I’ve written a lot lately about the shenanigans that are part and parcel of our equity markets, and how the current ghost in the machine appears uniquely predisposed to favoring the companies that derive their income from handing our money. I’ve speculated about how the Depository Trust Clearing Corporation (DTCC) abuses the public trust in order to effectively counterfeit shares of publicly traded companies, and how our regulators appear happy to stand by doing absolutely nothing while the American public gets fleeced.
I was at dinner last night, and a friend of mine asked me how long I thought that the abuses had been going on, and how large I thought the problem really was, and why nobody is doing anything about it.
First, as to the question of how long.
In 1999, the Depository Trust Corporation (DTC) bought the National Securities Clearing Corporation (NSCC) and created a new uber-entity – the current Depository Trust Clearing Corporation (DTCC) – entrusted with not only dematerializing every paper share and holding them all, but also now with clearing the trades and lending shares out to make the system run more efficiently. I believe that the real fail to deliver problem began in earnest then, when you had the same accounting firm doing both companies’ books, and you had like minds all thinking alike with the same imperative: how to make the maximum amount of money from the clearing and settlement and holding process. I believe that the real abuse began then, and has continued in an ever more ominous and dangerous manner, to this day.
The NSCC’s stock borrow program was set up to handle short term failure to delivers – like a day or two over the line. No problem there. But I believe that the system, and the avarice that is a natural lubricant for it, saw a way to create more trades, more commissions, more interest from the borrow, and more “liquidity.” Just abuse the short term system and convert it into a long term stock printing system – more commissions for the owners of the DTCC and NSCC (the brokerages) due to more shares available to trade every day, more fees from the borrow program, more fees from hedge funds who require a greater number of shares than the company ever authorized in order to achieve their goals of reducing prices to the point where their shorts were in the money. In short, everyone benefited from the practice financially, except of course the companies and their shareholders – but they are a fragmented lot, and the system, like most systems, is in place to perpetuate its own power and profitability, not be fair to the pawns in the game.
As to how large a problem it is, that is a little harder to pin down.
Overstock.com is one of my favorite cases, not just because I believe that Dr. Byrne is a man of genuine integrity and courage, but also because the timing of their manipulation is such that it provides us with a handy test case. OSTK showed up on the Reg SHO list on January 27. If SHO was working, it would have been off within 13 days. It is still on the list to this day. That tells us that any facile explanations involving prior grandfathered fails keeping the company on the list don’t apply. It also tells us that the rules are not being enforced, and that the system continues to fail us as investors, and as owners of companies we invest in.
The truly staggering part about all of this is the studied lack of any official response from the SEC. They are strangely silent on the matter. Not a peep out of them.
Now, where I come from, I would think that if the regulators have a pretty basic charter – keep the markets fair – and if they clearly aren’t doing so, well, that there would be a lynching at some point. Apparently that’s not the case with the SEC. They have allowed flagrant abuse of the system, as evidenced in my personal favorite case of the moment, the Compudyne matter, where a New York hedge fund sold over a third of the float of that company short in 975 separate transactions, EVERY ONE A FAIL TO DELIVER, and yet not one was flagged or stopped or caught by the system. Or another fun one, from Professor Leslie Boni’s paper, wherein she reviewed the trading of one market maker, where over 68,000 failed trades were put through for this one group, and a whopping total of 86 were bought in as the rules mandate. The rest were allowed to fail. And nobody did anything.
Now, I don’t know about you, but if I was allowed to break the rules in any business for profit 68,000 times, and only got penalized 86 times, I’d be thinking that I had a pretty good gig going.
Why are these noteworthy? Well, in the Compudyne case, because it is the NASD bringing the charges, not the SEC. The SEC is silent. And because the Boni paper was written while she was doing research for the SEC at the SEC.
So how big is the problem? As discussed many times before, the DTCC won’t tell us, or the companies. The SEC isn’t asking them (supposedly), although they haven’t really articulated why they aren’t asking them. And the exchanges aren’t telling, supposedly because the data is the DTCC’s and they aren’t allowed to disclose it.
So what it adds up to is a conspiracy of silence on what I believe will turn out to be the single biggest scandal to hit the regulatory environment as well as Wall Street in a century. I believe that the problem is pervasive, endemic to the system, and so widespread that the SEC is afraid to pull back the system and show the public what has occurred on their watch. I think they know it would horrify us, and drive capital out of the markets, and BK many of Wall Street’s finest. Now, all that might seem nutty at first blush, but in parting, consider this:
Not one person, not the SEC, nor the DTCC, nor the exchanges, is willing to just show us what the level of the failures are.
And that is the single most frightening aspect of it all. The silence is deafening.
(Editor's note: Over the past few months, many articulate Americans have joined the battle against naked short selling, the stock market scandal known as Stockgate. It will not be one voice that wins this fight, or rights this wrong, it will be the collective voices of the thousands who are truly interested in doing the right thing for all of America. This commentary is reprinted with permission from Bob O'Brien, whose other op-ed pieces can be found at http://bobosrevenge.blogspot.com/ and at The National Coalition Against Naked Shorting website at http://www.NCANS.net/ )
More Editor's stuff: There is an entertaining Q&A; session on the DTCC website about the naked shorting issue. It is rife with misdirection and doublespeak, but at least they are squirming in their seats enough that they feel compelled to publicly address the issue, and they did once again acknowledge the existence of naked short selling. Hey, it's a start. That interview can be found at http://www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html
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Investing 101 Archives:
Financial Terrorism in America (Mark Faulk, Mar 19, 2004)
Pump and Dump or Short and Distort? (Mark Faulk, Apr 18, 2004)
Response From Berliner Freiverkehr and The Berlin-Bremen Stock Exchange (The Faulking Truth, Jun 3, 2004)
The Berlin Connection? SEC and NASD to Meet With German Brokerage Firm Tomorrow (Mark Faulk, Jun 3, 2004)
Is Dateline Losing Credibility Over StockGate Story Delays? (Mark Faulk, Jun 11, 2004)
Who's Looking Out For You? SEC Critics Seeking Investigation (Mark Faulk, Jun 27, 2004)
He Said, She Said: SEC, NASD At Odds Over Status of Proposal (Mark Faulk, Aug 5, 2004)
The Berlin Connection: 250 Companies Out (And Counting) (Mark Faulk, Aug 30, 2004)
Jag Media Case Dismissed by Judge, Citing Filing Deficiencies (Dave Patch, Sep 9, 2004)
A Twelve Step Program to Clean up the OTC Stock Market (Mark Faulk, Sep 14, 2004)
Is Time Running Short in StockGate Scandal? (Mark Faulk, Oct 5, 2004)
Dateline: The Waiting is the Hardest Part (Mark Faulk, Nov 16, 2004)
Death of an Investment Class (Dave Patch, Dec 30, 2004)
Elgindy Trial Illustrates Incompetence at the Federal Levels (Dave Patch, Jan 4, 2005)
The Year of the Investor (Mark Faulk, Jan 5, 2005)
Regulation SHO’s Threshold Lists Leave More Questions than Answers (Dave Patch, Jan 11, 2005)
Feeding the Stock Market Beast (Mark Faulk, Jan 11, 2005)
Economic Corruption US Style (Joel S. Hirschhorn, Feb 27, 2005)
Stockgate Goes to Congress (Mark Faulk, Mar 10, 2005)
The Old Shell Game (Bob O'Brien, Mar 25, 2005)
FINALLY! Dateline to Air Stockgate Segment April 10th (Mark Faulk, Mar 28, 2005)
Dateline Stockgate Update: POSTPONED YET AGAIN! (Mark Faulk, Apr 6, 2005)
Time to Boycott GE, Dateline, and NBC? (Mark Faulk, Apr 6, 2005)
Pink Sheets CEO Calls for Reform in OTC Stock Market (Mark Faulk, May 2, 2005)
National Counterfeit Conspiracy Days, June 6th and 7th! (Mark Faulk, May 15, 2005)
Ninety-Four Trade Days and Counting (Dave Patch, May 25, 2005)
Stockgate: Turning up the Heat (Mark Faulk, May 31, 2005)
Stockgate: Donaldson out......Cox in (Mark Faulk, Jun 2, 2005)
SEC's Donaldson out, Cox in: One Step Forward, Two Steps Back (Mark Faulk, Jun 13, 2005)
President Bush’s Social Security Agenda - Steal your Money the Easy Way (Dave Patch, Jun 17, 2005)
Global Links Corp: The Real Story (Mark Faulk, Jun 26, 2005)
Forget SEC "Regulations".... This is Good Old-Fashioned Fraud (Mark Faulk, Jul 13, 2005)
Common Cause Joins Fight to "Stop Corporate Takeover of the SEC" (Mark Faulk, Jul 22, 2005)
Dateline Stockgate: We're on, we're off, we're on, we're off.....WE'RE ON AGAIN: July 31st!!! (Mark Faulk, Jul 25, 2005)
Dateline to Air Stockgate Segment in 2-Hour Show, Sunday, July 31st (Mark Faulk, Jul 29, 2005)
From Dateline to Overstock....The Plot Thickens (Mark Faulk, Aug 16, 2005)
Congress Sells America Short (Mark Faulk, Sep 20, 2005)
Stockgate: The Big Picture (Mark Faulk, Oct 10, 2005)
Stockgate: Rallying the Troops (Mark Faulk, Oct 16, 2005)
The $10.5 Billion REFCO Smoking Gun? (Bob O'Brien, Oct 23, 2005)
We Definitely Aren't in Kansas Anymore - Fraud Wall Street Style (Bob O'Brien, Nov 3, 2005)
Start Spreading the News: Stockgate Goes Nationwide (Mark Faulk, Nov 8, 2005)
Stockgate: "Can We Talk?" (Mark Faulk, Nov 27, 2005)
It's Money That Matters (Mark Faulk, Dec 11, 2005)
Regulation SHO; Results Leave Questions More than Answers (Dave Patch, Dec 29, 2005)
Faulking Truth Editor to Write CMKX Story (The Faulking Truth, Jan 5, 2006)
It Takes an Army (Mark Faulk, Jan 11, 2006)
The Circle of Greed: The Only Bull in this Stock Market is a Cash Cow (Mark Faulk, Jan 17, 2006)
A Silent Lynch Mob - An Open Letter From Rod Young (Rodney Young, Feb 2, 2006)
The Circle of Greed: A Voice in the Wilderness (Mark Faulk, Feb 13, 2006)
The Circle of Greed: Who Wants to be a Congressman? (Mark Faulk, Feb 26, 2006)
Freedom of the Press? (Mark Faulk, Mar 12, 2006)
The Parallel Universe of the DTCC: “Bits and bytes in book-entry form.” (Mark Faulk, Mar 24, 2006)
Finally...the Truth About Patrick Byrne (An open letter to Colin Kelly, Jr.) (Mark Faulk, Apr 19, 2006)
Faulking Truth recommends abolishing the SEC (Mark Faulk, Apr 27, 2006)
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