The Depository Trust Corporation's DRS System Does Nothing to Combat Naked Short Selling
Press Release Source: Investor Communications International, Inc.
Friday January 31, 9:01 am ET
BLAINE, Wash., Jan. 31 /PRNewswire/ -- The following is being issued by Marcus Johnson, representing Investor Communications International, Inc.:
Investor Communications International, Inc. ("ICI") announced numerous clarifications to a FinancialWire story dated January 30, 2003 entitled, "It's the DRS of the DTC, Not The Exit of the DTC" distributed by Investrend Communications, Inc. The FinancialWire story provides an erroneous alternative to companies utilizing custody only or certificated share ownership mandates to exit from the Depository Trust Corporation's ("DTC") electronic share transfer system. The DTC and National Securities Clearing Corporation ("NSCC") system does not ensure share deliveries are ever made in transactions involving share purchases on US public stock exchanges.
The growing group of OTC Bulletin Board companies that began exiting the system in 2002 in favor of Certificate Only holdings include GeneMax Corp. (OTC Bulletin Board: GMXX - News), Ten Stix Inc. (OTC Bulletin Board: TNTI - News), Midas Trade (OTC Bulletin Board: MIDS - News), Hadro Resources (OTC Bulletin Board: HDRS - News), and Vega Atlantic Corporation (OTC Bulletin Board: VATL - News), among others. Other companies, including Intergold Corporation (OTC Bulletin Board: IGCO - News) have applied for or expressed their intent to withdraw from the DTC share transfer system. These companies are opting out of the DTC system to combat the Naked Short Selling abuses made possible by the electronic transfer system, which is flawed and allows US $ billions in trading abuses to occur.
In the FinancialWire, Matthew Marcus, a principal with Integrity Securities, incorrectly insinuated that using the Depository Trust Corporation's ("DTC") "DRS" -- [Direct Registration System] will prevent illegal shorting attempts. Shares held in DRS format still clear through the NSCC's flawed 3-day settlement system that does not require share delivery in buy/sell transactions. This allows naked short sellers to sell an infinite supply of phantom shares of an issuer without regard to the outstanding shares of the issuer or legitimate short positions. The statements made regarding DRS and its alleged attributes are made by Mr. Marcus on behalf of Integrity Securities. According to the NASD, Integrity Securities, Inc., CRD #41321 has only one registered representative (broker).
Under conditions of a naked short sale, the DRS will result in failed share deliveries. The customer will be notified that they are not in possession of the shares to transfer. A naked short sale will be extremely easy to enter in this system since the transaction will be cleared electronically, and since DRS requires the public company to be registered for the DTC FAST program (a system that provides the highest level of electronic book entry transfers at DTC). No actual delivery of naked short sales would be required provided they used the correct exemption at DTC. Rather than helping the situation, using DRS will exacerbate the naked short sale share delivery problem in an issuers stock.
Research conducted by Global Stock Transfer of Denver, CO indicates that DTC accepts numerous "exemptions" to delivering shares that are sold, including, but not limited to:
a. "We hold a convertible security that represents the shares we sold"
-- (see "death spiral financing")
b. "Our regulations do not require us to deliver shares sold in this
fashion" -- (see Canadian IDA Rule 100 which outlines margin
requirements to short sell US stocks -- including penny stocks
-- without borrowing the shares or ever delivering them).
Mr. Marcus' statements regarding DRS' Profile Surety Program are nothing more than internal transfer procedures for DWAC customers (Deposit Withdrawal at Custodian associated with the DTC FAST System clients) and have no effect whatsoever on failed share deliveries and categorically nothing to do with naked short selling. It is simply a manner to replace the medallion guarantee, which, needs to be stamped on a stock power or certificate. Of all the many thousands of public companies serviced by DTC, only an estimated 300 utilize the DRS system.
In a "certificated" or "custody only" issue, the purchasing broker demands the certificate representing the customer purchase on settlement day. When the short seller refuses, the buy-in process commences. This process is more difficult and expensive for the naked short seller, since one short position is typically owed to many different firms. The exit from the electronic share settlement system and DTC alone will not prevent naked short selling, but is one of many elements required to help combat naked short selling.
In a "certificated" or "custody only" issue, the burden of completing the transaction (assuring that the public customer actually receives the shares purchased) rests squarely on the shoulders of the clearing firms where compliant attempts must be made to get the shares that the customer bought in the first place. Failure to get delivery of purchased shares after 31 days is an NASD violation. Parking or kiting a buy-in is "market manipulation" as a "wash sale" under Section 9(a) of the Securities Exchange Act of 1934. The clearing broker has many options under the NASD UPC 3360 regarding where they go to obtain the shares that are due to their customer, creating flexibility for the broker if market makers decline the order for "guaranteed delivery." These consequences can be tracked and those responsible for not keeping within regulations and laws held accountable for their actions via litigation or regulatory investigation.
Simply asking for delivery of your certificates, as Mr. Marcus of Integrity Securities urged shareholders to do, is often ineffective. If a public company has more than its trading float naked short, the DTC will simply deny the customer request for the certificate, stating that the stock is "chilled" and that no certificates are available for the customer position. This allows the naked short to maintain and grow and shareholders may never receive their stock.
Mr. Marcus of Integrity Securities refers to share certification as a "return to the stone age paper certs" notwithstanding that 99% of public companies have some form of certificated share ownership.
SAFE HARBOR STATEMENT
THIS NEWS RELEASE MAY INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE UNITED STATES SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO ACHIEVING CORPORATE OBJECTIVES, DEVELOPING ADDITIONAL PROJECT INTERESTS, THE COMPANY'S ANALYSIS OF OPPORTUNITIES IN THE ACQUISITION AND DEVELOPMENT OF VARIOUS PROJECT INTERESTS AND CERTAIN OTHER MATTERS. THESE STATEMENTS ARE MADE UNDER THE "SAFE HARBOR" PROVISIONS OF THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND INVOLVE RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN."
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Source: Investor Communications International, Inc. |
