Here is an excerpt from a much longer document with commentary about the new Regulation SHO, which will close many loopholes that today allow broker/dealers, in collusion with market makers and clearing firms, to short pink sheet stocks, naked, with ease, and with a tidy profit for each party to the transaction. I am convinced now, especially after reading the entire document, that there are 1 or 2 hedge funds who are shorting this stock, in collusion with market makers dependent on their commissions, and perhaps afterward locating certificates, or perhaps just letting these short sales lapse into "failure to deliver" status. Under current rules, the hedge funds immediately receive the cash proceeds from the sale, the market makers receive their commissions, and the shares can stay in "failure to deliver" mode forever. But effective Jan. 3rd, 2005, the landscape will change, and one can only hope that this egregious fraud perpetrated on the owners of pink sheet and OTC stocks will end.
The Baron
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There are a variety of loopholes in the clearance and settlement system that have allowed securities fraudsters access to investors’ money. The complexity of Wall Street necessitates a myriad number of rules and regulations and there are bound to be loopholes. AS HEINOUS AS IT SOUNDS, IF YOU LINK A FEW OF THESE TOGETHER IT REALLY IS VERY EASY TO SELL NONEXISTENT ENTITIES THAT RESEMBLE “SHARES” TO U.S. INVESTORS AND POCKET THE MONEY WITHOUT EVER HAVING TO COVER THE SHORT POSITION.
We all saw what happened when the regulators closed one loophole via the amending of Rule 3370. IMMEDIATELY the fraudsters moved en masse to the next most exploitable loophole which happened to be the arbitrage exemption under Rule 3370. That’s why we saw nearly 1,000 issues mysteriously being listed on the Berlin Exchange simultaneous with the closing of this one loophole. Why Berlin? Because there are no listing fees.
What’s different about Regulation SHO? In the securities fraud known as naked short selling the perpetrators of the fraud often need to link together 3 or 4 loopholes simultaneously to effect the commission of their crime. Regulation SHO SIMULTANEOUSLY CLOSES MANY LOOPHOLES. It need not close all loopholes to create a substantial effect. If a particular fraudster utilizes loopholes #6, 17, 31, and 38 and if Reg SHO closes one or more of these loopholes then the beneficial effect can be very pronounced.
Up until Reg SHO, six and a half of the 7 main anti-naked short selling laws did not apply to the OTCBB and Pink Sheets. The fact that Rule 3370 addressed “all” securities was refreshing but the gigantic loophole involving non-NASD b/ds negated any tangible benefit. So actually the OTCBB and PS are batting 0-for-7. The SEC’s attitude seemed to be that all development stage corporations trading on these venues were “scammy” pump and dumps until proven otherwise and unworthy of protection. The naked short selling securities fraudsters were not only aware of the existence of the many loopholes but were also aware of the attitude of the regulators towards these companies.
From an anti-naked short selling point of view, there are two significant events that really stand out. The first one is the massive listing of nearly 1,000 corporations on the Berlin Exchange in response to the new Rule 3370. It was not just the listings and their “coincidental” timing but THE RESPONSE FROM THE INTERNATIONAL COMMUNITY. THEY WENT BALLISTIC. This has resulted in the generation of more press releases, lawsuits, articles, and interviews in the various media than can be imagined. All journalists want to break the next big Wall Street corruption story. The next several chapters of this story will now be coming at us in a more accelerated manner. Since secrecy is so important to these fraudsters they must be cringing right now at the actions of that one German b/d. I firmly believe that the second most important event is the passing of Regulation SHO and its “shotgun blast” approach to closing off the loopholes present in the system. The timing of these two events was impeccable.
The result of these two events is that people smell opportunity. Everybody knows that these naked short positions are still on the books somewhere. The crime of selling nonexistent entities to an investor and pocketing the money without covering the resultant short position is too heinous to sweep under the carpet anymore. As my book stated this problem has been swept under the carpet for so long that the ceiling fans at the DTCC no longer can turn! How dare these big bullies on Wall Street create such a rigged market? The money they’re stealing was meant for putting food on the table and keeping houses warm in the winter. It was there for a comfortable retirement after one’s productive years were over. How dare they? The crime becomes even more heinous when you realize that it is the ultra-wealthy people on Wall Street and those elite invested in ultra-secretive hedge funds that are the recipients of the average Joe’s retirement savings. Approximately 45% of hedge funds voluntarily file with the SEC. Chairman Donaldson recently tabled the concept release demanding that all hedge funds with over 15 investors or $25 million in assets must file with the SEC. It would probably be safe to assume that the bulk of the fraud is being perpetrated by the 55% that don’t file. What has to be appreciated is the fact that MMs after decimalization are so beat up that they would promise to break every rule in the book to get the business of the 7,700 current hedge funds that have $860 billion in assets. Hedge funds love to naked short sell and need access to a bona fide MM’s exemption from borrowing and locating shares before the sale.
Since there are a lot more nice guys on this planet than bad guys, I would think that investment strategies that result in those investors’ funds being taken out of the pockets of the bad guys and placed back into the pockets of the average Joe’s would sell very well. The biggest gainers from Reg SHO will be the issuers trading on the OTCBB and Pink Sheets with “real” companies that have been hammered “real” badly.
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