".....Sounds like the slimy stock dealing and government dilly-dallying poop is about to hit the blades......
StockGate: Riggs Regulatory Failures Exemplified in StockGate Scandal, Says Patch
Jul 23, 2004 (financialwire.net via COMTEX) -- (FinancialWire) In a scathing commentary, the founder of InvestigatetheSEC.com, David Patch, a wronged investor who has become a leader in the fight against illegal naked short selling, has raised the issue of regulatory failures in the case of Riggs National Corp. (NASDAQ: RIGS) to those associated with StockGate.
StockGate has embroiled hundreds of companies, millions of investors, billions of dollars and dozens of brokerages such as FleetBoston (NYSE: FBF), Goldman, Sachs & Co. (NYSE: GS), and Charles Schwab (NYSE: SCH), which has just announced it will exit the market-making business.
"It would not be Washington Politics if we are not a daily dose of 'Do as I say not as I do'," said Patch. "This time, the contradictions lie with Senator Carl Levin and his admonishment of Federal Banking Regulators as it pertains to the Riggs Bank scandal.
Patch quotes a Dow Jones news report:
"When a bank such as Riggs operates with such reckless abandon and federal regulators are so ineffectual in their oversight, it does little to inspire confidence in our country's determination to stop money laundering, especially when that bank is located here in our nation's capital,' Levin said.
In the 113-page report, the minority staff of the Senate Governmental Affairs Committee's Permanent Subcommittee on Investigations urges bank regulators to bolster enforcement of anti-money laundering laws to prevent future oversight lapses.
"The failure to take quick and forceful enforcement action in the Riggs matter is not an isolated case," states the report, which details the findings of the panel's investigation.
"It is symptomatic of uneven and, at times, ineffective enforcement by all federal bank regulators of bank compliance with their anti-money laundering obligations," the report said.
Patch noted that, "suddenly it would appear that the Senator from Michigan is worried about the ill effects of money laundering and failed regulatory attentiveness. If only he would walk across the hall to the Senate Banking Committee and address those concerns with the committee. It is the Senate Banking Committee that has authorized the Securities and Exchange Commission to continue to allow our nations wealthiest Wall Street firms to continue to allow settlement failures in our securities to be used to launder money for many criminal elements including terrorists and organized crime.
"Recently the SEC passed a reform package, regulation SHO, in which they admitted that settlement failures can exceed the entire public float of companies. The SEC also admitted that 4% of all publicly traded companies have settlement failure abuses. The terms of the reform package for this abuse, however, has allowed the settlement failures of the past to remain unsettled indefinitely and the incorporation of changes to be pushed out another 6 months. All of this is in direct violation of Section 17A of the Congressional Securities Act of 1934. "Unfortunately, when the Act was drafted it did not address the conflict of interest within Congress between Investor protection and campaign contributions by Wall Street.
"Settlement failures are tied to money laundering through a well documented paper trail. In Canada the British Columbia Securities Commission (BCSC) has taken on a case against Pacific International (PI) in which the BSCS claims that PI helped launder money into the US markets for US Organized Crime families. British Columbia Securities director Sasha Angus had these statements to make during the hearings (www.rgm.com/articles/cornucopiaofcrooks.html) :
"Pacific International was little more than a massive stock and money laundering conduit which attracted and serviced scores of criminals, securities violators and other dubious American clients to circumvent American regulations and laws.
"According to a BCSC analysis, the commissions earned by Pacific International from accounts trading in U.S. stocks grew from $2.3-million in 1993 to about $19.2-million by Dec. 31, 1999, including trading done on a spread basis by brokers Dirk Rachfall and Michael Patterson, who were lured to Seattle by the Federal Bureau of Investigation, arrested, convicted and jailed for dealing with other Mafia-linked clients.
"The last major focus of alleged abuses was in the field of short selling. 'Many of P.I.'s U.S. clients were heavily involved in short sales. Staff reviewed ten particularized accounts for short sales. The total dollar amount of the month-end short positions in these accounts was approximately $72-million. In the month of June, 1999, alone there were 669 short sale trades totaling over $23-million,' Patch stated that Angus told the hearing.
"The evidence will show that the short sales done in U.S. markets from the P.I. accounts were naked shorts. That is, they were not covered in any way at the time the short sale was entered into. The evidence will also show that short selling of that nature is illegal in the U.S. and was a major reason why many of P.I.'s clients were trading at P.I. They were there, to the knowledge of P.I., to trade into the U.S. in defiance of American trading rules. They assisted knowingly in a breach of American trading rules. P.I. condoned that and grew fat on it."
Patch continued:
"The fact is these shares remain uncovered as they rest on our Wall Street books as unsettled trades. Like in the Riggs case, this crime is not isolated to simply one firm. Our US financial firms helped perpetrate these violations by failing to force settlement from the short seller and today, the Securities Regulators and the Senate Banking Commission are both willing to let it fly.
"Wall Street was given a free pass to their assumed liabilities. The cost of this abuse is immeasurable. The money laundering is not limited to organized crime but also terrorism. The SEC and Congress are fully aware of this fact. Therefore, losses are beyond monetary and into the loss of human lives. Is that to be considered acceptable collateral damage to protect these Wall Street firms who made a killing in years past in trade commissions on trades they never settled?
"Pacific International had its commissions grow to nearly $20 Million in 1999. An equal commission was taking place across the border in the US to those who were taking the trades executed by Pacific International.
"The Senate Banking Committee has the responsibility of oversight over the SEC. That oversight is supposed to be guided by the Securities Act of 1934 drafted by former Congressman. Today, with clear verbiage in the Act to address the need for "prompt and accurate clearance and settlement of trades" for the safety of the investor and the industry the present oversight committee is willing to forgo that law to protect those that aided in the crime in the first place.
"Only they can tell us why.
"Senator Levin was clear in his message that regulatory failures exist and that changes were needed. He was talking about banking regulations and he appeared to be one willing to force change. For me personally, I would hope that the senator would walk across the hallways to his colleagues in the SEC Oversight Committees and explain to them the impacts these failures have on our economy, our markets, and our reputation as a nation.
"The Senate cannot deny the existence of this abuse based on the data already provided. To ignore it now, and to play politics with American lives, is inexcusable. There is no justifiable reason to allow the Wall Street firms to continue to manipulate our investments by failing to settle these abusive settlement failures. These firms took the commissions on these trades and have failed to close out the contract as they were paid a commission to do.
"The financial risk of their actions must now be addressed as opposed to placing that risk on the unsuspecting public," Patch concluded.
As noted, Charles Schwab & Co. said it is exiting the market-making business. It is one of several market makers that have been the subject of accusations and/or legal entanglements over naked shorting allegations and issues.
The company had said it is either the number one or number two market-maker in more than half of all of NASDAQ's (OTCBB: NDAQ) listed stocks.
Recently observers were surprised to find a comment letter submitted to the SEC by Mike Alexander, Senior VP of Charles Schwab, that admits outright that brokerages regularly ignore rules and regulations, saying it is not rules that need to be written; it is changes in behavior that is needed.
The comments were directed towards proposed changes in the U.S. settlement system, but could easily apply to other regulations as well.
"Improvements in the U.S. settlement system will only be truly achieved if and when regulations are rationalized to ensure that all market participants are held accountable for compliance. For example, the industry has struggled with the issue of institutional trade affirmation for quite some time now. While the benefits to the clearance and settlement system are self-evident, Buy-Side firms and Custodian banks have been resistant to make those changes that provide for same-day trade confirmation / affirmation and assurance of trade settlement," said Alexander.
"Schwab opposes the notion that securities intermediaries such as broker-dealers be required to police compliance," he stated. "The NYSE and other SROs have had trade affirmation rules on their books for some time. However, such rules have not been effective in changing the behavior
of Buy-Side firms or their custodians; nor do the rules provide assurance that the affirmed trade will settle.
"Recognition of this fact is evidence that changes to the settlement cycle not only require overhauling systems, but also changing behavior. We believe that only by holding all market
participants directly accountable for making required affirmations will the necessary changes to behavior," he stated at www.sec.gov/rules/concept/s71304/charlesschwab061604.pdf .
In a June 23 release, the SEC stated it has put into place Rule 202(T), which establishes procedures to allow the Commission to temporarily suspend the operation of the current "tick" test in Rule 10a-1, and any short sale price test of any exchange or national securities association, for specified securities.
Through a separate order, the Commission will suspend, on a pilot basis for a period of one-year, the tick test provision of paragraph (a) of Rule 10a-1, and any short sale price test of any exchange or national securities association, for approximately one-third of stocks in the Russell 3000 index.
The order also will suspend, on a pilot basis for a period of one year, the tick test provision of paragraph (a) of Rule 10a-1 for short sales executed in any security included in the Russell 1000 index after 4:15 p.m. Eastern, and all other securities after the close of the consolidated tape, and until the open of the consolidated tape the next day.
The pilot will commence on January 3, 2005 to permit broker-dealers and self-regulatory organizations to make the necessary programming adjustments.
The Commission deferred consideration of the proposal to replace the current "tick" test of Rule 10a-1 with a new uniform bid test. The Commission could reconsider any further action on these proposals after the completion of the pilot.
Rule 203, which will incorporate current Rule 10a-2 and will create a uniform Commission rule requiring broker-dealers, prior to effecting short sales in all equity securities, to "locate" securities available for borrowing.
There will be limited exceptions from the locate requirement, including for short sales by registered market makers in connection with bona-fide market making.
Rule 203 also imposes additional requirements on designated "threshold securities." Rule 203 defines a threshold security to mean an equity security for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and that is equal to at least 0.5% of the issue's total shares outstanding.
Where a clearing agency participant has a fail to deliver position in threshold securities that persists for ten consecutive days after settlement, the participant must take action to close out the position. Until the position is closed out, the participant, and any broker-dealer for which it clears transactions, may not effect further short sales in the particular threshold security without borrowing or entering into a bona fide arrangement to borrow the security.
Rule 203 will become effective 30 days after publication with a compliance date of January 3, 2005, to permit firms to make programming and procedural adjustments.
Rule 200, which among other things, will redesignate current Rule 3b-3 with some modifications to define ownership and aggregation of securities positions, and include a requirement to mark all sell orders in all equity securities. Rule 200 will become effective 30 days after publication.
The Commission also adopted amendments to Rule 105 of Regulation M to remove the current shelf offering exception, and issued interpretive guidance addressing sham transactions designed to evade the rule.
The amendment applies to short sales effected within five days prior to the pricing of a shelf offering. Such short sales may not be covered with offering securities purchased from an underwriter or other broker-dealer participating in the offering.
The Rule 105 amendments will be effective 30 days after publication in the Federal Register, and the interpretive guidance will be effective upon such publication.
Opponents of naked short selling were, however, quick to denounce the provision that allows market makers an exemption, and many market observers said that the SEC should provide a public list of companies that fall into the "threshold security" category.
"The SEC claims that the number of companies involved in this 'threshold security' category is 4% of all publicly traded companies. If in fact it is that small the process is certainly manageable," said the website InvestigatetheSEC.com at www.investigatethesec.com . "It is also the right of every issuer, in protecting their business and their investors to know the status of their stock trading."
Some were discussing whether the SEC can keep such information private under the Freedom of Information Act.
The marketplace is already upset over promises by the Berlin Stock Exchange, since broken, that it would delist any company upon request.
"Please understand that cessation of trading in the shares of XRAYMEDIA Inc. (OTCBB: XRYM) is not possible," the exchange told one such requester.
It's not just U.S. companies such as Whistler Investments (OTCBB: WHIS), Sonoran Energy (OTCBB: SNRN), Celsion Corporation (AMEX: CLN), and eLinear Inc. (AMEX: ELU) or Israeli companies that have had serious concerns about their unannounced and unathrorized listings on the Berlin-Bremen Stock Exchange.
Apparently, some 150 British companies are protesting the same fate.
A number of UK-listed companies have demanded a London Stock Exchange investigation after they found that their shares are being traded.
Meanwhile, Whistler, Sonoran and eLinear have announced they have successfully secured their delistings, and the U.S. Securities and Exchange Commission has rescheduled its open hearing to consider the adoption of amendments to Regulation Sho to July 23 at 9:30 a.m. The announcement is at www.sec.gov/news/digest/dig061504.txt .
According to the London Money Telegraph, "several companies believe the market for their shares has been distorted and that they have fallen in value after trading started on the Berlin-Bremen exchange.
"Some smaller companies, whose shares are lightly traded in London, fear the Berlin market has been used by speculators to short-sell their shares."
The Telegraph said the number of companies are thought to be as high as 150, including even "larger companies" such as Matalan (OTC: MATNF) and Halfords.
Mladen Ninkov, the chairman of Aim-listed Griffin Mining (OTC: GFNMF), was quoted as saying: "We were put on the Berlin market without our knowledge by a German broker and now we've got about 8m shares out in a short sale. It is horrifying - that is about 4 per cent of the company and it is forcing the price down."
A spokesman for the London Stock Exchange said: "If there is evidence of market abuse we would refer that on to the appropriate authorities."
Whistler said that according to its transfer agent records, "we have 5,504,680 shares held by DTC, but the ADP broker search indicates of 6,217,458 shares being reported by broker/dealers as being held on behalf of their customers, indicating a short position of more than 700,000 shares. A summary report can be viewed at www.whistlerinvestments.com/shorts.html .
"We have therefore commenced work with DTC for a formal review of the reported excessive broker/dealer holdings of our stock so that we can conduct our corporate affairs properly in view of our planned stockholders meeting and other upcoming corporate matters. We again advise our stockholders make sure that they receive delivery of any shares that they purchase, and also that their stock is not being borrowed without authorization.
Holly Roseberry, President of Whistler Investments, states "We intend to get to the bottom of the excessive short position and bring stability back into the trading of our stock. We're happy to say that we have 5,133 stockholders and we expect all our stockholders to benefit from the shorters having to cover their short positions." |
