All that talk about illegal short selling made me think of this post.
Message 17486228 Lowry
ACI’s “Naked” Short Selling
My review of ACI’s activities found that between August 28, 1998 and September 17, 1998 ACI sold short more than 130,000 HBI shares into the market for its own accounts and the accounts of its customers. ACI did not deliver any of these shares to its clearing broker dealer, Spear Leeds and Kellogg (“SILK”). SILK produced records that demonstrated it was not contacted by ACI to borrow HBI shares during this period, and it did not lend any HBI shares to ACI. SILK has no record that it made any affirmative determinations on Asensio’s behalf or it’s short sales. However, ACI stamped on a photocopy of each ticket it produced in this Case that it made an affirmative determination it could borrow the securities.
It is my opinion that the stamps on the photocopies of the order tickets are not reliable evidence that ACI made affirmative determinations. My review of the copies of order tickets produced by defendants reflect that the “affirmative determination made” legend was stamped on the copies rather than the original order tickets. ... One employee, Chehrazad Mamri, testified that she wrote the words “affirmative determination made” or “okay to borrow” on the original order tickets, but she could not testify when those notations were placed on the order tickets. She also testified that Asensio directed her to make these notations sometime after the trades had been placed and that she was never involved in contacting any broker dealer to make such affirmative determinations. The original order tickets produced for inspection in the course of this litigation did not have any affirmative determination stamps on them. Another employee, Charles Stewart, testified in his deposition that the order tickets were not stamped on the day of the trade, and that the copies of the order tickets were stamped sometime after the date on which the trades were actually made, and could have been stamped after the Complaint in this action was filed.
In contrast to ASI’s order tickets, other broker dealers testified that HBI stock was impossible to borrow during this same period. One individual, Robert Brunson (Bear Stearns), testified that Bear Stearns could not locate any HBI shares between the end of August and early October 1998. He also testified that if Bear Stearns could not locate HBI shares, he did not believe any other firm could do so during the same period. Individuals from two other broker dealers (Goldman sacks and SILK) testified that HBI stock was on their “hard to borrow” or “impossible to borrow” lists during this period.
It is my opinion that ACI’s short sales for its own accounts and the accounts of its customers violated Rule 3370 of the NASD’s Rules of Fair Practice and that ACI knew these short sales were “naked” (i.e., it did not have a reasonable basis to believe it could deliver the securities it was selling to SILK, its clearing broker dealer, by the settlement date).
In August 1998, SILK had an open short position consistently between 120,000 and 300,000 HBI shares. In September 1998, SILK’s open short position grew to between 400,000 and 600,000 HBI shares. It is my opinion that these open short positions included the open short sales by ACI and its customers. ACI has not produced any evidence that HBI securities were, in fact, delivered to SILK for clearing on settlement date.
“Naked” Short Selling by Others
My examination found naked short selling activity by two other groups of investors: 1) customers of ACI who sold short in accounts maintained at other broker dealers; and 2) customers who sold short in accounts maintained at Canadian broker dealers.
The first group of short sellers (West Highland Partners, Andrea Lakian, Blue Ridge and Quilcap), had accounts both with ACI and other broker dealers although most of the trades were executed at the other broker dealers. I noted from testimony that each account had contacts with Asensio during the trading period. Andrea Lakian is the wife of John Lakian of Fort Hill Group, which leases and shares office space with ACI. Judy Stone (Quilcap), John Griffen (Blue Ridge) and Mike Wilkins (West Highland) were also personal acquaintances of Asensio.
The second group of short sellers (Bulldog, Steven Schechter and Paulson Partners) sold short substantial quantities of HBI shares through two Canadian broker dealers, Thomson Kernaghan and First Marathon. The short selling at the Canadian broker dealers is noteworthy because the U.S. broke dealers who executed the short sales for the Canadian broker dealers had no documentation that affirmative determinations had been made by them or the Canadian broker dealers. It does not appear that any of the shares sold by this group of short sellers were, in fact, delivered because both Thomson Kernaghan and First Marathon had deficits at NSCC consistent with the short selling volume. It is my opinion that these short sales were “naked” and that the short sellers did not have a reasonable basis to believe they could deliver the HBI shares to the clearing broker dealer by settlement date.
“Naked” Short Selling and ACI’s Negative Statements Impacted Price of HBI Shares
On August 28, 1998, ACI and the two groups of short sellers had a combined short position in excess of 390,000 HBI shares. The short positions for these investors grew to more than 865,000 HBI shares by September 17, 1998. The period between August 28 and September 17, 1998 is noteworthy because the market price for HBI shares remained strong despite the substantial short selling by ACI and these groups of investors. In fact, the price of HBI shares closed higher on September 17, 1998 ($9.625) than it did on August 28, 1998 ($8.50) and traded as high as $13.1875 on September 9, 1998.
It is my opinion that the demand for HBI shares was strong enough to sustain the price of HBI shares despite the illegal “naked” short selling by ACI and others until ACI made negative statements about HBI to the public in the form of a Business Week article that was first disseminated on the evening of September 17, 1998. Once this article was disseminated to public investors, the price of HBI shares dropped dramatically from $9.625 on September 17 to $5.25 on September 22, 1998. It is my opinion that the statements attributed to Asensio in the Business Week article would be subject to the anti-fraud provisions discussed above [omitted]. As a result of its activities, ACI was in a position to benefit financially because it established a short trading position prior to releasing the negative statements about HBI.
Trading Ahead of Research Reports
In November 1988, Congress enacted the Insider Trading and Securities Fraud Enforcement Act of 1988 (“ITSFEA”) which requires that all broker dealers to “establish, maintain and enforce written procedures reasonable designed” to prevent, among other things, the misuse of proprietary research and research reports by employee and proprietary accounts (the are referred to in the securities industry as “Chinese wall” procedures). ITSFEA also granted the Securities and Exchange Commission rule-making authority concerning these “Chinese wall” procedures. The SEC decided it would be best to rely on the NASD and the NYSE to establish minimum standards for broker dealers to comply with these procedures. ...
Each broker dealer was required to establish policies and procedures reasonably designed to prevent the misuse of inside information considering the broker dealer’s business, structure, size and other relevant factors. The intention to issue, update or downgrade a research recommendation was to be covered by these procedures. Such information could not be disclosed, prior to public dissemination, to anyone outside the Research Department (and in some instances to some within the Research Department) unless there is a need to know the information.
NASD rules governing just and equitable principals [sic] prohibit its members from trading ahead of research reports. Specifically, the NASD rules prohibit a broker dealer from engaging in trading activity that purposefully affects the broker dealer’s proprietary inventory position in a security in anticipation of the issuance of a research report.
ACI Traded Ahead of Its “Research Reports”.
As previously noted, during the three weeks prior to the Business Week article, defendants took substantial “naked” short positions totaling more than 130,000 HBI shares. Of particular note, on September 17, 1998 (just prior to the release of the Business Week article), one ACI employee, Chehrazad Mamri sold short 750 HBI shares, and ACI sold short 10,000 HBI shares. Additionally, John Paulson, a close friend of Asensio, sold short 135,000 HBI shares on September 17, 1998. After the Business Week article was disseminated, the price of HBI declined and ACI was able to cover its short sales at a profit.
It is my opinion that the trading activity of defendants ACI and Asensio immediately prior to releasing a research report (i.e., the Business Week article) violated the provisions of ITSFEA, which requires a “Chinese wall” between a firm’s research department and its trading department and prohibits trading ahead of the dissemination of research reports. Asensio was the person who made all of the trading decisions on behalf of ACI and Asensio was the person who researched the companies ACI covered.
"It's just the tip of the iceberg, lawyers say"
Just the "tip" of the iceberg.
ND |
