Re: 2/18/05 - NCANS.net: Letters to Floyd Norris of the NY Times
Letters to Floyd Norris of the NY Times
In response to his article of 2/17 in the IHT and the NY Times:
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Floyd:
I read your IHT article with interest, especially given the amount of time we spent on the phone - an enjoyable conversation, I felt.
I noted that you didn't actually articulate the reasons that companies like NFI or OSTK could be on the reg sho list in the first place. You hinted that there were reasons, but I missed the actual reasons and why they were credible.
It's not a list of companies whose valuations you disagree with.
It's not a list of companies that have run up, or down, or sideways, too quickly. I'm sure if you look at other companies in the peer groups and don's simply selectively filter, you will see that many have run up further - and that is a specious argument anyway, and we both know it.
It is a list of companies for whom the fails exceed a threshold mandated by the SEC. We discussed that, and you indicated that there were other possible reasons that a company could wind up on the list, where the fails might be high, and I responded that in a general sense that might be true, but let's look at specifics. I suggested NFI and OSTK, two companies I'm familiar with. Neither has the restricted stock that could act as a catalyst to winding up on the list. In point of fact, there is no other explanation than the obvious: they've been heavily naked shorted.
You are an icon of financial journalism. You are highly articulate, and more than passingly familiar with the issues. I was surprised that you elected to forego noting the obvious - the companies on the list are heavily failed - i.e. naked shorted - and instead positioned a number of straw man arguments that had nothing to do with the actual topic - valuations, trading action, apologists for the SEC, etc.
In my mind the simple questions are:
1) Specifically, why are companies like NFI and OSTK on the Reg SHO list? If there are alternative explanations, spit 'em out, don't allude to vague possibilities. Then test the theory.
2) Why won't the DTCC and the NYSE/NASDAQ tell anyone how big the problem is, even when you directly ask them? The entire defense from the SEC is now that it's not that big a problem, and we shouldn't worry about it, and that this is all just a bunch of paranoid companies and disgruntled shareholders - and yet all of that hypothesizing relies on an absence of information to the public. If there were a size of fails available, we wouldn't need the theories or the defenses. And yet that simple data point is hidden like it's the key to the red nuke button. Don't you find that odd?
3) The SEC apologist describes her critics/investors as disappointed speculators, annoyed that the list didn't result in price spik es.Again, ad hominem, and dodges the question: Why, if there are significant buy ins occurring, have the prices moved down in significant double digits? The BS about how they've all had good runs is just that - it ignores the central conundrum in favor of some facile and actually untrue price action gibberish.
The reality is that the real meat of the issue was nicely and obliquely hidden by discussions of virtually anything else. Valuations, ad hominem, defenses by bureaucrats, you name it. But those simple three points were avoided like a venomous viper.
Back about year ago, similar comments were made about NFI, and the hedge fund that was shorting them - how do you know it's him, how do you know he's even short, how do you know that naked shorting even exists, etc. Now we have a list of naked shorted companies and proof positive of the other points, and yet we still have the same hackneyed responses. How do we know that naked shorting exists and that we are victims of it? The list. And don't start on the general possibilities, vague and amorphous things besides what it clearly is that it COULD be. No need. It is what it is. All the hand waving and dissembling doesn't change that. And the DTCC and the Exchanges don't even tell the SEC how big the problem is, so I find it strangely impossible that the SEC can say with such apparent confidence that there's no problem. It sort of reminds me of Watergate, where lots of articles came out from respected sources decrying W&B as kooks, the Post as on an agenda, etc. See, we've seen this before. You are old enough to remember.
I can appreciate that not all writers will have a similar perspective. I can appreciate that those whose job effectiveness is being called into question would be defensive. I can appreciate that there are many whose fortunes depend on a perspective being advanced that "everything's OK, don't be alarmed." I have a comprehensive grasp of the reasons for not directly asking and finding the answers to those three questions.
I guess I'm just a little disappointed that given the opportunity, you decided to bunt rather than knocking the cover off the ball.
Regards,
Bob O'Brien
NCANS
(Note - in a followup discussion, Mr. Norris pointed out that a company could remain on the SHO list indefinitely due to the grandfathering of previous fails. I agreed, and pointed out that there was no way of knowing if there were new fails going on for those, but that for companies like OSTK, where they just appeared on the Threshold list as of January 27, there was no simple explanation like that. We are at somewhat of an impasse, as he pointed out that there are legitimate naked shorting exceptions like the market maker exclusions, which I don't dispute, although I disagree that "market makers" should be able to naked short. No one has ever explained to my satisfaction why that is a good thing. Additionally, we are talking about "strategic failures" here, not market maker temporary shorting - the word strategic connoting a strategy of not delivering as a trading vehicle - the polite way of saying naked shorting as part of a price manipulation scheme.While the market maker exclusion is a possible explanation for a portion of the fails, there's no way of knowing if it is an accurate explanation for any of them - the DTCC and Exchanges and SEC aren't providing data that would end the speculation. One wonders again why not. And therein lies the crux of the problem, IMO. O'Brien.)
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Dear Mr. Norris:
It was with a little dismay that I read your analogy of the student blaming the teacher for poor grades. It seems to me that you missed the basic fact underlying the existence of the Threshold list. These stocks have been sold and not delivered. Most of the market lives with the requirement to deliver securities within three days. Reg SHO issues have not been delivered in 13 business days. Each day the Exchanges look at the "fails to deliver" that have been outstanding a full two weeks longer than the required delivery deadline. There is a minimum "threshold" of one half of one percent of the total stock outstanding. For the two stocks you wrote about, that is more than $5 million dollars of sales without delivery... How much more? A fair question, I think, and one that is not being answered. They have the numbers, or they couldn't calculate whether a stock makes the list. There is nothing that makes that information protected. Why shouldn't investors know how much of their stock has been sold and not delivered?
The solution to the problem has been there since the 1934 SEC Act. If a seller does not deliver, then buy the stock in the open market. Why isn't this being done? Why was Regulation SHO written to allow previously outstanding Fails to Deliver to exist without resolution, perhaps indefinitely? I'm surprised that you find it worthwhile to write about the individuals who raise the issue, rather than the issue itself.
A number of exchanges around the world disclose total outstanding short positions every night. In the US market, that information is only disclosed once a month, and even then the total is disclosed nearly two weeks after the trade date on which the data were gathered. Having experienced owning a stock that was the subject of massive unseen short-selling, I can tell you that it was a harrowing time for me. Nothing at all was wrong with the company, but the stock price fell by over 40% in just two days. It was a thinly-traded stock, averaging only 40,000 shares a day. A number of small investors sold out, according to their posts on the message boards, often spurred on by other posters saying that 'big money' must know something, and that institutions were selling out. Several weeks later that stock's short interest was published, showing that a half million shares had been sold short. When several weeks worth of trading volume is sold in a concentrated period, stock prices can collapse. As it turned out, that particular stock recovered within a month, but that does nothing to help the small investors who took losses, primarily due to a lack of disclosure.
Now we have unsettled trades in significant amounts in a number of issues. It is illegal to sell securities and fail to deliver them. Why are you implicitly defending the traders who sold and didn't deliver? Why shouldn't the public know how many additional shares are in the market place that were not issued by the companies? I'm sure you wouldn't support letting companies issue stock without telling existing shareholders. Why should large professional traders at hedge funds be any different?
The solution is really simple: Full disclosure and enforcement of laws that have been in place for more than 70 years. Buy in undelivered sales, and let the seller who didn't deliver suffer the economic consequences. Why wait an extra ten business days? Why not on T+4 (four days after the trade)? What harm is done to the investment public to know how large the fail-to-deliver supply of stock is for each issue on the Threshold List?
I'd love to hear your thoughts.
Best regards,
HXXXXXX Hill
cc: NCANS
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Floyd Norris: If a stock falls, blame the SEC
International Herald Tribune
Friday, February 18, 2005
Mr. Norris -
In my humble estimation, you have completely missed the point. Regulation SHO is an admission by the SEC that the *counterfeiting* of shares has gotten out of hand in recent years.
This will be the story of the year- if not the decade - and to the shame of many journalists, they just don't get it. Most of the corporations whose common shares are listed on exchange Threshold lists are companies that have been targeted for destruction, most likely by hedge funds with enormous clout amongst the journalist community and who will stop at nothing in the quest for performance.
It is not a coincidence that the same tactics used to implode micro-caps (most, admittedly garbage companies) are now in use for much larger companies. Vis-a-vis the typical micro cap, a bankruptcy will only bring the short cadre perhaps $1 million in profit that will never have to be declared, as long as the stock trades at a fraction of a penny (the transaction is never closed out). Two companies cited in your article have close to $1 billion in market cap. If bankrupted via a steady and relentless succession of misinformation, class action lawsuits, bogus regulatory issues and naked shorting, windfall profits will result. Again, no taxes will ever be paid as long as a corporate shell trades for a fraction of a penny.
The incentives to forego a fair playing field are enormous.
Capitalism must fail without the stock market. The stock market is our capital formation system. Naked shorting places the total capitalization of companies in doubt, rendering it impossible to value those companies fairly. The total of illegally shorted shares are not reported and likely, the problem is so huge that no one is willing to step forward. Not the SEC, not the NYSE, and not the DTCC.
Think about it.
Regards,
Alan M. Newman, Editor
Samex Capital's Stock Market Crosscurrents
visit us at www.cross-currents.net/
cc: NCANS, Dr. Patrick Byrne
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