DTCC Confidential dtcc.com
We were very disappointed to read Euromoney’s April issue cover article on naked short
selling, which largely parrots irresponsible allegations asserted by lawyers in various
litigations filed around the U.S. against DTCC and numerous broker dealers. The article
fails to reflect a true understanding of the complicated securities clearing and settlement
programs it discusses, fails to report that most of the litigations have, to date, been
dismissed, withdrawn or are subject to dismissal motions, and, perhaps most egregiously,
accepts as true characterizations of DTCC’s stock borrow program (“SBP”) that
seriously misrepresent it and are wildly erroneous.
While DTCC provided your reporters with written material on many of the issues raised,
this information was ignored. In addition, there was little effort to fact-check
information about DTCC, nor was there an opportunity to directly rebut allegations
contained in the article.
In repeating the essential theme of the lawsuits filed against DTCC that the SBP is at the
root of naked short selling (because SBP borrowed shares allegedly are delivered to
buyers in place of the shares the naked short sellers fail to deliver), the article fails to
acknowledge that, in reality, only a small percentage of all deliveries (about 1.6%) are
filled by shares borrowed through the SBP, although this information was provided to
your reporter. This fact puts the lie to the claim, oft repeated by those seeking to
misrepresent the program and, unfortunately, prominently reported by Euromoney, that
short sellers feel “Who cared if you didn’t own what you sold – the DTCC would make
good on your delivery.” Had the reporters done their homework, they surely would have
realized that brokers who fail to deliver (and are never relieved of their legal obligation
to fulfill these contracts) aren’t relying on the SBP to fill open delivery obligations. It’s
hard to believe that DTCC would have been such a prominent part of Euromoney’s story
if the reporters had understood this basic fact regarding the SBP and what it doesn’t do.
Tel: 212.855.3240
Fax:212.363.5284
March 31, 2005
lthompson @dtcc.com
Mr. Peter Lee
Editor
Euromoney
Nestor House, Playhouse Yard
London EC4V 5EX U.K.
Dear Mr. Lee:
DTCC Confidential
It’s similarly shocking that Euromoney would refer to the lawsuits filed against DTCC
without mentioning the outcome of most of these cases: that they have been dismissed or
withdrawn. Indeed, Euromoney refers to the Sporn litigation in California, without
mentioning that only last month the federal judge involved dismissed the amended
complaint in its entirety. Plaintiff is now on his third version of the complaint, in a futile
effort to keep the case alive. (The main case is not pending before the Ninth Circuit
Court of Appeals, as Euromoney erroneously reported.) New motions to dismiss are
scheduled to be heard on May 2. Apparently Sporn’s lawyer failed to mention the case
history to Euromoney, and Euromoney apparently did no checking of its own. Again, the
information on these cases was given to your reporters by DTCC, but appears to have
been ignored by them.
2. Some Specific Mistakes in the Story
In addition to these general errors, there are very specific mistakes in Euromoney’s
reporting:
Ø Euromoney repeatedly refers to the SBP as relying on a “lending pool”
maintained by DTCC. Nothing of the sort exists. Securities remain credited to
the independent DTC accounts of lending members until and unless the member
informs NSCC on a daily basis that a position is available for the SBP and NSCC
needs the shares to fulfill a delivery obligation that day. All of this is
accomplished electronically, and there is no “pool” of shares. The notion that
there could be more shares in the (non-existent) “pool” than were actually issued
demonstrates a fundamental failure to understand how the system works.
Ø While making much of the fact that brokers don’t force buy- ins, Euromoney
never reports that NSCC has no power to compel its members to buy- in open
positions. It is up to the broker to determine whether it wishes to buy-in. NSCC
is not a regulator nor does it exercise enforcement powers. Those powers reside
with the federal and market-based regulatory agencies.
Ø After going through a confused example regarding the sale of hypothetical XYZ
shares, Euromoney stumbles badly when it reports that “Buyer A and Investor B”
could sell the same [XYZ] shares as a result of the SBP. In fact, if Investor B’s
broker, Broker B, had lent the shares to NSCC, and Investor B later advises
Broker B that he wishes to sell, Broker B must recall the loan, go into the
marketplace, or force a buy-in order to settle Investor B’s sale. Nothing about the
SBP enables Broker B to sell shares that it otherwise could not have sold. It is
simply untrue that Buyer A and Investor B “could sell the same shares,” and
Euromoney should know better than to suggest that they could.
Ø Another red herring is the issue of what information NSCC shares with the
public. NSCC does not disclose information regarding open positions – this is
confidential information and, if disclosed, could be used to manipulate the
market. Indeed, Regulation SHO does not require NSCC to disclose any
DTCC Confidential
confidential customer information to the marketplace; Regulation SHO only
requires NSCC to report certain information to the SEC, the national exchanges
and the NASDAQ, which NSCC certainly does.
Ø Much is also made regarding the delivery of physical share certificates. Another
red-herring. DTC routinely honors requests by its participants (acting on behalf
of their customers) to withdraw a paper share certificate. What has not been
permitted by the SEC are attempts by issuers (i) to remove securities that they
don’t even own from DTC; and (ii) to prevent their publicly held shares from
being deposited at DTC.
The Euromoney article ends by noting that the naked short selling issue is “a confusing
tale,” and that it is. But nothing in the Euromoney article contributes to making the issue
less confusing. Indeed, by parroting allegations of plaintiffs’ lawyers, failing to conduct
an independent investigation and reporting erroneous facts, the Euromoney article,
unfortunately, only contributes to the uncertainty and confusion surrounding the naked
short selling controversy.
As a publication covering capital markets globally, we would have expected you to give
greater care to this type of story. This article is far from the customary high standards of
journalism normally associated with your publication. The insinuations and
misinformation contained in this article are extremely troubling to us, and should be to
you. We will not accept silently this type of sloppy, one-sided journalism.
DTCC has been an integral part of the capital market system in the U.S for over 30 years,
providing automated post-trade processing of $1 quadrillion in securities transactions in
2004. We’re one of the most highly regulated companies in the world (by the SEC, the
Federal Reserve and the New York State Banking Department). Throughout DTCC’s
history, we have repeatedly demonstrated our resolve to protect the integrity of our
financial markets, including during the horrific attacks of September 11, 2001. DTCC
personnel stayed at their desks to ensure that $280 billion of transactions were settled
that day, and kept operating throughout that week to settle a total of $1.8 trillion in
securities transactions.
We’re asking that our rebuttal be published in your next issue as a letter to the editor and
that Euromoney acknowledge that inaccurate and misleading statements occurred.
Sincerely,
Larry Thompson
First Deputy General Counsel
DTCC |
