I don't follow IPVO but saw your post. You might also want to check out the latest information on the growing "naked shorting" scandal, particularly the information on the listing of US companies on the Berlin exchange against the company's wishes.
Naked Shorting - This is the best summary I have read. It is a great comment to the SEC - It's very long 43 pages so cut and paste to a Word document if you don't have time to read it. I have only pasted a tiny amount here. This is something that continues to affect us small/micro cap investors. You can make a difference here and your ultimate net worth will be affected.
sec.gov
Tiny excerpts from a very well-written comment
2) In 1(ii) "Had reasonable grounds to believe that it could borrow the security" is unbelievably subjective. What are reasonable grounds, "easy to borrow lists"? When writing these rules, we would suggest that you "PRETEND" that the naked short selling of micro cap securities represents perhaps the single biggest fraud ever perpetrated on U.S. investors and the integrity of the market is at stake and that the people that have made literally billions of dollars committing this fraud are looking for any potential loophole that will allow them to carry on the commission of this fraud ad infinitum. Plug all loopholes! Why would the SEC even consider allowing these crimes to continue? . . .
It is these thinly traded securities that are the most easily manipulated by predatory MMs and their associates in Canada as well as in offshore hedge funds. One would think that they would need MORE protection than the investors in Microsoft if anything. Solid development stage companies "incubating" on the OTC: BB and Pink Sheets are extremely fragile and very susceptible to predatory attacks. Unethical market makers and their co-conspirators have come to the conclusion that billions of dollars can be made while shooting these "fish in a barrel". The sobering reality is that these companies are a lot like sandcastles and naked short selling predators are a lot like beach bullies and we all know that it's a thousand times easier to destroy a sandcastle or a young public corporation than it is to build one.
9) We believe that the naked short selling problem is much more systemic than you at the SEC give it credit for. It is the collusion and complicity amongst MMs that needs to be addressed. Watch Level 2 trading and see how they operate as "packs" or "herds" in heavily naked short sold stocks. The mere act of sending these naked short selling accounts to naked short selling "jail" for 90 days will just result in handing the naked short selling baton to a different account or to a buddy MM. The offshore hedge funds would obviously just set up numerous accounts at many different MMs and b/ds and rotate naked short selling orders through those accounts not currently in naked short selling jail. Perhaps severe penalties, criminal and civil, should be administered to repeat offenders while any of their accounts are in "jail". The text of the explanation didn't address it, but we assume that these illegal naked short positions in excess of the Rule 11830 parameters will be bought in as the account goes off to 90-day jail. If not, why not? Why would the SEC not require the settlement of all securities transactions in U.S. markets? . . .
12) The invisibility of trading on the OTC: BB and Pink Sheets needs to be addressed. Even Level 2 visibility tells an investor absolutely zero about which market maker is buying and which is selling. What's the big secret? If a certain MM was selling 50 million shares of an issuer every month and buying none, month after month, this would be a nice thing to know. Don't you agree? If the SEC is strapped for cash and manpower then open up the visibility to investors and place a deputy's badge on them to protect their possessions. They are aptly incentivised to do a good job. The monthly disclosure of aggregate short positions and fails to deliver is critical to ending these abuses. There is no better disinfectant than the light of day. OF COURSE THIS WON'T HELP WITH FRAUDULENT SHORT SALES INTENTIONALLY MISLABELED AS LONG SALES.
13) I would hope that the SEC would treat naked short selling as a totally out of control systemic fraud that, if remains un-addressed, WILL cause cataclysmic damage to the integrity of our markets. We are of the opinion that the naked short selling fraud totally dwarfs the current mutual fund fraud even though there are currently $7 trillion currently sitting in these vehicles. Look at the egregious nature of selling entities that don't exist and bankrupting U.S. companies as well as investors, versus market timing issues or late trading issues. . . .
It really doesn't matter whether the actual initiator of the naked short sell order was a predatory financier selling death spirals, an offshore corporation set up in a tax haven with strict banking secrecy laws, an unregulated hedge fund, an Internet naked short selling "guru" or one of his disciples, a Canadian broker/dealer, etc. All of these orders go through U.S. market makers, U.S. clearing firms, and the DTCC. . . .
Abusive MMs love to spot a "stop loss sell order" down below the bid, sell a bunch of nonexistent shares knocking out underlying bids thereby "tripping" these stop loss sell orders. They then watch the PPS implode from long shareholders sensing a catastrophic sell off in process and selling out their long positions. This is a very common phenomenon known as market makers "shaking the tree" and is extremely easy to perpetrate because of the enhanced visibility these Wall Street "professionals" have and they love to use this leverage over the people to whom they owe a fiduciary duty. . . .
The concept that naked short sellers do not receive the proceeds of their sales until delivery is made is the second biggest misconception of naked short selling in existence and couldn't be further from the truth. Rule 11 at the NSCC says nothing of the sort indicated in the explanation of Proposed Rule SHO.
The only thing in the system that offers a slight check or balance to what these naked short sellers are doing is the fact that they must collateralize the loan that was made to mask the failed delivery. Recall that the critical intrinsic governor of only being able to short sell shares that can be legally borrowed has gone by the wayside in the case of naked short selling. As the constant selling of nonexistent shares drives the PPS from $5 to a penny, the amount of collateral needed to guarantee that debt is negligent at the 1-cent level. The proceeds of the sale of nonexistent shares at the $4 and $5 level are safely in the pocket of the fraudsters. That brings us to the single biggest misconception in the discipline of naked short selling, that being that the naked short sellers have to cover. They would be idiots to cover, all they have to do is to keep the price per share ("PPS") pinned down low and that's incredibly easy because they really do act like bona fide MMs at extremely low price levels because there are no real sellers and plenty of opportunistic buyers, and their supposed mandate is to provide liquidity by selling nonexistent shares into this disparity. . . .
23) We would hope that you learn about some of the mechanics of naked short selling through the Sedona case. Notice how the offshore Panamanian domiciled corporation working out of Zurich was utilized. Notice how multiple U.S. broker/dealers were used in series to obfuscate identities of the sellers. Notice the use of the market maker's proprietary account allowing access to the Rule 3370 exemption from borrowing before the sale of nonexistent entities meant for bona fide market makers only.
Space underneath this "umbrella of immunity from the borrow" entrusted to bona fide market makers only, is being rented out by market makers constantly. The rent payments are usually in the form of increased order flow. Notice also the use of ECNs to maintain yet more anonymity and how the ECN trades were done after the close. Notice the role of the "Internet bashers" paid to induce selling and dissuade buying. We would hope the Department of Justice will eventually get around to addressing these "shareholder advocates". Notice how once Rule 11830 was invoked and Sedona went onto the "restricted" list the immediate transfer of the naked short selling to Canadian broker/dealers.
Notice in the SEC press release that you mention that, "Canadian broker/dealers are not members of the NASD and are not subject to its short sale restrictions". Notice also the use of "wash sales" and "matched orders". Keep in mind that Rule 100 of the Canadian Investment Dealers Association allows naked short sellers to "hedge" positions in unregistered convertible securities that don't mature for years to come by selling nonexistent shares today. How can the SEC allow offshore brokers with lax rules and regulations to amalgamate the loopholes in their system with those in our system? Please closely study the Thomson Kernaghan bankruptcy and note the percentage of their business dedicated towards the naked short selling of U.S. micro cap corporations. This is not an isolated case as recent cases have revealed during their discovery phases.
The laxity, or more accurately nonexistence, of Canadian delivery laws is often referred to as the "tunnel under the border". They simply sit on "failures to deliver" for several years. Canadian broker/dealers enjoy access to the U.S. markets yet are not forced to follow the rules of the NASD and SEC. Please take note of the fact that there is no "affirmative determination" rule or Rule 3370 analogue in Canada. Not that this makes a whole lot of difference as the affirmative determination rules in the U.S. are riddled with loopholes and violations detected are met with minor hand slaps and a meaningless letter of censure. Nor is there a Rule 15c3-3 or 11830 analogue in Canada forcing buy-ins of undelivered shares after 10 days.
Notice also the incestuous ownership relationships of the offshore hedge funds utilized in these alleged frauds. The point being that there are thousands of "Sedonas" out there, some already bankrupt and others on their deathbeds. Death spiral financings probably don't even account for 1% of all of the naked short selling activity out there because of the easily recognized motive of the financiers. As heinous as the practice is, the convertible death spiral is a rather mild version of naked short selling. In the garden variety naked short selling the fraudsters pay nothing to the issuers and investors. They just take their money and run. The only expense they incur is the collateralization of the naked short position via margin maintenance requirements and/or net capital reserve requirements, but since these are tied to the "marked to market" share price that is in free fall, it is just looked upon as a cost of doing business and is minimal. At least predatory financiers cough up some money although often it is money from the sale of nonexistent shares of the victim company even before approaching them to do a financing. How's that for a slick fraud, take money from the investors in a company and hand it to the company in exchange for a floorless convertible security, and then use that convertible security to destroy the company completely? . . .
SUGGESTED ADDITIONS/MODIFICATIONS TO REGULATION SHO
1) Modifications to Addendum "C" of the rules and regulations of the NSCC and the automated "Stock Borrow Program" therein created is critical. The greatly perverted intent of this addendum was to allow trades involving shares that for one or more legitimate reasons could not be delivered by settlement date to go ahead and settle since their arrival was imminent.
Our research indicates that the abuse of the spirit of this extremely short termed exemption from delivery, when combined with allowing market makers to LEGALLY naked short sell into buy orders while theoretically wearing a "bona fide" MM hat (NASD Rule 3370), has resulted in synergies that abusive MMs and clearing firms and their co-conspirators have used to fleece micro cap investors for decades, thereby undermining the entire clearing and settlement process in the United States.
All you have to do is look at the age and magnitude of the "open positions" which in effect have masked the sale of nonexistent shares in the 7,500 U.S. public corporations trading on the OTC: BB and the Pink Sheets. We'll warn you in advance, this is going to be a very sobering experience. This is a national scandal of heretofore unheard of proportion. The nonexistent shares sold by and through these unethical market makers and clearing firms enter into the clearing and settling system at the DTCC via the smokescreen provided by the "Automated Stock Borrow Program". . . .
Further, the DTCC participant that "generously" rented his client's shares to the abusive market maker is highly incentivised to do this because he can convert a stock certificate or electronic book entry gathering dust into real cash that collateralizes this "loan". Everybody on Wall Street comes out a big winner as the investors watch their investments become worthless from the massive dilution attendant to this process. The "borrowed" share simply gets credited to the new buying b/d's account where it can be loaned out from tomorrow. At any given time, one "real" share can be loaned out in 43 different directions allowing the very temporary "good delivery" of 43 different illegal naked short sales and their clearance and settlement.
If the system had integrity, once loaned out a share would be sequestered off to the side until the loan is repaid. This "reverse Ponzi scheme" has been in existence for decades in a variety of other frauds. . . .
2) A "gatekeeper" must be installed to monitor "bona fide" MM activity. Selling millions of nonexistent shares of a stock month in and month out while buying zero, does not constitute "bona fide" MM activity. Nor does the hiring of paid Internet bashers to dissuade the buying and induce the selling of a targeted company's shares. If you don't think this is happening, let us give you a few company names along with the main manipulating market makers on each one, and you can do your own research via your subpoena powers. We are happy to provide the names of the bashers as well, to make your lives even easier. . . .
7) We would ask that the SEC realize the prominent role of offshore hedge funds working through Canadian naked short selling margin accounts. As you know, hedge funds with less than 100 participants do not need to follow the precepts of the 1940 ICA or Investment Company Act. They are allowed, for some unknown reason, to fly under the regulatory radar. Many U.S. MMs have very distinct ties to offshore hedge funds as you well know. Besides abusive MMs working through proprietary or non-proprietary accounts while theoretically under the umbrella of immunity from borrowing provided by acting as a "bona fide" MM, the next most common abuse we see are offshore hedge funds operating through Canadian margin accounts. This puts them two steps out of the SEC's grasp theoretically. Space underneath this umbrella of immunity from borrowing is very much for rent. Rent is most often paid by "order flow" to these unethical market makers.
When broken down into its simplest form, the clearing, settlement, and delivery system at the DTCC allows fraudsters to target a company, sell nonexistent shares in unlimited numbers (see, e.g., Pinnacle Business Management, Inc.), thereby creating a giant pile of money in their margin or proprietary accounts. These naked short positions at the DTCC must be collateralized at 130% but the collateral necessary is MARKED TO MARKET on a daily basis. This explains in part why you will see 100 or 200 share prints at the bid on thinly traded OTC:BB and Pink Sheets securities, especially where there are wide spreads between the bid and offer. These are referred to as "NEBBs" or non-economic bid-bangings. . . .
When addressing the potential size and breadth of this fraud referred to as naked short selling, we might offer the following "metric" relevant to the current market frauds being perpetrated. We recently saw the frauds being perpetrated by the "specialists" on the national exchanges. A specialist is basically a single market maker of a stock who everybody knows the identity of and who has no anonymity whatsoever. Now consider the typical OTC: BB or Pink Sheet stock with 15 MMs that operate in total anonymity and have plenty of opportunity for collusive activity. In fact we know that many of them collude using instant messaging to coordinate their actions.
One might conservatively anticipate perhaps 10 times the "hanky panky" going on here as compared to the fraud being committed by the specialists operating in the light of day. Now compare the existing delivery in rules in Canada versus those in the U.S. One might conservatively anticipate 10 times the chicanery going on behind the doors of the Canadian broker/dealers as it relates to naked short selling as opposed to that within a U.S. b/d.
. . .
Have we reached the point in time where market makers should go the way of the dinosaurs? Does a buyer and a seller really need a middleman to find each other? The Electronic Communication Networks (ECNs) and Alternative Trading Systems (ATSs) seem to work well in uniting a buyer and a seller without a middleman. Is the "injection of liquidity" by a market maker theoretically acting in a bona fide capacity worth the conflicts of interest and fraudulent behavior this role brings with it? Should stocks really be trading at artificially low levels below the intersection of real supply and real demand in order to suck in new victims into the trap? . . . |
