TOO ALL: Here is an article that explains "naked shorting" Its Great!!
It can be found at:
microcapstocks.com
and for a primer on the OVIS situations go here:
olympusventures.com
Undeclared Short Selling
Introduction
Many dynamic growth companies have been damaged by undeclared short
selling. This practice consists of creating stock that doesn't exist or
borrowed (as is the legal requirement) and subsequently sold in large
amounts in the open market creating panic selling and decimating share
prices, where they hope to buy the position back at lower levels (creating a
profit for the short seller).
Declared Short Sellers
Declared (legal) short sellers are institutional money managers and fringe
group market professionals, not small capital public investors. Their
positions are reported publicly on a regular basis, and these individuals must
borrow the shares before taking on a short position. They must also
typically deposit 50% of the value of the short as a margin deposit. From
whom do they borrow? Read the fine print on your margin account
agreements and you will see it is YOU! This is a perfectly acceptable, legal
and ethical investment strategy - just like in commodities you have some
folks betting on higher prices, others betting on lower prices in a controlled,
disclosed, and regulated environment.
Undeclared Short Sellers
Undeclared short sellers don't borrow the stock they are selling. They (in
most cases) don't even have to pay the margin requirements for their
position. They are betting on (and trying to create) total failure of the public
company. The odds of failure in small business are better than 98 to 2.
There are many ways a public company can confirm an undeclared short
position in their stock. One way is to use the response to the company's
annual general meeting. The company can add the issued stock (IS) and the
short interest (SI). The sum is the stock available in the company's market.
Now add the known shareholder positions (KS) and the street stock
proxies (SP) If the (KS+SP) sum is greater than the (IS+SI) sum, you have
an undeclared position in your stock. Most street stock owners (held in
street name at a brokerage firm) don't even submit proxies. You can
estimate the size of the undeclared short position by multiplying the stock
proxies by 1000. This assumes 10% of the street owners submitted proxies
(an estimate, by the way, which is unusually high). When public companies
do this comparison they often learn they have 3-7 million shares short and
undeclared.
The limiting of access to undeclared short selling was supposed to be the
Equity Reform Movement but it hasn't limited the practice. It excludes most
retail brokers, newsletter editors, money managers and anyone on the
fringes of the internal working of the market. Undeclared short selling
networks include a few powerful market insiders, a couple of politicians,
and a few financial powerhouses. Their motto: "You can never sell too much
stock." It is estimated these individuals gross over a billion dollars annually,
making it a very big business.
How Can Undeclared Short Sellers Create Nonexistent Shares?
The trading system is responsible for some of it but most nonexistent stock
comes from offshore tax havens. It is impossible to trace the beneficial
owner. The nonexistent stock trades several times and comes to rest within
the control of the undeclared short selling group. Undeclared short sellers
have enough power to force the company to issue more stock, if necessary.
It works because the trading system lacks closure. The monthly brokerage
house account statements aren't tied to specific shares issued by the public
company. The client account statement is a "claim" of sorts on shares. It
does not represent actual ownership of share certificates. You end up with
an open-ended option on the stock you buy - and no actual ownership.
Nine times out of ten your brokerage firm loans your shares to the shorts
(short sellers) on settlement day!!
So, What Do I Do Now?? (Complaints to regulatory agencies)
Though it sounds good in theory, complaints to the so called "experts" who
regulate our financial markets have proven to be completely useless. The
problem is simple: Lack of knowledge on the part of the regulator. You
would be hard pressed to find anyone versed on undeclared shorting with
the SEC itself let alone the NASD (who oversees NASDAQ and the
Bulletin board) who are "association police" with no real legal power and
virtually no transactional knowledge. A complaint to the NASD would
probably result in them attacking the public company and the legitimate
brokers who bought the shares for their client -- they would attack the
victim rather than the culprit.
A Short Trap
The term "short trap" refers to backing the shorts into a position whereby
they must cover (buy back the short position in the open market). The only
effective way is to demand delivery of all of the shares currently held in
street name. This must be done by the shareholder. The problem is that
most brokers are brainwashed to believe that if the shares are not on
account at their brokerage firm they are gone forever and the commissions
generated selling the shares will go to somebody else. One possible solution
is a large buyer (sometimes as much as 10% of the float) who will demand
delivery of his shares.
The Good News (Is there any?)
The good news is that is the trap is effectively enacted the short will HAVE
to cover the position. This can, in some cases, take a $.50 stock to $15 or
$20 a share - creating huge liquidity for the company and make the
shareholders rich. (20-1 returns are not uncommon) Some of the most
successful stocks on Wall Street are a result of an effect short trap.
Example: Presstek (PRST) -- this was a $20 stock that made shareholders
a five banger when a major promoter brought in some large players to bust
the short.
The Only Real Protection
The only real protection: education of investors! Demand
delivery of all shares you buy!!!! |
