the course of this litigation did not have any affirmative determination stamps on them. Another employee, Charles Stewart, testified in his deposition that the order tickets were not stamped on the day of the trade, and that the copies of the order tickets were stamped sometime after the date on which the trades were actually made, and could have been stamped after the Complaint in this action was filed.
In contrast to ASI’s order tickets, other broker dealers testified that HBI stock was impossible to borrow during this same period. One individual, Robert Brunson (Bear Stearns), testified that Bear Stearns could not locate any HBI shares between the end of August and early October 1998. He also testified that if Bear Stearns could not locate HBI shares, he did not believe any other firm could do so during the same period. Individuals from two other broker dealers (Goldman sacks and SILK) testified that HBI stock was on their “hard to borrow” or “impossible to borrow” lists during this period.
It is my opinion that ACI’s short sales for its own accounts and the accounts of its customers violated Rule 3370 of the NASD’s Rules of Fair Practice and that ACI knew these short sales were “naked” (i.e., it did not have a reasonable basis to believe it could deliver the securities it was selling to SILK, its clearing broker dealer, by the settlement date).
In August 1998, SILK had an open short position consistently between 120,000 and 300,000 HBI shares. In September 1998, SILK’s open short position grew to between 400,000 and 600,000 HBI shares. It is my opinion that these open short positions included the open short sales by ACI and its customers. ACI has not produced any evidence that HBI securities were, in fact, delivered to SILK for clearing on settlement date.
“Naked” Short Selling by Others
My examination found naked short selling activity by two other groups of investors: 1) customers of ACI who sold short in accounts maintained at other broker dealers; and 2) customers who sold short in accounts maintained at Canadian broker dealers.
The first group of short sellers (West Highland Partners, Andrea Lakian, Blue Ridge and Quilcap), had accounts both with ACI and other broker dealers although most of the trades were executed at the other broker dealers. I noted from testimony that each account had contacts with Asensio during the trading period. Andrea Lakian is the wife of John Lakian of Fort Hill Group, which leases and shares office space with ACI. Judy Stone (Quilcap), John Griffen (Blue Ridge) and Mike Wilkins (West Highland) were also personal acquaintances of Asensio.
The second group of short sellers (Bulldog, Steven Schechter and Paulson Partners) sold short substantial quantities of HBI shares through two Canadian broker dealers, Thomson Kernaghan and First Marathon. The short selling at the Canadian broker dealers is noteworthy because the U.S. broke dealers who executed the short sales for the Canadian broker dealers had no documentation that affirmative determinations had been made by them or the Canadian broker dealers. It does not appear that any of the shares sold by this group of short sellers were, in fact, delivered because both Thomson Kernaghan and First Marathon had deficits at NSCC consistent with the short selling volume. It is my opinion that these short sales were “naked” and that the short sellers did not have a reasonable basis to believe they could deliver the HBI shares to the clearing broker dealer by settlement date.
“Naked” Short Selling and ACI’s Negative Statements Impacted Price of HBI Shares
On August 28, 1998, ACI and the two groups of short sellers had a combined short position in excess of 390,000 HBI shares. The short positions for these investors grew to more than 865,000 HBI shares by September 17, 1998. The period between August 28 and September 17, 1998 is noteworthy because the market price for HBI shares remained strong despite the substantial short selling by ACI and these groups of investors. In fact, the price of HBI shares closed higher on September 17, 1998 ($9.625) than it did on August 28, 1998 ($8.50) and traded as high as $13.1875 on September 9, 1998.
It is my opinion that the demand for HBI shares was strong enough to sustain the price of HBI shares despite the illegal “naked” short selling by ACI and others until ACI made negative statements about HBI to the public in the form of a Business Week article that was first disseminated on the evening of September 17, 1998. Once this article was disseminated to public investors, the price of HBI shares dropped dramatically from $9.625 on September 17 to $5.25 on September 22, 1998. It is my opinion that the statements attributed to Asensio in the Business Week article would be subject to the anti-fraud provisions discussed above [omitted]. As a result of its activities, ACI was in a position to benefit financially because it established a short trading position prior to releasing the negative statements about HBI.
Trading Ahead of Research Reports
In November 1988, Congress enacted the Insider Trading and Securities Fraud Enforcement Act of 1988 (“ITSFEA”) which requires that all broker dealers to “establish, maintain and enforce written procedures reasonable designed” to prevent, among other things, the misuse of proprietary research and research reports by employee and proprietary accounts (the are referred to in the securities industry as “Chinese wall” procedures). ITSFEA also granted the Securities and Exchange Commission rule-making authority concerning these “Chinese wall” procedures. The SEC decided it would be best to rely on the NASD and the NYSE to establish minimum standards for broker dealers to comply with these procedures. ...
Each broker dealer was required to establish policies and procedures reasonably designed to prevent the misuse of inside information considering the broker dealer’s business, structure, size and other relevant factors. The intention to issue, update or downgrade a research recommendation was to be covered by these procedures. Such information could not be disclosed, prior to public dissemination, to anyone outside the Research Department (and in some instances to some within the Research Department) unless there is a need to know the information.
NASD rules governing just and equitable principals [sic] prohibit its members from trading ahead of research reports. Specifically, the NASD rules prohibit a broker dealer from engaging in trading activity that purposefully affects the broker dealer’s proprietary inventory position in a security in anticipation of the issuance of a research report.
ACI Traded Ahead of Its “Research Reports”
As previously noted, during the three weeks prior to the Business Week article, defendants took substantial “naked” short positions totaling more than 130,000 HBI shares. Of particular note, on September 17, 1998 (just prior to the release of the Business Week article), one ACI employee, Chehrazad Mamri sold short 750 HBI shares, and ACI sold short 10,000 HBI shares. Additionally, John Paulson, a close friend of Asensio, sold short 135,000 HBI shares on September 17, 1998. After the Business Week article was disseminated, the price of HBI declined and ACI was able to cover its short sales at a profit.
It is my opinion that the trading activity of defendants ACI and Asensio immediately prior to releasing a research report (i.e., the Business Week article) violated the provisions of ITSFEA, which requires a “Chinese wall” between a firm’s research department and its trading department and prohibits trading ahead of the dissemination of research reports. Asensio was the person who made all of the trading decisions on behalf of ACI and Asensio was the person who researched the companies ACI covered. |
