July 23, 2008 6:14AM
The SEC Battle, Round 2
By Alexis Glick
One thing is clear about our almost daily coverage on the merits of the job the SEC is doing and whether or not they have to reconsider the “Uptick Rule,” or extending the number of institutions protected under this new emergency naked short selling order: people care. I want to thank all of you for responding to these blogs on the SEC and what you think needs to change. I would much rather have an open dialogue with you on this blog and welcome your input.
A couple days ago I interviewed the former SEC Chairman William Donaldson and Robert Shapiro from Sonecon. I wrote a blog entitled “The SEC’s Battle.” Shortly after I posted that blog I received a letter from the Depository Trust & Clearing Corporation that they were unhappy with Mr. Shapiro’s appearance and that they did not think that he properly disclosed his legal work against the DTCC. If you don’t know what the DTCC is or the SEC and how they work together, here is a simple explanation:
The SEC or U.S. Securities and Exchange Commission is responsible for maintaining a fair, orderly and efficient market for anyone who trades in them. The SEC governs the rules and regulation that make markets fair and it also makes sure that the corporations that trade in those markets report financial information to the markets about the health and well being of their companies. The DTCC clears, settles and provides information services on the trades that get executed on those exchanges. At any one time the DTCC holds assets and provides custody to as much as $40 trillion dollars worth of securities. Which securities? Equities, corporate and municipal bonds, mortgage backed securities and many more.
With that in mind, take a look at the note below that I received from the DTCC:
Alexis,
On your broadcast today, Robert Shapiro made the assertion that “DTCC was leading the fight against regulation to curb naked short selling.” Not true.
Mr. Shapiro should have disclosed to you–and your viewers–that he has been a paid consultant to lawyers involved in litigation against DTCC. The litigation was unsuccessful…and his assertions are without foundation.
The SEC has affirmed on many occasions that both short selling and naked short selling are trading activities, regulated by the markets and the SEC….and has nothing to do with clearance and settlement.
As you know, The Depository Trust & Clearing Corporation is involved in the post-trade process of clearing the trades executed on the exchanges, helping settle the financial obligations between major firms involved in trading and moving the ownership of securities held at our securities depository. Last year, we settled $1.86 quadrillion in securities transactions.
DTCC provides information daily to the exchanges and to the SEC, that along with information obtained from financial firms, empowers SROs and regulators to police the markets. For Mr. Shapiro to suggest otherwise is misleading to your viewers, at a time when factually accurate reporting is so critical to market and investor confidence.
We’d appreciate if you’d address this correction on air…..and insist Mr. Shapiro disclose he has made part of his living as a paid litigation associate on this issue.
Thank you.
Stu
ps. I tried to call you to discuss, but was not permitted to reach you.
Stuart Z. Goldstein
Managing Director
Corporate Communications
Depository Trust & Clearing Corporation
In response to Stu Goldstein’s note, I sent the following note:
Stu,
I thank you for this very thorough note and for clarifying the role of the DTCC. May I post the second half of this note on my blog to help clarify what has been misstated? Also I am cc’ng my Executive Producer Brian Donlon and my senior booker Yvette Michael. I would be thrilled if Chairman Donald Donahue could join me for a live interview to talk about what the DTCC does and how it is impacted by the temporary change in naked short sale rules. Very few people in this country know that you provide the clearing and settlement for so many different securities and that the assets you hold in custody are valued at $40 trillion. This is an important story and I want to help tell it and explain it. This SEC story and the future of regulation in the markets will be a big story for months to come. Can we book Mr. Donahue? I would be thrilled to have him on tomorrow morning. I anchor the show from 7-9am.
Yvette or Brian can coordinate. And I am serious that I would like to post your comments assuming you feel comfortable.
All the best,
Alexis
P.S. Also we are looking into Robert Shapiro’s background and ties. Clearly we had no idea.
We then called Robert Shapiro to allow him to respond to Mr. Goldstein’s note. Here is what he had to say:
I can appreciate Mr. Goldstein’s frustration. For several years, representatives from the DTCC have minimized the significance of naked short sales and criticized those analysts who, like myself, have studied the phenomenon and concluded that it is widespread and often used to manipulate share prices. Now they have to contend with the SEC’s findings that naked short sales are, indeed, widespread and often used to manipulate share prices. He is correct that the SEC has said that short sales and naked short sales are trading activities; but he fails to note that the SEC also says that naked short sales are illegal trading activities. The DTCC’s role in the process of naked short sales is also acknowledged, albeit implicitly, in Mr. Goldstein’s statements: Naked short sales, in which a short seller sells shares he doesn’t own (as does every short seller), receives payment for those shares (as does any short seller), and then fails to borrow and deliver the shares (the crucial difference with legitimate short sellers), would not be a problem if at the end of the three-day period allowed to deliver the shares, they were not “cleared and settled” as if the shares had been borrowed and delivered. That’s precisely what the DTCC does through its stock borrow program, and that is also precisely what naked short sellers depend upon when they try to manipulate stock prices, as the SEC has effectively acknowledged..
As to Mr. Goldstein’s ad hominem attack on me because I have advised attorneys pursuing litigation against the DTCC, my role there has been to analyze overall market movements and interpret their significance, matters on which the SEC also has asked me for advice. I have worked hard to establish the means and credibility to carry out that analysis, including degrees from the University of Chicago, the London School of Economics, and a doctorate from Harvard University, stints as a Fellow of Harvard University, of the National Bureau of Economic Research, and of the Brooking Institution, and service as the U.S. Under Secretary of Commerce for Economic Affairs. I am paid to do economic analysis, as Mr. Goldstein is paid to advocate the positions of the DTCC. What matters here is not whether he or I have to earn a living, but whether the analysis and conclusions we reach are backed up by real data. I am gratified that the SEC recent steps on naked short sales have effectively reflected the positions and analysis which I, among others, have pursued.
I have asked to meet with the DTCC on more than one occasion to see if we could collaborate on at least identifying the basic data on the incidence of naked short sales against particular companies, data which they control. , and open a dialogue about their significance. The DTCC has never even responded. I reiterate that offer. The data should see the light of day, so many outside analysts can study them and provide analysis and recommendations. This matter is too serious to degenerate into the personal attacks which Mr. Goldstein unhappily offers.
Robert Shapiro
As you can see from my note to Stu Goldtsein, I invited the Chairman on and would very much like to continue the dialogue and allow Robert Shapiro and the Chairman of the DTCC Donald Donahue to respond to each others points. I want to reiterate once again that I am happy to have him on and welcome this discussion. The response I received from Mr. Goldstein is below
Alexis,
We’d be pleased to have you post the full note on your blog. If Mr. Shapiro is invited back on FOX to talk about naked short selling, your viewers would also be well served to know the full nature of his involvement in this issue.
With regard to DTCC, it is never easy covering the complex nature of trading markets and how market infrastructures function in the tight timeframes (3-4 min segments) that TV requires. I’m certainly open, however, to talking with your folks to see about appropriate subjects.
The current changes by the SEC have no impact on DTCC, since these changes only reaffirm that short selling and naked short selling are trading activities………..unrelated to what happens “after-the-trade” is executed. Requiring firms to secure the source of borrowed securities to cover a short sale….are SEC actions focused on further regulating trading activities.
However, there are other subjects that might interest you. For example, if you want to understand why investors have such wide choice in buying mutual funds in the U.S…..its because our Fund/SERV system links all fund families with all broker/dealers, banks and financial planners. In contrast, in the UK or Europe, you can only buy the 10 or so funds your bank offers you. Huge difference.
Why don’t you come visit with a colleague. Our low key nature as an organization is in part because of the critical role we play in the industry and the threat of terrorism. But we can always look for common ground….as long it fits the medium.
Stu
Posts
Comment by lenofus
Jul 23rd, 2008 at 9:06 am
Why not have Stu disclose ownership and control of the DTCC?
The DTCC have frustrated our attempts for years to add transparency to the naked shorting issue. Naked shorting has destroyed thousands of companies and enriched a few beyond any comprehension of wealth. As Patrick Byrne said on your network yesterday morning, ‘we have the data. We aren’t guessing” (paraphrased here). And anyone with a lick of common sense could survey the landscape and realize we have a huge problem.
The facts are in. The situation is critical. The DTCC should cooperate, instead of fighting us tooth and nail, while we still have a tooth, and a nail.
Comment by chuck
Jul 23rd, 2008 at 9:25 am
Question is the DTCC benefiting from naked short selling? Just courious. His reactions has raised more questions than answers becouse his company handles transactions. What’s his stake in all of this? Is afraid of a Sec investigation? He reminds of that Valdosta,Ga realot who tried to play mr. know-it-all.
Yet naked short selling is a serious issue for some traders on Wall and Broad. I read the exchanges. I find the reaction to all this real interesting. But the DTCC neads to clarify its position on the issue.
Comment by Judd Bagley
Jul 23rd, 2008 at 9:38 am
For a little more context on the nature of the DTCC and its unique approach to PR, naked short selling and general accountability, read this.
Comment by Dan Palermo
Jul 23rd, 2008 at 10:15 am
Hello Ms. Glick,
Your approach in addressing this important topic is right on. As most journalists are capured, or lack incentive, NSS is still a mystery to most investors. This issue WILL collapse our financial system. There are many of us who have written letters, support various coalitions (NIPC), and initiate lawsuits.
Enforceing settlement laws by our government can be best achieved by people like yourself, Liz Moyer, Patrick Byrn, and others in position to inform to the masses. What you have done in the last few days is being widely noted.
Thanks and regards,
Dan Palermo
Comment by Sean
Jul 23rd, 2008 at 10:31 am
Ms. Glick , this is what we are talking about, you have raised up a hornets nest. You have turned on the light and now the insects are looking for cover. Don’t you find it odd that everyone one is willing to meet with you except the folks at the “DTCC” what are they hiding? Could it be their illegal activities that are stealing the money right out of the accounts of the average American worker. If they have nothing to hide then they should confront Patrick Byrne and Robert Shapiro once and for all on your show and appease the minds of “Joe investor”. The arrogance of these bureaucrats are simply amazing, where I come from if you accuse someone of something you should do it to their faces not in an email. I believe that Stu Goldstein of the DTCC and their lead counsel Larry Thompson have something to hide. Lets get to the bottom of this once and for all. This involves billions of dollars of investors stolen funds, small companies’ stolen futures and taxpayers stolen money.(Total to the tune of trillions)Let’s follow the money trail, I guarantee you I know who you will find at the end, the DTCC. Also if this were such a matter of National Security and worried about terrorists and what not ask them how a lowly “reporter/journalist” by the name of Gary Weiss had access to their computer system in the past. This is all far from over, I remember the saying from my Mom “Night can only run for 12 hours before day catches it”. Day has finally come and the Patrick Byrne, David Patch, Bud Burrell and Bob O’Brien’s have been Vindicated. Let the people judge who is lying. this criminal arrogance has to stop and Now is the time.Thank you for providing a forum for this very important topic.The future of our capital markets and investor confidence (which is at an all time low) depends on the outcome of this dialogue.
Comment by Fred
Jul 23rd, 2008 at 11:10 am
It is disingenuous of the DTCC to say that naked short selling has nothing to do with settlements. They are doing the same thing Donaldson did in your interview: focusing only on the initiating event and not the closing event (delivery). The bottom line is that many market transactions are occurring with the buyer delivering good funds and not getting shares in return. That is a violation of basic legal principles.
I wish you had asked Donaldson, instead of “Is naked short selling illegal?”, the alternative “Is is illegal to execute a sell order with no intention of delivering the shares in 3 days?” Donaldson was able to answer the question as you asked it perhaps technically accurately but quite misleading.
Comment by Bob O'Brien
Jul 23rd, 2008 at 11:17 am
I love this telltale sentence:
“The SEC has affirmed on many occasions that both short selling and naked short selling are trading activities, regulated by the markets and the SEC….and has nothing to do with clearance and settlement.”
Yes, and the SEC has also said on many occasions that Reg SHO was working (as has the DTCC) when it provably was having no positive effect, and fails were growing, not shrinking. So it is documented as being, at the most charitable, deeply mistaken and incapable of analyzing simple data, and at worst, engaged in a cover-up and a habitual liar.
Also, they ARE trading strategies, in the sense that fraud is a “Business strategy” or genocide is a “population moderation strategy.”
When the rhetorical and lawyerly tap dancing comes out, you know you have the DTCC on the line. Black is white, up is down, the organization that is WHOLLY OWNED BY THE BANKS WHO ENGAGE IN THE PRACTICE is at the mike, claiming to be incapable of policing the activities of it’s owners, and yet ignoring that it is an SRO (self regulatory organization) chartered among other things with policing the activities of its member owners….well, you get the picture. Wall Street created a privately owned organization to clear (process the trade) and settle (deliver) it’s trades, which basically lobbied long and hard to divorce the process of collecting the money, and ensuring the share was ever delivered. And now that group claims it really can’t be responsible for this, it’s primary mission. It is just a hapless conduit.
The DTCC has led a campaign to both minimize the size and scope of the problem, as well as to attach anyone credible who came to the forefront to expose its dishonesty.
Now it has a problem. The SEC has clearly tipped its hand that the problem is MASSIVE (or otherwise, why would any protection from it at all be required in an emergency order?), and the NYSE has re-affirmed that by purportedly threatening not to open unless the market maker exemption was added to the measure - effectively blackmailing the SEC with having to grant immunity from the rule to the NYSE market makers responsible for creating much of the problem in the first place.
So which is it? For all the rhetoric, the SEC is behaving like a regulator scared out of its wits by systemic collapse of the financial sector, which it correctly saw aggravated, if not wholly caused, by the relentless processing of sell orders with no delivery of shares. That “trading strategy” is fraud in any other business - taking a buyer’s money, and then not delivering what was paid for. It should be scared. My research, and the research of guys like Shapiro, who have the academic and professional credentials to be taken extraordinarily seriously, indicates that this practice is pervasive, and likely impacts all stocks in the market - the question is to what degree. Any time you have the capacity to take money and then not be burdened with the cost of goods sold of delivering the product, you are creating a temptation akin to leaving the liquor cabinet open for your teenage son’s party. It’s not surprising that a rapacious Wall Street culture has correctly concluded that it can be enormously profitable to get paid without delivering the value for which it was paid.
This isn’t hard, or confusing. Guys like Stu are paid to make it all seem very confusing, so you can’t see how basically wrong the practice is. That’s theater, for which they are well compensated. Just as the tobacco industry had talking heads assuring the public that there was no conclusive linkage between cancer and smoking, the financial industry has talking heads assuring the public that they aren’t looting the public blind through fraud and collusive manipulation. One has but to step back and consider the remarkable events of the last week, to see that those with deep understanding of the problem, and with no financial incentive to perpetuate it, are blasting the alarm from the highest rooftops.
The DTCC is merely assuring the public that there is no iceberg dead ahead, and counseling the band to play on - secure in the knowledge that it has one of the few reliable lifeboats in the coming catastrophe.
How do you know that Wall Street is lying? It’s lips are moving.
Thanks for your fearless and unbiased treatment of this topic. It’s been a long time coming.
Comment by James
Jul 23rd, 2008 at 12:12 pm
Mr. Goldstein is correct. Naked short selling is a trading technique. What he isn’t telling you is that there is a problem with settlement that is bigger than his firm and which also applies to long trades. The prime brokerage cartel, which owns the DTC, only fractionally backs share claims with real shares. Shareholders in small companies often have trouble getting their share certificates because there is more phantom supply in the system than real shares. This phantom supply isn’t always caused by shorting.
All street form shares are registered to a mysterious private partnership, “Cede & Co.” which is claimed to be the nominee of the DTC, but if you read their financials, there is no reference to the ownership or trust arrangement with this private company. The company predates the DTC and even the old NYSE share clearing system, dating to at least 1971. It is presumably owned by the prime brokerage cartel.
All custodial arrangements are subject to contract law. The clearing brokerage has a trust relationship with the DTC and the introducing brokerage has a trust arrangement with the clearing brokerage. The investor has a trust relationship with their brokerage. At any level in this chain, the trust can be broken and less shares can exist than there are chits or claims on those shares.
Examples:
- your brokerage may desk shares to you. They take your money, print the trade, but don’t buy anything
- prime brokerages treat all their obligations as a fungible mass ($1,000 of pinksheetco is the same as $1,000 of Apple), then net their obligations. Rather than deliver the billion dollars worth of shares I need to deliver, I net them against the billion dollars of shares owed to me.
- the DTC nets claims, with 98% of trades netting without having to settle. For the 2% where they need to provide real shares, they have a share loan program that recycles shares from one account to the next. A lends to b lends to c lends to d lends to e. E has real shares. A, B, C all have claims on real shares
- the DTC lets the share position of their members go negative
- etc.
The naked short selling thing is a red herring. The much bigger problem is values of shares have been heavily diluted by wallstreet insiders that have realized than can get billions of dollars in bonuses by creating claims out of thin air, which are only fractionally backed by real shares.
This makes corporate voting a joke (did you know Cede & Co. doesn’t have to vote the way they are directed by proxies and routinely throws votes away). The average investor has been ripped off in this portfolio by this hidden dilution.
The securities industry discloses huge failures.
How big is the delivery failure problem? Try $67+ billion as of Q1, 2007, for just NYSE member firms - and that is at today’s mark to market value, not the price at which the sales were made - likely 5-10X or more higher. See the totals for yourself in the Securities Industry Association’s own summary of NYSE member firm financial performance, and contrast that to the DTCC/SEC’s $6 billion fairy tale. Lines 69 and 103.
http://www.sifma.org/research/statistics/other/NYSEFirmsTotals.xls
Comment by shawn brandom
Jul 23rd, 2008 at 1:22 pm
i wonder if stu can explain the massive FTD’S in virtually every investment i have made.
shameful stuff.
Comment by chuck
Jul 23rd, 2008 at 2:38 pm
Hey Judd thanks
U really enlighten me on this subject. When I first heard about this on Morning For Breakfast I was confused over naked short selling. I wonder if DTCC is corrupt since they don’t want to play the transparency game. When I heard about the attacks on the Washington Correpondtant Shapiro it took me by surprise. Hey have more online financial journalists dig into this subject. That should spook the head of the DTCC. U know most investors wouldn’t know where to look for short selling; I wouldn’t kno where to look.
Comment by Roger
Jul 23rd, 2008 at 3:34 pm
At this point, the ordinary investor [to say nothing of the general public] has only a dim understanding of the problems involved in the issues of naked short selling and failure-to-deliver.
This equity I bought is on my statemnt, right? What’s the problem?
The problem, of course, is that with the prevailing lack of transparency in the market processes of settlements and delivery, the equity I bought just might be the target of abusive naked short selling practices. The slick Wall Street guys who do this [flooding the market with fake shares] want me to think that the precipitous drop in share price of my equity is only the result of normal market conditions. Right? That’s all it is.
Note that all those involved in abusive practices continuously bring up the tiresome non-sequitur that the targeted company is poorly managed, as if that somehow authorizes writing massive amounts of fake equity shares.
I can’t thank the Gilck Report enough for having the articulate Robert Shapiro talk in his elegant style on the enormous problems of these issues. I hope someone can persuade Gary Aguirre to make an appearance in the future.
Comment by Fred
Jul 23rd, 2008 at 4:29 pm
Ms Glick,
I certainly hope the huge moneyed players don’t bring influence to your management to force you to stop this line of inquiry. You are courageous to do this, because it is obvious you are knowledgeable and know what opposition you might encounter.
Keep up the standards of good journalism. It is an opportunity to deliver a great service to your country. A free press is sometimes the only thing that keeps this country together.
Comment by Gary Jewell
Jul 23rd, 2008 at 4:39 pm
I am a partner in Christian, Smith & Jewell, attorneys for a number of parties seeking redress as victims of naked short selling. During the past several years I have had the privilege to consult with Dr. Robert Shapiro. To say the least, it has been a wonderful learning experience. No one disputes that our legal team has retained Mr. Shapiro to consult on a variety of financial market related matters and that he has been compensated for that time. We are please to share that distinction with Presidents of the United States, cabinet leaders at the SEC and Commerce among others, candidates for high public office, leaders in business, finance and academia. His credentials speak for themselves.
It is a shame that Mr. Goldstein would rather launch personal attacks on Mr. Shapiro as opposed to discussing the merits.
Perhaps your readers would be better served by efforts of the DTCC to provide greater transparency about its ownership, governance and operations. What does the DTCC serve, beyond its own self interest, when it restricts the public disemination of readily available information such as security failures to deliver, the aging of those fails and the responsible parties. Your readers may have a greater interest in how DTCC “settled 1.86 quadrillion in securities transactions” in a single year if they felt that the information they were receiving was not the result of careful editing.
Comment by n-tres-ted
Jul 23rd, 2008 at 5:31 pm
James reports that delivery failures as of 1Q07 were $67 billion according to SIFMA’s figures. Three months later at June 30, 2007, total failures (including failures to receive) were shown as totaling $192 billion according to SIFMA consolidated balance sheets of its member firms. A SIFMA historical chart of failure data shows total failures rose to $140 billion in 2002, then dropped to about $50 billion in 2003, then rose above $140 billion, then back to about $50 billion. This trading practice is being used to defraud other investors of billions of dollars and must be stopped. I would post the chart here, but your comment form does not permit it.
Perhaps the most beneficial effect of the SEC’s emergency order, other than saving the favored 19, is that it required the SEC to admit publicly that this trading practice is being permitted against all other companies. The president and Congress must force SEC to do its job of protecting investors. All shares that remain undelivered must be bought in and delivered to the parties who bought and own them - now. If it shakes the financial foundations of the perpetrators, so be it. They have received billions under fraudulent circumstances.
Comment by lenofus
Jul 23rd, 2008 at 5:41 pm
I would suggest your network, who seems to have some guts and integrity, have a naked short selling symposium. You’ve got plenty of airtime, and I’ll bet you ‘ll get huge ratings. Have Patrick Byrne, his choice of panelists, and let the dark side pick their henchmen. We’ve got the facts. America has the ruins. Let’s see Fox Business take the lead on this. It would be good for the Country. We’ve got some very serious problems; if you could shorten the misery by one day, it’d be well worth it.
You want Reality TV? This would do it.
Comment by bfeuz
Jul 23rd, 2008 at 6:07 pm
I am of the opinion that the SEC and DTCC obfuscate the FTD (fail to deliver)/NSS (Naked Short Selling) situation intentionally.
The issue of the significance of FTD’s/NSS could be cleared up by simple macro disclosues … why doesn’t the SEC just require the reporting of the total “long” shares position of each security by the exchanges on a daily basis (no trading secrets or strategies would be disclosed). Then it would be simple math (Total Long Shares minus Total Oustandstanding Shares) will give you the “TRUE” number of shares shorted. The you can compare this to the bi-weekly (which should also be daily) short reports (which are theoretically legitimate shorts) … and you get a much clearer picture of the FTD/NSS problem and its significances.
Comment by Jean-Paul
Jul 23rd, 2008 at 6:22 pm
What in the world is in that DTCC building?!! What are they hiding? Who’s behind them? Send in a SWAT team, batter down the doors, get the DOJ to swarm over the records and let the people know what’s going on with their retirement investments and stock shares they now erroneously believe they own.
Anyone with nothing to hide would not act as surreptiously and arrogantly as the DTCC.
Peel back the layers of camouflage, Ms. Glick. Stay on ‘em! Thank you.
Comment by Jean-Paul
Jul 23rd, 2008 at 6:25 pm
meant “surreptitiously”
Comment by Dan Somers
Jul 23rd, 2008 at 7:25 pm
Ms. Glick,
I would te-iterate the words of Bob O’brien and save you a lot of reading time. My main concern is to tell you in the most profound way THANK YOU for listening to us. You will be long admired.
Sincerely
Dan
Comment by Craig Payne
Jul 23rd, 2008 at 8:58 pm
Ms. Glick…just a note of appreciation for your coverage of this issue on more than the usual cursory level. Until recently, very few in the entertainment financial media would even mention the word “naked” shorting, or were anything other than dismissive or condescending towards those few who have struggled for years to bring this massive abuse to light. I urge you to keep continue coverage of this issue…the investing public have been basically ‘raped’ at will by the proprietary trading desks of the major IBs, certain hedge funds which specialize in short selling, and the Options Market Makers who, using their “legal” exemption to counterfeit, fascilitate the whole lucrative scheme.
The claim of innocence by Mr. Goldstein of the DTCC is absolutely laughable.
Judging from the body of accumulated evidence, the DTCC is deeply involved in the Failure to Deliver issue.
With journalists such as yourself willing to be fair and allow the evidence to be presented, we may one day see the cabal of Wall Street criminals responsible actually prosecuted under RICO statutes by the Justice Department.
BTW, ‘naked’ shorting without the intent to actually take delivery of shares is illegal. The pattern belies the intent; naked shorting is being used as a means of sh/pr manipulation and as such is illegal. What about counterfeiting has become so tolerable, even defensible…where is the outrage?
Comment by djs
Jul 24th, 2008 at 2:02 pm
The problem with the SEC and DTTC is that they are basically being allowed to print counterfeit money; only in the form of counterfeit stock generated through naked shorting. The mere fact that counterfeit stock exists indicates there is a big problem and a fraud in being perpetrated on the american public. No counterfeit stock should ever exist! If i dont have money in my bank account and i want to buy something, I cant just go out and print my own money. If I borrow money to buy something; I also have to borrow real money; not counterfeit money..there is something seriously wrong here.
Comment by John Grant
Jul 24th, 2008 at 10:15 pm
Thank-you Ms. Glick for your coverage of this important area.
It is telling that the ‘vested’ interests do NOT want transparency in the capital markets. Rather they claim the need for secrecy for their “trading strategies”. However, if you allow them to report the information in the aggregate (so that their secrecy is ensured), they then put forth another argument. Bottom line: they have developed over the years a system that gives them (the well-connected insiders) an edge in the markets. They will fight tooth and nail to keep their money-making advantage ! Their motive is greed, their motto is: “All I want is a fair advantage!”
So, we come back to basic principles: the marketplace has to give equal protection (a level playing field) to all market participants. It is infuriating to the “average” investor when the largest, best-capitalized, full-time market participants want special treatment. They exibit the same over-reaching attitude that led to the “late trading in mutual funds” scandal. Let us hope that enough citizens (including the press corps) are able to shine the light on these practises and shame the regulators into doing the right thing. SETTLE THE TRADES - NO EXCEPTIONS !!!
Comment by Patrick Byrne
Jul 25th, 2008 at 4:38 am
Dear Ms. Glick,
Welcome to the rabbit hole.
Patrick Byrne
Comment by mfm
Jul 25th, 2008 at 7:09 am
Alexis, thank you for your probe. As you well know you’re touching nerves of the most powerful miscreants our society has yet witnessed. I urge you to not relent on this crusade BUT please be careful! Get the complete support of your editors and your entire organization.
How about a show involving Shapiro,Burrell,Patch,O’Quinn,Christian, Jewell, Byrne (you’ll never convince Bob O’Brien to show up unfortunately)on topic and labelit “Can they folks really be considered “The Baloney Brigade”?
You’ll become a financial press hero. I think you already are
Comment by KeithK
Jul 25th, 2008 at 8:49 am
Thank you, Ms. Glick
this is an eye opening and shocking revelation into the depths of our country’s financial markets that I look forward to more stories on. It seems to have raised the ire of a lot of people. I can tell you that if I tried to operate my personal finances in this manner, I would be sued, in jail, bankrupt or all of the above.
Keep up with the good work
Comment by Jay Armsie
Jul 25th, 2008 at 11:21 am
Investigative fame awaits the journalists who nail down the wide-spread fraud of failure-to-deliver. But doing so will require courage, technical knowledge, and credible sources within the DTTC. Those inside sources would need courage too and, of course, integrity. To see why watch the movie “The Insider”. One has to think there is at least one well-placed current or former DTTC employee with the integrity to expose the systems bookkeeping through which untold billions of dollars are illegally harvested from unwitting investors and passed back to the naked-shorters.
Exposure of this fraud has been stymied by official obfuscation and the fact that the U.S. financial media are in-the-tank for the Wall Street establishment.
This blog thread demonstrates many individuals possess credible information and insights on the issue. Still lacking are (1) reliable access into the DTTC and (2) a leading journalist who’s NOT in-the-tank.
Perhaps, Ms. Glick and Fox Business will be willing to take a run at the DTTC stone wall. That won’t happen through one interview. Rather it will take a well-led investigative team with courage and persistence and inside sources at the DTTC.
Comment by Gary Jewell
Jul 25th, 2008 at 12:42 pm
Chairman Christopher Cox recently stated in the Wall Street Journal (July 24, 2008) article “What the SEC Really Did on Short Selling”:
“”Naked” short selling can turbocharge these “distort and short” schemes. In an ordinary short sale, one borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn’t actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.”
– and –
“When the SEC announced this order, I also made clear my intention to ask the full commission to apply operational protections against abusive naked shorting to the broader market. The scope of last week’s action is based on the Fed’s designation of those financial institutions to which our government and the taxpayers will now temporarily provide liquidity, but its rationale extends to all public companies.”
– and –
“We are also exploring other remedies to “distort and short” and naked short-selling abuses, such as the reporting of substantial short positions (akin to the long-standing requirement to disclose significant long positions). All of this comes on the heels of the agency’s recent elimination of other exceptions to Regulation SHO, and our March proposal of a new antifraud rule targeting naked short selling.
The SEC is committed to maintaining orderly securities markets. It neither can nor should direct the market’s fluctuations, up or down. Instead, the commission’s most basic role is to ensure a continued flow of liquidity to the markets from participants who are confident the game isn’t rigged against them.
Abusive naked short selling is far different from ordinary short selling, which is a healthy and necessary part of a free market. Manipulative naked short selling is one worry investors shouldn’t have.”
Personally, I would be interested in Mr. Goldstein’s thoughts relative to Chairman Cox’s comments and efforts being made by his employer to restore investor confidence that the “game isn’t rigged against them”?
Comment by Dave
Jul 25th, 2008 at 3:15 pm
In an optimal world:
All short sales would require a pre-borrow. The pre-borrow would insure that clients do not deceive brokers and day traders do not cheat the system. This would eliminate much of the gaming taking place today by short sellers and broker-dealers.
Trade settlement would be reduced to T+1 to lower the opportunity for present day non-transparent fraud. The CNS system will be less spongy. The closer settlement is to trade the smaller the impact an event can have on the overall market.
Market making would maintain their present exemptions for liquidity but there would be limits on where they can use such exemptions. There would be a cap on when the market maker adds liquidity in a buy-side or sell-side event. For example, in a $10.00 stock a market maker is excluded from using the market making exemption once that market falls into a 5% loss on the day. They are likewise not to make a market making purchase when a stock appreciates more than 5% in a single day. Markets trading in this range already have sentiment in them and any buyer or seller wishing to enter must find an equal trade on the other side. This may lower overall volume as it slows down trading but it will also protect against abuses with the exemptions. The exemption limits would be based on the market itself in the same manner that minimum posted shares is modified based on price. When a stock is falling there is no need to cap sell with the fall similarly when a stock is rising there is no need to buy into a rising market. Market making is by definition the contrarian to market direction.
After a settlement failure has exceeded T+TBD a mandatory buy-in is executed by an independent third party to the trade. I would suggest this be the DTCC. The third party would be mandated to execute the buy-in as a guaranteed delivery and at the cost required for guaranteed delivery. This will eliminate the present regulations that simply require best efforts which is too arbitrary to enforce. This will include market making activity.
Short sales are released at the end of each business day relative to total trade volume. This will provide the market investors with full transparency on why markets are moving as they are and who is moving them.
Regulations will be addressed in a manner that failure to comply will be closer tied to market manipulation than to mere “compliance” violations. Pre-Borrow is cut and dry, locate but no borrow is arbitrary. Mandatory buy-in is final, best effort is arbitrary.
What the SEC and Congress need to do as they evaluate such options they take is to consider what the risks and rewards are for each involved in the equation. Usually the risks v. rewards diverge depending on whether you are the investor or the system.
Should liquidity for one investor place another investor at significant risk and where is the break point? Should the cost efficiency for one place financial burden on another? There needs to be a compromise in how the markets function but even in compromise the market regulators and Congress must define which is #1 and which is #2. Should growth of capital markets trump investor protection or should investor protection trump capital market growth. Does growing the economy for all supersede the rights of individual investors to a fair market?
Dave Patch
http://www.investigatethesec.com
Comment by Sean
Jul 27th, 2008 at 11:51 am
Ms. Glick, want to bet that you get another repremand by the DTCC after your interview with Patrick Byrne on Monday morning? That is if they have not attempted to strong-arm you already into not discussing their responsiblities in this crime of the Century. Because of your few interviews with the credible sources that you have managed to have on your show, you have attracted alot of attention. And since CNBC seems to have been bought and owned by the few Hedge Funds that have demolished our capital markets, I see your show as being our only source of accurate information by way of the Major Media Markets. Another guest that you should have on your show is a former employee of the DTCC a Ms. Suzanne Trimbath (sp). Also if available the former SEC attorney that was fired because he tried to supoena John Mack of Morgan Stanley for some alleged insider trading activities with another large Hedge Fund (Pequot) is Mr. Gary Aguirre. Between Patrick Byrne and these two other very able and credible sources you will see how deep this story really goes. Thanks again for your efforts.
Comment by Jay
Jul 28th, 2008 at 2:44 pm
Ms Glick,
Regarding Sean suggestion of contacting Dr. Suzanne Trimbath, here is her website and bio….Note its second para, “… She gained 20 years experience in financial services operations at Depository Trust Company in New York….”
ABOUT SUSANNE TRIMBATH
Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Dr. Trimbath’s credits include appearances on national television and radio programs (CNBC’s Power Lunch and NPR’s Marketplace) and the Emmy® Award nominated Bloomberg report Phantom Shares. Trimbath’s articles appear in the national publications US Banker, The International Economy, The American Enterprise, and The Mergers & Acquisitions Advisor.
Dr. Trimbath is a Technical Advisor to the California Economic Strategy Panel and Associate Professor of Finance and Business Economics at University of Southern California’s Marshall School of Business. Dr. Trimbath was formerly Senior Research Economist at the Milken Institute and Senior Advisor on the Russian capital markets project for KPMG. She gained 20 years experience in financial services operations at Depository Trust Company in New York, Pacific Depository Trust and Clearing Corporations in San Francisco and the Federal Reserve Bank of San Francisco.
Dr. Trimbath has authored, edited or contributed chapters to five books, including Mergers and Efficiency: Changes Across Time (2002), Beyond Junk Bonds: Expanding High Yield Markets (2003), and The Savings and Loan Crisis: Lessons from a Regulatory Failure (2004).
Dr. Trimbath holds an MBA in Management from Golden Gate University and received her Ph.D. in Economics from New York University in 2000. Her research covers mergers and takeovers, real estate asset studies, corporate finance, and capital market development. Her most recent working paper, Settlement Failures in Bond Markets, addresses the $400 billion secret hidden inside the black box of Wall Street’s back office operations.
Comment by Jay Armsie
Jul 28th, 2008 at 2:48 pm
Former DTCC employee Dr. Trimbath’s web site is http://www.STPAdvisors.com/aboutus.html
Her credits include participation in “the Emmy® Award nominated Bloomberg report Phantom Shares.”
Looks like a good lead.
Comment by Carmela Soprano
Jul 30th, 2008 at 9:42 am
Dear Ms Glick,
Firstly, its a real pleasure to see a US TV Network brave enough to take on such a contraversial issue as “mark to market” Continuious Net Settlement(CNS) at the DTCC.
First and formost, the very fact that a securities asset base the size of the DTCC that is virtually unknown to the vast majority of the public is bizarre! I had no idea that stock that I bought with my hard earned money are no longer actually owned by me in my brokerage account, but actually registered to a CEDE & Co for the convenience of the stock operators is strange to say the very least.
When I opened my brokerage account, It was demanded of me to sign a hypothication agreement. In fact, I was told that If I did not sigh the hypothication agreement my account would not be opened. So I read up on the terms ” hypothication” and learned that every share of stock or bond I own could be lent to other parties to be used for short sales. I was not offered any share of the interest or fees generated by loaning out my assets with no recourse.
As I read the endless horrible news that only now our Securities regulators have finally succumbed and admitted that our fabulous and robust multi trillion dollar economy tetters on the edge of a financial precipice, all based on the greed of Wall street operators, hedge funds, prime brokers and endless leverage that for all intents and purposes could only be the result of massive fraud.
How massive is this problem? How will the ordinary taxpayers ever be able to pay for this damage that our Federal reserve is engineering? How many years of high inflation will it take for these unknown sums of money to be paid back into the system? What state will our country be in when US inflation rages at levels as high 20%+ akin to the Paul Volker years? Can this really be the true state of our sacred financial institutions, leveraged at levels of $30+/- in debt for every $1 of true equity? It’s a receipe for distaster.
The DTCC by their very own admittance is the Ground Zero for these circumstances. How do I kow this? By requesting every stock and bond position I own to be delivered to mt hands in physical form from my three ‘AAA’ rated brokerages. I have never heard such excuses from another human being as to why I cannot have what I have paid for, with the exception of my son AJ when caught smoking weed!!
I contacted my Attorney who recommended a specialist in this area. The Specialist told me that “if everyone called their certificates of ownership for every stock and bond on their statements out of the DTCC the system would get a wake up call it could never handle. The ensuing chaos would bankrupt every Brokerage that uses the DTCC as well as the DTCC itself!”
I sought more information and got a lesson in “fractional reserve deposit systems”. It would appear that similar to banks multipyling the true ‘actual’ amount of customers cash deposited, banks lend or create money to loan against the true deposits, the DTCC and the hypothication of my assets have been leveraged into an unknown number of shares or bonds that have been lent out for others to short sell. I understand that to mean that while I own assets for their appreciation, others are borrowing my assets to profit from their fall in value. On an equal footing of ownership to lent out this fair as the risk is basically equivalent.
Now I am reading, and I am led to understand that there has been circumstances where Brokers have been selling stocks and bonds that they neither borrow, nor ever intended to borrow, yet somehow the DTCC’s massive clearing house allows this practise to persist. This must be classed as the most outragious financial fraud ever devised to seperate US taxpayers and securities owners from their wealth. This is no different from any counterfeit scam. Federal laws are very strict on counterfeit money production as they should be. Yet this is a replication of the exact same crime cloaked in jargon and confusion so that the masses has no transparent view.
I’d suggest that Mr. Cox and his SEC cops are years late in trying to rein this in, which probably suggests that the SEC cops have been in on the ‘vigorish scam’ the entire time.
Thank you for allowing my rant. May I remind our great Congress that the Roman Empire was brought down by its debts, similarly the Great Britain’s empire was lost through uncontrollable deficits.
I hope someone can make a difference and begin to rein in this abuse of our great country’s financial system.
God help us all.