An Open Letter from Anthony@Pacific, December 25, 2007 3:00 pm PST
This is an open letter to all us traders and investors who have their money at risk in our financial markets. This letters involves just about every single trade and investment decision that is made in our over-the-counter markets, specifically dealing with our ability as Americans to take advantage of what historically has been one of the most profitable trading strategies of all time, yet something that has been primarily kept in the shadows and enjoyed quietly by the professional traders and firms who deal with the endless hype pumped out on a daily basis by stock issuers and their paid shills. Others may make this issue sound trivial or of little significance but it is anything but that. And now, it's become a critically significant issue that MUST to be addressed, by us all.
I am talking about "borrowing" requirements and restrictions that have been implemented by the SEC at the behest of the NASD and the hundreds of sham company insiders that used to complain, in the years before "SHO", about their misdeeds being uncovered. The implementation of Reg "SHO" and its related rules has implemented a set of restrictions and artificial rules that prevents the average investor from trading ANY stock from the short-side, is overvalued, regardless of the reason, unless he can first "borrow" the shares. These restrictions in essence force traders to seek and then obtain what literally amounts, to "permission" to bet against a given stock, known as "short-selling" from those who own the stock, and therefore have a bias to the upside, before that investor can make the countering bet on the downside. A requirement that makes no sense, isn’t grounded in any economical theory or principle and is simply an arbitrary and fatally conflicted premise that falls apart under any critical scrutiny.
Furthermore, the current "political climate" criticizes and demonizes anyone else who wants or seeks to short a stock without first borrowing it, a practice known as "naked short-selling. Selling stocks without first borrowing the shares has been around and allowed previously, in one form or another, since the day Wall Street was actually a wall put up by Dutch settlers. These new requirements, however, just as the now phased out "up-tick" rule proved, are only geared at preventing the public and private investor from having access to the same strategies that are enjoyed by the top Firms and traders in the world.
As a result of the current restrictions that were implemented these past few years, while I've been in jail for telling the truth about various stocks, none of us can now short any of the thousands of stocks that regularly pump out "great", "fantastic" and "too-good-to-be-true" news but fail to live up to their own rhetoric. None of us can legally dig up info, obtaining info that arguably no one else has, through the dint of our own hard work, and profit through that hard work nor can anyone of us jump in and sell-short the shares of an IPO when it opens and it trades to absurd levels, a phenomena that costs Americans billions of dollars each year.
I have read all the hubris about "naked short-selling" and the evils of such trading. There has been much said and much done in these last few years, during which I've been taken "out of commission," but my time has been consumed fighting the false charges and the wrongful convictions. However, now that that work has been done & as I wait for oral arguments on my Appeal to take place on Feb 5th, 2008, I’ve shifted my attention to the market once again.
Everything I have seen and everything that I have read has simply been inadequately explained and or argued and the strongest arguments against the ability to sell a share of stock, that wasn't first borrowed, I've found to be completely misleading and disingenuous. The "Anti-Shorts" claim that by allowing naked short-selling it creates shares that don’t exist, a claim that is absolutely false. It is false because the only thing a naked short-sale represents is the selling of a share short in a stock that was NOT made available to be loaned out, VOLUNTARILY, that’s it !
A "naked" sale occurs when those who short the stock are unable to borrow shares because those who own the stock REFUSE to loan their shares to anyone. It's not surprising, since they are refusing to loan shares to the very people that seek to expose the scam, the hype and/or the reasons why the stock's price is too rich. This arbitrary and artificial requirement gives the shareholders and the company a virtual lock on an environment that only allows ONLY for the pushing of stocks to higher and higher levels and no consideration to those who feel differently or those who believe nefarious forces are at work, in the current environment that exists today.
The proper logic should be that if a share exists, it should be shortable by anyone, regardless of how shareholders or corporate officers might feel. Why does a trader who believes that a stock that is at $50, should be at $20 need the permission and consent of those who own the stock and therefore want it higher, in order to put his own money and research at risk?? Why does the guy who wants the stock at a $ 100 get to decide if the trader, who thinks the stock should be at $ 5, gets to make that bet in the first place ??
There is NO logical reason whatsoever behind requiring a trader to first borrow the shares of the stock he believes will fall. Such a restriction is exactly why the SEC has all but stopped trading halts for fraud and exactly why scammers and con-men are now able to freely take full page ads in the newspapers and magazines luring investors into stocks that are all but worthless. The amount of spam stock promotions has exploded since the implementation of these artificial and arbitrary requirements. As a result, these promoters and insiders have literally become "untouchable", these past 4 years, since there is literally ZERO incentive for anyone to seek the truth.
No one running these stocks is concerned anymore about being exposed or dragged out of the shadows and that is what eliminating naked 'short-selling" has brought to America. Our economy is flooded by good news and hype and the vast majority of it is bogus. Our dollar is melting, our real estate is collapsing and nobody believes a word from our "commander-in-chief". Wall Street is the ground zero of our credibility and as is clearly demonstrated every single day, our credibility is simply NON-existent to the rest of the world.
It is difficult to comprehend exactly which stock scammer, who knows he is scamming the public, will make his shares available to the traders and investors who seek and endeavor to uncover any fraud or lies, so that that trader can sell short those shares in the hopes of seeing the price drop to it's true value, which is usually somewhere around zero. Who would want to loan me, Anthony Elgindy, stock so that I can go and expose the lies they tell? It is simply NEVER going to happen. History tells us that real companies with real sales, real revenues and real earnings NEVER concern themselves with the shorting or not shorting of their stock, they let the numbers speak for themselves and that is how it should be....
A company that has 50,000,000 shares outstanding of which all 50,000,000 are made available to short-sellers, would result in a company that has shareholders that own a total of 100,000,000 shares, clearly something, that in theory, is obviously and legally possible. Therefore rendering the argument that a 2,000,000 share "naked-short" creates a situation where the owners of 2,000,000 shares can’t get delivery of that stock utterly meaningless because in the days of "naked short-selling" the rare owner of shares that actually wanted delivery of his shares would simply contact his broker who would force a "buy-in" to get the actual shares to make delivery. In this day and age of computerized trading and electronic journal entries, physical delivery is simply unnecessary. History has taught us that those who pull their stock from the market in the hopes of warding off the shorting of their stock, typically end up only holding sheets of the most expensive wall-paper around.
Secondly, the claim by those who seek to deceive and mislead the public, that naked short-selling can lead to an unlimited number of "phantom shares" hitting the market, thereby driving down the prices artificially is a red-herring. Every share that is sold (naked or not) is also a share that MUST be re-purchased at some time in the future, something that CANNOT be said about the shares that are printed and flood the market when Insiders and unscrupulous promoters are hyping their shares so they can unload them on the investors they drive in with their news stories and grandiose claims.
Companies currently enjoy limitless dilution by issuing more and more shares regardless of corporate activity and this dilution is what ultimately destroys shareholder value, not "naked short-selling" Each share printed is simply sold in exchange for hard cash from some hapless investor who doesn’t know that the press release he had just read, and caused him to buy that stock, was false. That investor who purchased his shares at $5 when the company had 10 million shares outstanding, has no recourse when the price goes to $1 and there are now 50 million shares out there. Yet the only cry is against those who sell something that they know, must be bought back...It is the lies, the fraud, the hype and the massive dilution that destroys share value not the naked shorting of a stock that must be re-purchased regardless of what happens at the company or in the market.
As unprofitable and questionable companies raise more and more money to either fund the lavish lifestyles of the corporate officers or enrich unknown secret shareholders they accomplish this dilution by feeding often inaccurate and embellished news stories and press-releases that are wildly overstated and in many cases simply false. The SEC enforcement actions prior to 2002 show an undeniable pattern of the pumping of stock and then the massive dumping of shares by these unscrupulous insiders and promoters. Rarely now do investors ever know that they are being misled until it is woefully too too late.
The topic of "naked short-selling" has come to the forefront of our markets because the folks behind these scam deals want to operate in a critic free world, and that can only be accomplished when traders are NOT allowed to short-sell shares of a stock, without borrowing it first, in which its insiders and promoters are lying and deceiving the public. Unfortunately, it is this "naked short-selling" that has historically been the only "check" in the system that ever existed and allowed for keeping the corporate issuers, promoters, stock peddlers and secret shareholders in line.
Since in a traditional short-sale a trader is required to first borrow the shares before selling the stock short, he is severely disadvantaged because those who are running scams clearly know that they are running a scam therefore they typically refuse to loan any shares out to anyone. One of the most common tactics employed when "naked-shortselling" was allowed in Canada and the US before 2004 involved the insiders and promoters recruiting other shareholders to remove their shares from accounts and institutions that could possibly loan those shares out to short-sellers. It’s a conflict of interest that only cuts in one way, and that is in favor of the scammers. By taking the shares out of circulation for borrowing purposes it prevents traders and investors who know the truth or who would normally have motivation to seek the truth from ever speaking or even caring to investigate the thousands of claims made by publicly traded companies on a day to day basis
By removing the financial incentive behind the verification of a company's claims, the regulators and the government have given issuers "carte-blanche" to perpetrate as big as fraud on the market as possible and for as long as possible, since there is little fear of ever being exposed since there is no reason to invest the energy and time proper research and due-diligence required to expose the truth behind the PR-hype machinations of corporate America.
When a trader sees a company making a claim, and he investigates that claim and that claim turns out to be false or grossly misrepresented there is currently NO mechanism in place that allows that investor any opportunity to profit by doing that research and due-diligence. The only traders and entities that can make trades that would benefit by such knowledge are the few hundred firms here in the US, that are NASD licensed "market-makers" who are exempt from the "borrowing" requirement as long as they claim they are engaged in legitimate market-making activity. Currently they number approximately 500 out of the 6,000 brokerage firms licensed here in the US.
Clearly selling shares to investors who are clamoring for shares that seemingly no one wants to sell at a certain moment in time is legitimate market-making activity. But the question is why can ONLY market-makers enjoy such access to wildly overpriced stocks to trade on the short side. Why can Meryl Lynch sell a share short in ABCD corporation at 10 when the stock is NOT borrowable but Joe and Mary Six-Pack cannot??
When a company comes out with "block-buster" news and existing shareholders are holding tight to their shares and other investors want to buy shares and bid the prices up to higher and higher levels, ALL investors should be free and be allowed to sell shares to these buyers who are now snapping up shares whether they are available or not.
It is NOT the short-sellers that caused this buying activity and the ensuing frenzy, that blame belongs only to the promoters and insiders who are looking to unload their shares unmolested. These insiders don't want anyone else joining them in selling any stock, other than their very own, to the hapless investors that their hype has driven into the market. All investors should be free to sell shares to the buyers who have chosen to believe the company's hype and wild rhetoric, and NOT just those few NASDAQ market-makers that have been approved by the NASD. It is fundamentally unfair.
Otherwise, these smaller companies, that are held by unscrupulous promoters and insiders and their nominees, wholly escape the critical scrutiny and magnifying lens that currently shines on the bigger, larger capitalized, marginable and more widely held stocks in the market. By eliminating the ability to sell short the shares of the more obscure and lesser known stocks, the government and the NASD is not only encouraging less transparency it's creating a virtual sealed environment that makes it HARDER not easier for shareholders to get accurate and balanced information in the very companies that are the most difficult to investigate.
It is absurd to implement a series of rules that in essence leaves the wolf in charge of the hen-house by loaning shares out ONLY if the wolf himself chooses to do so. As is made clear every single day by companies that are wildly overvalued and have no fundamental support for their market valuations, they don’t want ANYONE borrowing any of their shares and that removes the vast bulk of a company’s outstanding shares from being bet against upon. What shareholder, insider or promoter wants a third party betting against his own financial interest or poking his nose into the various claims made by these companies every single day?
By allowing naked short-selling to the public and to the average investor the government would be leveling the playing field for not only the NASD professional traders but to all investors. If the company is telling the truth and the news they release is real and their growth is legitimate their shares will rise and stay up as those who shorted stock at lower levels run to cover their 'naked' bets before they are bankrupted. If the company has been fibbing then any subsequent drop in price would be an efficient demonstration of proper market forces. As the market currently stands the rules favor only a bullish view of Wall Street and penalize the average investor from having any access to a bet against a stocks rise in price.
Apparently, there is good reason why here in America there is only the giant bronze Bull, poised to charge, across the street from the NYSE, our markets have been rigged only to the upside, as a result the bear is conspicuously missing, wounded and trapped, to all of our detriment. When will Americans tire of the "bubbles" that keep growing and then suddenly burst. Why must every crash be a precursor to more and more legislation and interference by the government??
By allowing normal naked short-selling to take place, will in fact, actually reduce volatility and wild price moves because when news hits and new investors jump in, snapping up shares, the dearth of selling activity by existing share-holders, who are in it for the long term, will be mitigated by investors and traders who've decided the claims are suspect, the shares are overvalued or have legally discovered material information that hasn't yet found its way into the marketplace yet.
Without naked short-selling as an option the market becomes a haven for the criminals and con-men that currently control the over-the-counter markets. Without naked short-selling in a free market that rewards and penalizes investors through the quality and accuracy of their information, the market becomes what it is now, a rigged system without any accountability for anything said to the public until its woefully too late.
Just recently, I recall reading a remark made by the former lead prosecutor in my case, Kenneth Breen, who recently stiffed his partners and law-firm with a $250,000 un-paid legal bill, then jumped ship, in order to represent Bernard Kerik, the corrupt, mob-connected and disgraced former "top-cop" of NY. He asked: What gave me, a hedge fund or any trader the right to determine if a stock is a scam or not.
The answer is simple, the same right that I have to determine that a stock is good investment is the exact same right I have to decide if it's not. If it walks like a duck, looks like a duck and quacks like a duck, I don’t need to wait for the US government to tell me it's a duck. That right, to determine if a stock is good, bad or somewhere in between is not only my right, but the right of every single person who believes in a free capitalist market.
I don’t need the NASD, FBI or the SEC to tell me if a stock is a piece of shit, my nose works just fine. The question isn't "who made me boss" to decide which stock is good, which isn’t , what it's worth and what it's not, it's; Who the hell do you think you are to even ask such a stupid question ?? If the money is mine than it's my right to decide what a stock is worth to me, not the US govt's.
Should a short-seller fabricate negative information or lie or deceive the public about a company, stock or officer, he or she should be prosecuted to the same extent that those who lie and deceive on the up-side face. Therefore, there is NO argument as to why one direction should enjoy artificial protections while the flip-side does NOT.
We the public NEED to have the same access and the same rights to make a bet against a company, that is lying to us, that the TOP Firms in the US have. The NASD must open the gates to let all Americans trade in a fair, legal and orderly way that rewards the accuracy of information and penalizes those who deceive.
If one company has 10 million shares outstanding and those shareholders allow all 10 million shares to be loaned out and those 10 million shares are then sold short, it results in one group of shareholders, that combined, own 20 million shares and another group that owes and is short 10 million shares of that same company. There is no one from the SEC, the NASD or any agency that can explain what the difference would be if those same shareholders had no say in the matter and the 10 million shares that were sold short were sold short without first having to obtain permission ("borrowing") before making the same exact short sales. You still end up with the exact same two groups of investors, 20 million bullish shares and 10 million bearish ones.
There is simply NO logic , No explanation and No reason that can justify what the purpose of "borrowing" is, or what exactly it accomplishes, other than a way to allow the con-men and scammers to operate in a critic-free environment, and reserve one of the most profitable trading strategies in existence, for only the privileged few tapped by the NASD.
Allowing access to these trading strategies is how we will get the truth into the marketplace quicker and it is the only way to keep these issuers honest and on notice that what they say, will be checked out at their own peril.
Yes, it is true that I am currently in prison, but it is also true that I am the only American trader and short-seller who has ever been imprisoned for actually telling the truth about a stock, this isn’t something I made up, it's an undeniable fact, and something obviously, that needs to be rectified, in the meantime, it is my sincere hope that you the reader can look past the messenger and see the truth in the message itself.
In any event, it’s time, it’s time to finally speak up and it’s time to undo all the damage these artificial restrictions have done to our capital markets and the American public. It's time for everyone to DEMAND equal access to the same trading capabilities enjoyed by the country's most elite traders and firms. It's time to over-ride those who use confusing, circular and convoluted linguistic gymnastics and semantics in order to preserve their "special status".
The truth must come out, we NEED it out there otherwise we are all in jail, with our hands firmly tied to our sides, unable to benefit or profit if we get it right and they got it wrong. It's time to untie our hands & set us free. As Americans we must be able to profit by exposing and stopping the lies, the deception and the scams that have hi-jacked the truth. Quite simply, in a nutshell, if a share exists it must be shortable, period. Nothing else makes any sense.
The average American and the average trader have every right in the world in a free market to trade with the same privilege that the top few hundred firms and their respective traders have enjoyed for the past 217 years. As a market that allegedly has been moving towards greater transparency this unfairness and this corrupt and conflict ridden status quo against naked-shortselling is the ugliest fraud on American investors of our present time.
As my governor likes to say, I'll be back.
Very truly,
Anthony Elgindy
December 25, 2007 |
