Investing 101 - Mar 24, 2006 - Printable Version
- The Parallel Universe of the DTCC: “Bits and bytes in book-entry form.”
by Mark Faulk In an article written to convince states and the securities industry to eliminate stock certificates altogether, appropriately entitled “Escaping the Parallel Universe of Paper Certificates”, DTCC Chairman and CEO Jill Considine entered a parallel universe of her own. It was a statement made to underscore an ongoing campaign by the DTCC and SEC to eliminate the only truly tangible proof of stock ownership.
Considine opens her commentary, which was issued almost two years ago, with the prophetic words: “You may think that parallel universes are nothing but science fiction. But we know better in the securities industry. We work in parallel universes all the time.”
Anyone who has followed the bizarre saga of Stockgate knows that the drive to eliminate paper certificates is nothing new. We first reported it in July of 2005, and by then, the drive was already well underway. In a Faulking Truth article from July 13, 2005, entitled “Forget SEC Regulations….This is Good Old-Fashioned Fraud”, we had this to say about the proposed elimination of paper stock certificates:
The SEC, in concert with the DTCC, has initiated a covert crusade to convince the states to eliminate paper stock certificates altogether, leaving investors with absolutely no way of knowing if the stock that they've bought and paid for has been delivered to them, or if brokers are buying and selling them imaginary stock created out of thin air, stock THAT THEY NEVER DELIVER.
However, it appeared that the SEC and DTCC’s crusade to “destroy the evidence” was all but dead when I spoke with the North American Securities Administrators Association General Counsel Rex Staples after the NASAA’s Forum on Naked Short Selling on November 30, 2005, This is an excerpt from “It’s Money That Matters”, published on Dec. 11, 2005:
In my opinion, the most encouraging comment of the day came after the forum, when I spoke with NASAA General Counsel Rex Staples, and asked him about the SEC and DTCC’s efforts to convince states to eliminate paper certificates altogether, which would effectively destroy investors’ only recourse to prove actual ownership of the stock shares that they have bought and paid for.
His response? “It’s not going to happen. The SEC and DTCC can lobby all they want to, but not one state has eliminated paper stock certificates, and no one will.”
Score one for our side, right? The Stockgate crusaders, who I’ve affectionately dubbed “The Dirty Dozen”, have won another round in our efforts to clean up the stock market. Hooray for our side. As Patrick Byrne would put it, “chill another bottle of champagne.” (Note to paid Overstock bashers: This is not to be construed as a suggestion that Dr. Byrne drinks champagne to excess. It’s an aphorism.)
But wait…not so fast. Today, Bob O’Brien posted a blog about, of all things, the crusade to eliminate paper stock certificates by the DTCC. It seems that sometimes the best way to be successful in a covert operation is to just wait it out….wait until the storm dies down, and when everyone’s attention has been diverted to another issue, sneak in through the back door.
O’Brien provided a link to the DTCC section advocating the elimination of paper certificates, subtly titled “NO MORE PAPER – DTCC’s Campaign to Eliminate Paper Certificates.” Nice. Sure enough, there has been a flurry of new activity touting the advantages of a world without evidence of stock ownership, including “articles” written by the DTCC and the Securities Industry Association this year. Why wasn’t I informed of this? I didn’t receive a single phone call from my good friends at the DTCC or the SIA.
Now, let’s get back to Jill Considine’s Cosmic Theory of Parallel Universes. After her “We work in parallel universes all the time” opening statement, she goes on to say:
“In one universe, we’re in a world of high technology with paperless trading and straight-through processing. In this universe, securities are dematerialized. They can be issued, traded, registered, cataloged and stored quickly and electronically. Because they consist of bits and bytes in book-entry form, they’re nearly impossible to steal or destroy. And they can be delivered halfway round the world in seconds.”
Hey, wait a minute. Did I hear that right? Did the Chairman and CEO of the DTCC just say that shares of stock “can be delivered halfway around the world in seconds”? And “they’re nearly impossible to steal or destroy”? That can’t be right. According to the latest Reg SHO list, there are 159 stocks having significant fail to delivers for at least 13 days, twenty-three on the list for over 100 days, and four (Krispy Kreme, Martha Stewart Living, Netflix, and Global Crossing) with significant fail-to-delivers for a whopping 303 days.
But yet, there it is in black and white, or it you prefer, there it is in bits and bytes. Stock “can be delivered halfway around the world in seconds.” Oh yeah, I almost forgot. The securities industry works in parallel universes all the time. In one universe (the one where they want to eliminate paper certificates altogether), they can deliver stock in nanoseconds, but in their parallel universe, they can’t deliver the shares in 303 days (and counting).
While the DTCC and the SIA lobby states to eliminate paper certificates, a shareholders’ task force for CMKM Diamonds (CMKX) has been conducting a stock certificate pull for that company, in an attempt to establish just how many of their shares are real, and how many are simply “bits and bytes in book-entry form”. After two extensions and over 4 months, the brokers who sold the over 700 billion shares and the transfer agent in charge of delivering those physical shares (sorry, that should read “over 700 billion REAL shares”), have only been able to deliver 550 billion shares to their clients. And conservative estimates are that only 30,000 out of a total 50,000+ CMKX sharehoders have received their certificates. However, the “bits and bytes in book-entry form” were, in fact, delivered in a matter of seconds. How long will it take to deliver the real shares, and how many "bits and bytes" shares exist as opposed to those real shares, remains to be seen, but the most recent March 15 deadline has now been extended to May 15, 2006.
In another another parallel universe article from February 2006 entitled "NO MORE PAPER", the SIA “reassured” shareholders with these soothing words:
“There is no need for a physical certificate to evidence an investor’s ownership. An investor’s broker/dealer or custodian bank will periodically send them a statement of ownership that lists all of their security holdings”
Really? Someone want to tell that to the 20,000 plus CMKX shareholders still waiting for their stock? How about the millions of shareholders in the thousands of companies (many now completely destroyed) who NEVER received their “real” shares of stock?
In the meantime, the crusade continues. The DTCC’s Janet Wynn had this to say about the securities industry’s efforts:
“It is charging ahead to stem the issuance of new paper certificates as much as possible through the use of DRS (electronic Direct Registration Service ) and book-entry-only programs. Meanwhile, it’s fighting a rearguard action to ensure that paperless securities remain paperless, and that shareholders don’t convert them into paper.”
It is at the very least suspect that the DTCC and the SIA renew their push towards total the elimination of paper certificates at the same time that evidence mounts showing that significant fraud exists in the delivery of those shares. More likely, it is a concerted effort to simply destroy the evidence and bury the bodies. If that happens, our stock will be nothing more than “bits and bytes in book-entry form.”
And that’s the Faulking Truth.
In other news, CBS is airing a segment on 60 Minutes this Sunday about hedge fund SAC and Gradient Analytics concerning stock manipulation accusations involving Overstock.com. In this writer’s opinion, it will most likely be another “isolated incident” story, just as NBC Dateline turned their “major expose” into a 10 minute segment about a single company, Eagletech Communications, and ignored the larger issue altogether. In fact, I’d be willing to bet that there will be no more than a passing reference to naked short selling at all, and that that will accompanied by a lame joke about the word “naked” and a slightly embarrassed giggle from a female commentator. Any takers? Our only hope is that Patrick Byrne is involved in the segment, because, given more than 30 seconds of air time, he will address the larger issue of fail to delivers and stock counterfeiting. Good for him.
Here’s CBS’s description of that segment, which is scheduled for this Sunday, Mar. 26, 2006:
BETTING ON A FALL – Investment pools for the very rich are known as hedge funds. One of the major ones is being accused of spreading negative information about a major company and then betting on its falling stock price. Lesley Stahl reports. Janet Klein is the producer.
60 Minutes airs Sundays at 7 p.m. ET/PT. Check your local listings.
For more information on the 60 Minutes report, go to:
http://www.marketcenter.com/stocks/story.action?id=ITR083r3955
This article is also posted at The Sanity Check, along with an excellent comment forum, at:
http://www.thesanitycheck.com/Default.aspx?TabId=86&EntryID;=176
Mark Faulk is the Editor of The Faulking Truth, and the author of the upcoming book entitled "The Naked Truth," due out in June, 2006. For more information on the book and on the stock market scandal, go to http://www.faulkingtruth.com , and to pre-order your copy, go to http://www.theownersgroupinc.com/cart/
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Investing 101 Archives:
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