Re: 3/15-17/04 - Blogmaverick.com: Bob O'Brien and James Brownfield Debate Naked Shorting
Note: "Bob O'Brien" presented a list of 12 questions for James Brownfield to answer on Mark Cuban's blog regarding naked shortselling. I've combined the questions and repartee for each question for easier reading.
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B: Simple questions, jimbo:
J: [empty]
B: Your responses are telling in their dishonesty. I have a few minutes, so I'll be happy to demonstrate how. Let's go down the list:
J: [empty]
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B: 1. What is the extent of the fails for the companies on the SHO list?
J: I neither know nor care. It has no bearing upon a company's operations or their financial performance.
B: The question is not whether you care - it is whether you know. You are one of the "this isn't a problem" crowd, and I was hoping you had some factual basis for your lack of concern. Apparently that was misplaced. You don't know. And yet you pretend that it isn't a problem. Argument from ignorance.
J: I know what the question was. Implicit in asking that question, and especially asking it first, is that one ought to know. There is no need to know nor is there a need to care. Activities in the third market have no bearing upon a company's financial performance.
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B: 2. Why is it a secret? Why should it be?
J: In most cases, it remains a secret because many of the companies themselves are not being open or honest about their outstanding share counts.
B: Wrong. The question is how many fail to delivers are there for companies on the SHO list. The answer is I don't know, and the reason I don't know is because the only people with that info - the DTCC - aren't telling. You have tried to answer a question that wasn't asked, and build in some agenda-based tripe that assumes everyone is guilty of something - again, with no basis in fact. So two for two.
J: Nope. Not wrong. A number of companies fell off of the SHO list in January after they updated their shares outstanding. Companies that are diluting their common shareholders don't rush out to make news of it. There remain plenty of stale shares outstanding counts, Global Links will be the best example of such a company when it becomes known how many shares they really have outstanding.
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B: 3. Is naked shorting illegal for everyone besides market makers?
J: Your flavor of "naked short selling" is not so much illegal as it is a minor procedural violation. The tools to correct a failed delivery of securities against a contra party have been around for years. If you have a failed delivery in a stock, let me know and I will show you how to correct it. As far as "naked short selling" for "everyone besides market makers", it is simple activity to perform and very legal. Find someone stupid enough to want to buy and hold shares in one of these scam companies and offer them a discount from the current market price to hold a futures contract for delivery at a later date. Or, you could engage them in a private repo. Or, you could sell them a Euro style call option with a miniscule strike price. There are plenty of legal means for all investors to create positions that mimic the these "naked short selling" positions.
B: You go on to discuss private deals, and ignore the one that is being discussed - selling shares you don't own on the open market to manipulate a stock's price down, like in the Compudyne case where 975 separate transactions were used to sell over a third of the float short naked. That's the one I am asking about. Not some convenient side deal - open market fails to deliver, like in Compudyne. Answer: They are illegal. You know it. I know it. You just don't want to answer the question being asked. Dishonest, but in keeping with the rest of your responses.
J: The point of showing the ease with which an identical position as a "naked short" can be created by anyone, easily and legally, was to demonstrate the folly of blaming "naked short selling" for the failures of so many of these scam companies.
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B: 4. Hasn't it been for 71 years?
J: Private securities transactions have always been exempt from regulatory oversight.
B: Except we weren't discussing private transactions - you introduced that to duck the actual question. It's called a straw man. No one reading this is stupid enough to fall for it. Besides, perhaps, you, since you are the one trying it.
J: The "naked short seller" is the straw man. The real problem is, and has always been, companies that were run into the ground by incompetent or corrupt managements.
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B: 5. Why were the fails prior to January 7 pardoned?
J: They haven't been pardoned. If you have a fail to deliver in a securities account, you may still force settlement by the means that have been discussed before. (See NASD Rule 11810.) Reg SHO is a reporting mechanism only, it does not excuse the consequences of prior settlement failures.
B: Wrong. All fails prior to January 7 have been spared the rules and regs that SHO mandates. So they are not subject to the forced buy ins that SHO defines as mandatory. Given Professor Boni's paper, which highlights where out of 68K failed transactions only 85 or so were bought in, or Compudyne, where not one of 975 were bought in, saying that Reg SHO doesn't apply to all those is a grandfathering. There is no buying in occurring on those, and they are being allowed to fail indefinitely.
J: Reg SHO does not forgive prior fails. It doesn't report them. If you have an account with a settlement failure in it that occurred prior to January 7, 2005, please let me know and I will walk you through the steps to rectify it.
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B: 6. Why are you defending illegal activity?
J: I am not defending illegal activity. I am objecting to the practice of diverting blame for the demise of so many companies away from management (where it rightfully belongs) to a group of people who have no role in a company's operations or their financial performance. What is most objectionable about this activity of yours is its use as a tool to sell worthless shares to misinformed investors.
B: You are in fact diverting your ducking of the actual questions and the replacement of those with more easily answered questions of your own - which is a rhetorical dishonesty that should be abundantly clear now, to anyone reading this. Again, how stupid do you believe the readers are? You are refusing to acknowledge the illegality of the behavior being questioned by pretending that we are discussing a different behavior of your choosing. Nice try. At least you are consistent. Do you work with Mark?
J: I know exactly how stupid some of these readers are. The "naked short seller" argument is very insidious. Not only does it make these scum managements appear to be "victims", but in many cases it excuses the investor who took neither the time nor the trouble to do thorough due diligence on the company's financials.
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B: 7. Why should those perpetrating the illegal activity get away with it?
J: They don't. Parties to a settlement failure can enforce a buy-in any time they choose.
B: Can. But don't. Like in Compudyne's case. Or Professor Boni's paper. Thus they are getting away with illegal behavior.
J: Then perhaps your crusade should be geared towards getting parties to failed transactions to force settlement of their securities purchases? With the tools that are already in place to correct settlement failures, it would be a lot easier and wouldn't require the scamming of a U.S. Senator.
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B: 8. Why should some companies be protected by the law, and others not be?
J: Protection from settlement failure is uniform. The procedures for an 11810 Buy-In apply to all securities regardless of the underlying financial condition of the company whose securities have not been delivered.
B: And yet settlement failures for those on the SHO list aren't bought in, as evidenced by their presence on the list. And according to you, they are mostly scams and shams - it's their fault, they deserve it. So the logical conclusion is that the companies on the list - who are ostensibly shams - aren't afforded the same rights as "legit" companies. That's why they are on the list. They aren't legit. Circular, but your logic.
J: The Reg SHO list does make for an interesting tool precisely because companies that draw the interest of short sellers tend to have fundamental flaws that warrant concern. However, there is no place on the 11810 Buy-In form that asks whether the Buy-In is being performed for a stock that appears on the Reg SHO list. When it comes to securities settlements, they are afforded the same rights as any other company.
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B: 9. Who benefits from the fails being kept secret?
J: In most cases, the company's management. It's a red herring they can point to instead of addressing the flaws in their business plan. It enables them to dump more shares upon an unsuspecting public to raise money which, in turn, finds their way into managements' pockets when they run their next payroll.
B: A baldfaced lie. Presumes the companies are engaging in felonious behavior without any proof offered. Burden of proof of outrageous claims is upon the claimant. You offer none, and then blame the victim, as though by declaration you can make it true. You can't, and it isn't, no matter how many times you say it is. Sorry.
J: There is nothing felonious in what these companies' managements are doing. However, there is plenty of proof for how they play their game. That proof, if you take the time to read an SEC filing, is in their income statement. Examine the financials of so many of these companies claiming to be victimized by "naked short sellers" and you find company after company with no profits, little to no revenue, and dwindling common equity. Look more closely at the income statement and you find most if not all of them have general and administrative expenses that are completely out of line with what they generate in gross revenues or what they spend on R&D (if they're a "startup"). Find one of their annual reports and you'll see the salaries being drawn down by their executive suites. An SEC filing can be a wonderful tool in helping you track the dollars that come out of shareholders' pockets and make their way into management's pocket, if you can find someone to read it to you.
Which "naked short selling" victim would you like to check out first? Jag Media? Sedona? Eagletech? Global Links? Nanopierce?
You'll find the same thing on all of them: capital raised, capital gone, fat and happy management.
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B: 10. Should I be able to sue the funds that naked shorted my investment to a fraction of its value? If not, why not?
J: You can sue anyone you want, but ultimately anything you stand to win in a lawsuit must be tied to the value destroyed by these funds. You don't get Lincoln Continental money if someone runs into your Ford Pinto. With every company that has ever cried about "naked short selling", you look at their SEC filings and you find companies that have little to no value. In every case I have seen, their market cap has far exceeded the value that any reasonable person with a financial background would assign to such a company.
That a hedge fund can make money while you lose money doesn't mean that the fund is responsible for destroying value or that they've stolen anything from you. Generally, it would signal that you don't know a thing about investing and they do. Our judicial system is not in place to repatriate capital away from parties who can read financials and know how to allocate capital properly to give it back to dimwits who won't do research and think the stock market is nothing more than a glorified gumball machine.
B: Correct. And if your aforementioned declaratory assumptions that they are all shams turns out to be, well, to put it charitably, poop, the funds will be out a ton of money for their illegal naked shorting. At least this one you answered truthfully, the filibustering thereafter notwithstanding.
J: There is a line of causality that you still don't get, which is why no fund has to worry about being found guilty of damaging a company targeted by "naked short sellers". Short selling is not a cause, it's an effect. When it becomes known that a company and its management is not going to deliver value to its shareholders, short sellers congregate to profit. All it takes to burn short sellers is a good management team.
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B: 11. Should I be able to find out the identities of those breaking the rules? If not, why not?
J: If you have a settlement failure and your broker/dealer acted as principal, you have the name. It would be your broker/dealer. If you have a settlement failure and your broker/dealer acted as agent, they would have the name of the culprit. They would be the party named in the 11810 to force the Buy-In.
B: 99.999% of the time the retail buyer doesn't realize that they own a fail - the broker doesn't tell them. That's how it works. The DTCC lends the seller the shares to be given to the buyer's broker, and the fail stays on the NSCC's books in their sub C account, collateralized by the cash in the sub D account. But you are correct that there is a contingent liability that still exists for the seller's broker.
J: Then get after those retail buyers, if that's really the problem.
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B: 12. Should I be able to sue Government officials who have harmed me through their actions, by lying and covering up for their cronies on Wall Street? You can with the IRS. Should I be able to do so with the SEC?
J: Blaming a government official for your ineptitude in the stock market is a really novel idea, but I don't think it will fly.
B: How about suing an individual at the SEC who can be shown to have full knowledge of the size and scope of the settlement problem, and who has acted to conceal the issue, for the benefit of those who violated the law, and against the interests of the public? Would that suit work for you?
J: Any suit you file would work for me. There would be nothing more comical than seeing an inept investor file suit against a public official. I'm sure you'd have an army of inept investors behind you, supporting the cause, and urging you to fight the good fight.
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B: I'll look forward to your answers to these questions.
J: [empty]
B: Most of your answers don't address the actual questions asked, or assume a different set of facts than those known to be true. That is the art of the con artist, albeit a relatively crude level con. Either that, or you merely are unusually susceptible to logical fallacies, and don't even realize you are guilty of them.
Take your pick. Gotta run, but I'm always available to help promote understanding, even among those who seem closed to any possibility other than the one their agenda mandates.
That would be you, BTW, unless you can actually answer the hard questions as framed, and not as re-framed by your preferences to avoid the truth.
J: It would add even more humor to the words, "Case dismissed."
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