Talk:Naked short selling/Archive 4

message: To ESkog
I saw your kind words and would respond on the page I read them on, but I cannot find it, so I hope you don't mind that I have come over here, and I will also post this on my talk page. It seems obvious that the naked short selling page has been co-opted by the miscreants. I see no reason that the link http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/Default.aspx is not permitted on the page as it is a legitimate blogsite, full of useful information where one can learn and share information on naked short selling. It is obvious to many of us that watch our stocks on a daily basis that there is blatant manipulation of the share price in many stocks, which is only possible through the counterfeiting of phantom shares. I am sorry you chose to side with the big money who are manipulating our markets and now the wikipedia. If I cannot participate in the wikipedia anymore, so be it. I know a lot about a few things, and a little about many. However if the wiki is not interested in seeking the truth, count me out.
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If this link http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/Default.aspx is not permitted to be displayed then it is obvious that the crooks are in charge of what is allowed to be included in the wikipedia. Shame on you for allowing either money or a personal bias by corrupt evil doers to bastardize widipedia and get in the way of telling the truth, the whole truth and nothing but the truth, so help me God. 
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Leuko & Co I put the link in again http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/Default.aspx Please do not remove it as it is a powerful source of information on naked short selling. TIA 
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To whomever:
TheSanityCheck.com is not a commercial site. We sell nothing. It is a collection of opinion and data, representative of everyone from academics, regulators, journalists, investor advocates. It is the official blog of the Market Reform Movement, whose work has been officially recognized by the Columbia Journalism Review, the Nevada Supreme Court, and other similarly serious sources. Most of the factual content is FOIA data collected from the SEC, which shows the actual amount of naked short selling in the US equities markets. The opinion pieces are typically written by Dave Patch, who has appeared on CNBC, Mark Faulk of TheFaulkingTruth.com, Bud Burrell, and Bob O'Brien, who has been interviewed by numerous publications. The overarching imperative of the bloggers and academics who contribute to the site is to establish a fair and transparent rule of law in our markets. Critics of our work generally fall into one camp - those who gain financially by an illegal practice such as naked shorting, and who will do virtually anything to silence any exposure of the extent to which the practice takes place. That includes many of the most powerful and wealthy icons on Wall Street, and most of the large institutions that trade stocks and make markets. Those who oppose naked shorting are everyone else: academics, investors, regulators, lawmakers, CEOs, anyone who has any interest in investing in the markets.
The "controversy" over naked shorting is a red herring. There is no controversy. It is illegal for anything but a market maker in bona fide market making instances to naked short. Much is made to confuse innocent failure to deliver due to a lost certificate, and the sort of practice that has hundreds of millions or billions of shares failing delivery every day. The 1934 Securities Exchange Act stipulates clearly that shares need to be delivered promptly - "settle" - including transfer of record ownership. Selling shares one doesn't have possession of, and has no intentions of delivering, is fraud. Simple. As discussed before, much effort goes into creating and atmosphere where simple fraud is blurred, by calling it something else. The reason all the effort is invested is because Wall Street makes many billions from the practice, and it is in the best interests of that system to lie, and obfuscate, and confuse, and pretend that taking a buyer's money and then refusing to deliver what they paid for is anything but fraud.
The battle taking place on this site is typical of what has taken place in the media. On one hand, we have wordsmiths with an agenda - argue that illegal naked short selling counters penny stock scams, cite like-minded journalists reciting their lines by rote, hammer that hundreds of millions of undelivered share COULD POSSIBLY be innocent, cite the SEC's self serving sleight of hand statements, ignore all contradictory evidence and data, no matter how plentiful...virtually every rhetorical dishonesty can be seen in just a few short paragraphs. On the other hand, we have the 1934 Act and the rules therein, we have FOIA data, and we have the expert testimony from a host of securities regulators, academics, legal experts, public officials, all of whom clearly articulate that naked shorting is real, is damaging, and is a big problem.
That Wiki allows the former to have precedence over the latter is tragic. They are not equal. Any rational or logical adult can see they aren't. References to one author's mediocrities, in both book and dated article format, abound, while the statements of the former head of the SEC, of the securities regulator of UT, of the former Undersecretary of Commerce, of magazines like Time and Bloomberg and Forbes, are discarded out of hand, with a feeble argument that "meat puppets" are advancing an "agenda."
Perhaps that is true. An agenda is being advanced. It can seem foreign to those with ulterior motives and an adversarial imperative.
The agenda is known as the truth.
Whether Wiki finds it unfamiliar and unwelcome is really the question, isn't it?
This is the long way of saying that removing the link to the pre-eminent site on naked shorting, which HAS been cited by the folks who hand out the Pulitzers as the source to go to for info on the topic, is typical of intellectual dishonesty of one of the editors here, and speaks to a desire to remove a source of hard data, on any pretense.
But using the contrivance that it is a commercial link, or someone's own, private website, is a canard, and beneath any site wishing to hold itself out as having even a modicum of integrity.
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Please do not remove this link http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/Default.aspx until you have given an adequate reason why a link to a blog dedicated to naked short selling should not be included on the naked short selling page. You gave one reason, then when I showed that I was not affiliated with the site and that it is not a commercial site all you could say was oh well, it is not allowed. I say it is allowed. TIA
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In the most recent edits, I deleted unsupported opinion from columnists and reporters containing no hard data, but rather their non-expert opinions. I restored links to expert testimony in the form of letters to the SEC from regulators and other acknowledged authorities on market operations. I removed the segment wherein a rant about penny stock scamsters contends that this is all a ploy by them to distract the market - no basis or data is cited for this section, and it has no information to support its statements - it is pure agenda masquerading as fact. I would propose that if there are penny stock scamsters using the technique to defraud investors, and if naked short sellers, by beaking a different set of laws, somehow are helping the market, that data be cited demonstrating that to be true, and quantifying how often it happens, and what measurements are being used to establish their helpful role.
I have no doubt that the editor who has been so opposed to anything approaching balance here will strike it all, arbitrarily, arguing that "meat puppets" (ad hominem attacks on other editors) have "vandalized" (shorthand for cited facts and struck unsupported, biased statements) the article. Let's all start our stopwatches to see how long it takes.
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Please stop removing this blog link http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/Default.aspx 
As I stated it is not a commercial site and I have no affiliation with the site other than learning and sharing information about naked shorting. I am new to the editing procedures, so if someone could advise or help make this link permanent I would appreciate it. TIA
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Apparently, the opinions of reporters who have no advanced degree or academic history in stock clearing, securities law, or any other relevant area are OK - as long as they support the article's agenda that concern over naked short selling is a crackpot agenda. If you cite Forbes, or Time, or Bloomberg, or Euromoney, or any of the host of academics on record pronouncing it to be a huge problem, that is deleted by the editor with an agenda. Why? Who knows...
Today, TheSanityCheck.com got in a new set of FOIA data on OTCBB issues from January 3, 2005 to May 31, 2006. The number of failed deliveries increased by almost 20%, from 585 million per day to 670 million. To put that into perspective, that is roughly 15% or so of the daily volume on OTCBB that is naked shorted. And yet the article would have most believe this is a fringe non-issue. I would call 15+% a big problem. Certainly, I would cite it as fact, and not Floyd Norris' opinion, or a Wiki editor's opinion that pump and dump fraud (of unknown severity due to a complete lack of any supporting data) is offset by naked short selling fraud.
Wiki has the potential to be a valuable tool. When it is hijacked by a special interest, whose agenda is to eliminate facts and dissenting data, in favor of opinion that resonates with that special interest, it destroys any value the forum has. The SEC has said that Reg SHO is working, and has resulted in a marked decrease in delivery failures. We now see that on the NYSE they are up a bit over the last year and a half, and on the OTCBB, they are up 20% or so. The SEC is lying when they say it is working. The data proves the lie. There is no interpretation required. It is basic math. Thus, their opinions are suspect, as is their Amicus. Apparently one state supreme court agrees.
I note that Wiki prides itself on debunking pseudo-science. I celebrate that debunking drive. It is with wonder, then, that I read paragraph after paragraph of gibberish containing no verifiable facts, but rather arguments from authority, non sequitors, logical fallacies, and an articulation of rules and requirements that seem as draconian and bureaucratic as anything Pravda had during the height of the Soviet era.
How about we lose all the "critics say an illegal trading practice responsible for over 15% of one exchange's daily volume is actually good for you" rhetoric, and stick to the facts? Facts like FOIA data, on-point academic dissertations by experts, balanced comments from noted authorities (versus the one-sided spin of the NASAA forum - where most of the panel of experts agreed the problem was substantial, and growing, and only the rep from the exchange, and the regulator, tried to pronounce it a non-issue - to virtually universal derision of the other panelists), and citations of SEC code and UCC 8?
NCANS filed an Amicus that disagreed with the flawed argument submitted by the SEC. The SEC's spin is cited, but the NCANS and NASAA briefs, that argue that the SEC is wrong, are not. Why not? Or rather, why is the SEC's screed here in the first place? UCC 8 defines a security entitlement as requiring prompt delivery, in order to remain bona fide. That is in UCC 8. When a share isn't delivered promptly, the entitlement ceases to be bona fide, per UCC 8. No opinion required, just the ability to read the code. If someone wants to obfuscate the security entitlement issue, why introduce one of three Amicus' submitted in that case, instead of the actual code that clarifies the point? To what end? How is our appreciation of the issue improved? Answer: it isn't.
Pseudo-science, throughout the centuries, always has giveaways. The first is a rigid requirement that facts inconvenient to the theory are ignored. In extreme cases, such as witch hunts and periods of severe dogmatic hysteria, all evidence of flaws in the prevailing wisdom are erased, deemed dangerous to the pseudo-scientific agenda. Only "approved" authors may be cited, only "approved" knowledge described. The very existence of data that shows the agenda to be false is considered a danger, and often the pseudo-scientist is the first to call everyone else a heretic, or a vandal. Fascist regimes also operate in this manner. Knowledge is dangerous. Facts are dangerous. Data is dangerous. Best to erase it, declaring it to be flawed, then to allow the reader to judge it on its merits.
Wiki, in the best pseudo-scientific, or metaphysical tradition, is doing exactly that with this article. Experts are dismissed, only select sources are cited, and hard data is expunged and deemed irrelevant.
Most would think that the actual number of delivery failures on our exchanges would be relevant to this article. Not the editor who keeps changing all of it back every few hours. Most would believe that the observations of securities regulators and academics and market scholars would be of more value than the opinions of reporters with no particular acumen on the topic. Not on Wiki. Most would likely find reading the actual code, that mandates prompt delivery of all trades, including transfer of record ownership, to be more germane than forgettable paperbacks with no relevance. Not the editor "standing guard" here, who also coincidentally wrote the Wiki page on that author, which is a glowing and improbably positive genuflection.
What a shame that the academics who are involved in Wiki have to lower their standards to the point where circling the wagons entails supporting this sort of nonsense. So much for rigorous logic and the scientific method. -- Boboncans --
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OK. This is the answer I was given. Please do not add commercial links or links to your own private websites to Wikipedia, as you did in Naked short selling. Wikipedia is not a vehicle for advertising or a mere collection of external links. You are, however, encouraged to add content instead of links as long as the content abides by our policies and guidelines. If you feel the link should be added to the article, then please discuss it on the article's talk page rather than re-adding it. See the welcome page if you would like to learn more about contributing to our encyclopedia. Thanks. Leuko 02:43, 3 October 2006 (UTC)
thread_title:  About the Illegal Naked Short Facts 

message: I think the current page is OK. However, no mention is made of the wild conspiracy allegations being made by these people. --Tomstoner 23:07, 20 February 2006 (UTC)
thread_title:  My Two Cents 

message: Surely if it were a widespread problem, that would imply illegality?
The bonafide market making exemptions for legal naked shorting are by definition not a problem.
So, naked short selling itself is not necessarily a problem.
Illegal naked short selling is a problem, because it can only exist is a weakly managed system.
The unanswered question remains, just how widespread is it: big problem, or small problem?
I would still consider splitting the formal situation (SEC etc.) from the alleged situation (the debate).
Anyways, good luck; this is my last post to y'all. Unless there are questions ;-)
Zilcstra -- logged in, but perhaps not visible as such. Tue Feb 21 00:48:22 CET 2006
The article is fine.--Tomstoner 05:16, 21 February 2006 (UTC)
thread_title:  Illegal vs. widespread problem? 

message: And since philosophical bias has trickled in here in both camps. I have deleted every statement that,
*Is not fact based
*Just opinion
*Alleged
*Not an effect of naked short selling
*He said/She said (not an effect)
*Can not be verified from a reputable source or to whom the quote or action is being attributed to
So it severely shortens the "Effects" section, keeps it fact based and keeps the philosophy out of it. I think this is the only true fair way to describe the effects, and not something else.
If someone wants to start an "Examples or famous quotes" sections, a lot that has been deleted would fit there.--tom 08:18, 21 February 2006 (UTC)
thread_title: Since this is a contentious issue... 

message: That's all I have to say. I'm done here -- no time to fix. Page has been hijacked and turned into a polemic, all balance removed. Nuff said. Maybe a knowledgeable person can fix. I don't have time to baby sit this one and do reverts when my fixes are unfixed.  --Tomstoner 21:44, 21 February 2006 (UTC)
thread_title:  Page Hijacked 

message: *What remaining information is not correct or fact based?
*Only verifiable facts remain to ensure this is NOT turned into a polemic
*Allegations, beliefs, statements, etc are what will turn this into a polemic, that is why I removed them all.--tom 22:37, 21 February 2006 (UTC)
thread_title:  Only The Facts will do 

message: Of course the other reasons belong here. The SEC provided a FULL answer. You just put in the part of the answer that supports your point of view. --Tomstoner 17:54, 22 February 2006 (UTC)
thread_title:  Selective Quotations Skew the POV 

message: The Section is "Effects of naked shorting" NOT the many other reasons for price fluctuations of stocks. The question in the Q&A is :
"Is naked short selling the reason my stock has lost value?"
The answer :
*"There are many reasons why a stock may decline in value." from the same SEC answer
and as it pertains to Naked Short Selling further down :
*Naked short selling, however, can have negative effects on the market. Fraudsters may use naked short selling as a tool to manipulate the market. Market manipulation is illegal.29 The SEC has toughened its rules and is vigilant about taking actions against wrongdoers.30 Fails to deliver that persist for an extended period of time may result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled.
This WIKI article on naked short selling is not about,
 
*"If many people want a stock (demand is high), then the price will rise. If a few people want a stock (demand is low), then the price will fall." from the same SEC answer
*And on and on like things above that have nothing to do with naked short selling at all. The SEC page is linked and anyone can read up on the full text.
It is factual quote from the SEC related directly yo naked short selling. Do not delete factual and relevant information.--tom 18:50, 22 February 2006 (UTC)
thread_title:  The Section is "Effects of naked shorting"  

message: The deletion of factual external links is a violation of WIKI policy. I ask this stop. —The preceding unsigned comment was added by Tommytoyz (talk • contribs) 19:08, 22 February 2006  (UTC)
:Actually, it's not. Please see our policy on external links. If we just googled for "Naked short selling" and put all the hits in our "External links", it would overwhelm the article. We should limit ourselves to two types of links: (1) significant references used when creating article content, and (2) external links which go in more depth than is necessary here in a reasonably neutral manner. (ESkog)(Talk) 21:11, 22 February 2006 (UTC)
thread_title:  Do not delete factual links   

message: I think the SEC quote is a little long, but every idea presented in it should be stated here (including the other factors that can cause a stock to decline). Is it really so impossible to present a summary that's just a paragraph or two long, and then include a link to the entire reply? Kafziel 19:38, 22 February 2006 (UTC)
replies: text: Unrelated to naked short selling, yes, but not unrelated to the reason stocks drop, which is what the quoted question is asking. A simpler solution to summarizing it might be simply to remove the entire SEC quote altogether and replace it with one from somewhere else that is answered in a more relevant way. I'm sure there are other stock websites out there with advice on the same subject. Kafziel 21:03, 22 February 2006 (UTC)

text: I don't know if I'd consider the SEC any more unbiased than other sources, but if it's important to you that it be used a major source, then why not just put the whole answer in there? There's really no limit to how much information you can put into a Wikipedia article. If it's too long and boring, people can just skip it and go on to the next section. (Besides, something tells me anyone interested in short selling will have the patience to read the whole thing.) Kafziel 21:27, 22 February 2006 (UTC)
thread_title:  Third Opinion 

message: You have been warned not to delete factual links and quotes. To explain your actions, explain your claim that "references to "FOI requests" and other dross that regulators have decisively rejected as utterly meaningless. " Where did you see that? WHen has any regulator commented on the FOI data? Quote with link please. 
Until then it will remain. 
--tom 23:50, 22 February 2006 (UTC)
thread_title:  Factual text, quotes and links are being delted 

message: Also the the SEC's explanation of the "substitutes" -- that it is a TERM FROM THE UNIFORM COMMERCIAL CODE ! -- has been removed. The page has been so messed up that I am going to have to revert back to the way it was before it was ripped to shreds. --Tomstoner 16:11, 23 February 2006 (UTC)
thread_title:  The Page is a Mess 

message: The only problem I see with the article is its sloppy presentation of source material. This article needs to be divided into two sections, one for, one against NSS. These sections should separately summarize cited viewpoints on each side. The situation is much like in a U.S. presidential debate, where candidates are vehemently opposed to each other, but are not allowed to interrupt each others' presentations. Unsourced material needs to be verified as per WP:V or deleted. After sources get verified and arguments get presented in a logical format, I think the POV issue will work itself out. Best of luck - Cdcon  07:58, 26 February 2006 (UTC)
replies: text: Tomstoner, thanks for the comment on my Talk page, I'll do what good here I can. To you and anyone else who might be interested, I have a blog, and my two most recent entries there (today, March 4, and yesterday, March 3) deal with issues raised here, although the blog as a whole deals with a lot else -- pretty much whatever crosses my mind on a given day. Anyway, feel free to chat about this subject there if you'd like. cfaille.blog-city.com 
--Christofurio 20:27, 4 March 2006 (UTC)
thread_title:  RfC reply 

message: I removed it because it is grossly unencyclopedic and presents a one-sided view of the issue, putting an anti-shorting spin on a lot of highly technical mumbo-jumbo without any sourcing whatsoever. And no, taking an ambiguous sentence from an SEC document and highlighting it, and then saying what one thinks it means, is not proper sourcing.
This is an encyclopedia and personal research into this issue does not belong here. --Tomstoner 20:35, 6 March 2006 (UTC)
thread_title:  Reply 

message: Thank you I'm not called "ingenuous" very often but the rule prohibiting original research is a product of Wikipedia's ingenuity not mine. --Tomstoner 23:21, 6 March 2006 (UTC)
thread_title:  Sur-Reply 

message: Editing talk pages is permitted as per the guideline I cited, and I toned down some of my own remarks as well. However, rather than get into a tussle over that, I'll await adminstrator intervention, if any, on this whole issue of the personal remarks.
As for arbitration -- I am all for that. However, it seems far too early for an arbitration, given that the previous steps have not been completed, but if that can happen now I certainly think it is a good idea. 
As for your remark that "you will be on it" (meaning "on the arbitration," whatever that means) again I am going to draw your attention to the warning on your user page that remarks directed against other editors are against Wikipedia policy. Personal remarks seem to be a constant, ongoing problem concerning with this page, as has been noted in the past by other editors.
There is, incidentally, an overriding issue that needs to be addressed that was raised by User:CdCon. While I objected to your added material because it is original research and unencyclopedic, I think the article overall may very well be objectionable because of sourcing (as per his comment -- please refer back to that above on the talk page). I think it may well be that that both sides of the argument are not well sourced through veriable sources as required by Wikipedia.
Were a wholesale rewrite to be done, and if the sourcing were to be verified as per Wikipedia policy, then I am not sure there would be much left to the article, particularly from the "anti-shorting" viewpoint. Apart from the Time article, there does not appear to be too much in the way of proper sourcing that can be cited. Again, it needs to be kept in mind that raw data is not allowed. That is not my policy but Wikipedia's, so please don't flame me for pointing that out.
For example, there is no doubt whatsoever that raw lists of "fails to deliver" would be original research not permitted by Wikipedia policy. However, and by the same token, the SEC Q&A might well be objectionable for the same reason -- original research. However, since the SEC Q&A is written in plain language and designed for a general reader, and is from a neutral source of widely acknowledged reliability, I would argue that it would not fall under that category.
Rather than go back and forth on this, I would personally prefer to do nothing until some fresh eyes come in and look at this page and, particularly, the sourcing issue. Fair enough? --Tomstoner 18:02, 11 March 2006 (UTC)
thread_title:  Concerns Re Sourcing & Personal Attacks

message: Well, we have no choice but to reach consensus. I have asked the experienced user who first raised the sourcing issue to come over and give his input. 
Re sources -- you see, I don't think that www.businessjive.com would be a proper source under the Wikipedia guidelines. However, the studies cited on the site may be another matter entirely. 
The "verifiability" requirement is a big obstacle to putting together this article, as it would seemm, at least to me, to pretty well knock out the vast majority of websites and blogs that deal with this issue from both sides! Let's face it, there's no way that SanityCheck or the Jeff Matthews blog could possibly be considered meeting the verifiability standard.
There's nothing wrong with official sources, and obviously you see them all over Wikipedia. Historical documents etc. etc. The problem is that here you have a technical issue here. If you post lists of FTDs or language from a regulation, such as the one re grandfathering, you are posting an opaque piece of writing that I really don't think you can put in an encyclopedia. Also it seems to fall afoul of the ban on original research. People on one side of the issue feel the documentation, lists etc. mean something, but if that is just expressed on a website or chat room, then I think you have a sourcing issue.
On the other hand, if you have an SEC document like the FAQ that is written in plain language, and is understandable by just reading it, then I can't see a sourcing problem with that. It isn't raw data and it is from a source that I believe could be considered verifiable. 
Frankly I have not seen Grandfathering even addressed anywhere but the message boards. Why not look at the verifiability page here and see what you can find that would meet that criteria? --Tomstoner 00:24, 14 March 2006 (UTC)
thread_title:  The Source Thing 

message: This link:
*http://www.businessjive.com/nss/darkside.zip (Presentation explaining the mechanics of naked shorting) is a 16 mb .zip file which is both extraordinarily large and could expand into almost anything. I wonder if both the negative and positive viewpoints regarding naked short selling are adequately presented? Fred Bauder 16:49, 8 October 2006 (UTC)
thread_title: .zip file

message: I cannot speak for SlimVirgin's reasoning, but I believe the deleted edits should be retained outside of the page history. A logical extension of our policy regarding the biographies of living persons and our policy prohibiting personal attacks is clearly that we cannot permit potentially libelious attacks on persons on- or off-Wiki at any time. Reposting the content again may result in a block for personal attacks and violations of our protections on living persons. (ESkog)(Talk) 03:10, 9 October 2006 (UTC)
thread_title:  Comment on recent history deletions 

message: This is the voice of all fifty state securities regulators.  Their comments on the naked short selling and failures to deliver leave little doubt as to whether it is a problem.  They have enforcement powers.  It would be a shame if this article is not included in the discussion of the topic.  Note that this source refers to a number of other primary sources with acknowleged expertise.  These are far better than the opinions expressed by only one person who has no direct experience or authority in the matters discussed in the article.
Viz. copyright, these are part of the public record as formal comments filed with the SEC, so deleting them is against wikipedia policies as I understand them.
http://sec.gov/comments/s7-12-06/jpborg7410.pdf
Just one section from the letter to the SEC by NASAA should give you the desire to read the entire letter:
HIDING BEHIND THE SKIRTS OF LEGITIMATE MARKET PARTICIPANTS
While NASAA readily acknowledges the legitimate role of short selling, investors demand accountability for those who engage in dishonest conduct while masquerading as legitimate short sellers. Just as regulators must prevent manipulation of share prices upward, they must detect and prevent manipulative schemes and devices that push share prices downward. These devices include naked short selling, collusion between traders and analysts as to the content and timing for release of research reports, the existence of substantial open fail positions, and the depressive effect on prices of multiplicity (having multiples of shares available for sale).1
Regulators must recognize that processes designed to facilitate and accelerate the settlement of trades are facilitating manipulative schemes and devices. 
::[further down in the letter is a list of abuses facilitated by the current system]
The potential problems caused by abusive trading – masquerading as legitimate trading – are legion:
:• Higher settlement failures. The number, volume, and length of settlement failures are increased because of the trading activities of short sellers;
:• Lack of disclosure. Customers may complain that they are not aware of the extent to which their shares are being lent out and the effects on them of the lending. Some also may complain that they are not receiving any portion of the compensation the brokerage firm is earning by lending out the customers’ stockholdings.
:• Shareholder voting rights are impaired. This can include overvoting as well as possible customer complaints that they are not being informed of the risks their votes will not be counted. It could be argued that broker-dealers affirmatively are misleading customers if the firms provide proxy voting information to customers when the customers’ shares have been lent to another.
:• Inaccurate recordkeeping. Individual customers rarely are informed when their shares have been lent by the broker-dealer. The secrecy of this practice is facilitated by the records of the broker-dealer which continue to show the customer as the owner of shares. When the customer receives her account statements, any shares that have been lent to another by the broker-dealer still are listed on the customer account statement as being in the customer account. This record is not accurate. If the shares have been lent, the customer is not the holder or owner of the shares.4
:• Multiplicity. As described earlier, the number of shares advertised as available in the market may exceed the number of shares actually available to deliver. This magnifies the depressive effect of the asking prices for these shares. As described below, the extent by which the shares being offered exceed the number of shares outstanding can be enormous. See note 13.
:• Improper incentives. Short selling creates incentives for other violative or manipulative conduct. Regulation SHO, while it attempts to prevent short selling abuses, permits some conduct that can further abusive conduct. These incentives include:
::o Insider trading. Because short selling is profitable only if a company’s stock price falls, traders have a significant incentive to learn – or create – negative information about a company, then advertise that information. Testimony at the June 28, 2006 hearing by the Senate Judiciary Committee, ”Hedge Funds and Independent Analysts: How Independent are Their Relationships?” included testimony that some traders collude to have research firms release reports disparaging a company’s performance, then time the release of those reports to occur after the trader has amassed a large short position. The Commission has brought several enforcement actions involving insider trading. In March, three hedge funds and a manager were accused of insider trading and naked short selling in connection with 23 Private Investments in Public Equity (PIPE) offerings. SEC v. Langley Partners, Lit. Rel. 19607, Mar. 14, 2006. In May, the SEC sued hedge fund adviser Deephaven Capital management for insider trading on advance knowledge that 19 PIPE offerings were about to be announced publicly. SEC v. Deephaven Capital Management, LLC and Bruce Lieberman, Lit. Rel. No. 19683, May 2, 2006.
::o Bear raids. There are many examples of companies who have sought financing only to have the financers try to drive the stock price down. Such financings involve the company guaranteeing the value of convertible debt by promising to deliver additional stock if the company’s stock price drops below certain levels, then having the lenders seek that very result. These types of financings may be PIPEs or convertible debt (also called – generally after the fact – death spiral financing or toxic convertibles). Reportedly, some lenders short the stock of the company to which they provide financing in an effort to cause declines in the stock’s price and to then profit from those declines. The lender ends up with cash profits and more stock. Emshwiller, Lawyer Tied to Past Small-Stock Scam Takes Up Contentious ‘PIPE’ Deals, Wall. St. J., Aug. 25, 2006 at C-1.
::o Naked short selling. Short selling can be risky. The profit margin to be earned can be substantially reduced or even completely offset by the costs of borrowing stocks. The costs can be significant, reportedly as much as 23% of the value of a security for certain “hard-to-borrow” stocks. Short sellers who avoid borrowing stocks before selling them (and avoid delivering them at settlement) can save these costs, increasing their profit margins.5 Two lawsuits have been filed in New York accusing prime brokers of, inter alia, charging stock lending fees for stock that never was lent. Moyer, Hedge Fund Hell, Forbes.com, July 28, 2006.
::o Inadequate locates. Regulation SHO only requires a short seller to “locate” shares that can be borrowed. The seller is not required to “reserve” (decrement) the shares located and nothing precludes a lender from giving a “locate” on the same shares to multiple sellers. This can lead to an increase in settlement fails if multiple sellers relied on the same locate and some are then unable to actually borrow those shares. In such a situation, Regulation SHO is not violated and the lender and “locator” have not acted improperly. This contributor to fails should not be permitted. Inadequate locates also can come from customers. Because Regulation SHO permits customers to obtain the “locates” on shares to be sold short,6 customers are tempted to act on their economic incentive to avoid the costs of actually borrowing shares.
::o Manipulation. The insider trading, naked short selling, delivery failures and bear-raid activities described above all are forms of market manipulation. The frequency and magnitude of these abuses are exacerbated by short selling.
::o Uptick abuses. We fear that traders may avoid the uptick rule by having another broker enter an accommodating trade for 100 shares at an uptick price, thus permitting the trader to enter an order for a short sale of 100,000 shares.
::o Mismarking trades. Too many firms fail to report information about short transactions. Due to the significant economic benefits that can be derived from abusive short selling, we are suspicious that the failure of some firm to mark short sale transactions accurately is intentional, not accidental. Whether intentional or accidental, these reporting errors are significant and can affect the accuracy of public information dramatically. More needs to be done to ensure that brokerage firms accurately report the short selling activities of their clients. This will promote investor confidence in the integrity of the markets and enhance the accuracy and transparency of market information.
::o Avoiding threshold designation. We are concerned that some traders seek to hide their short selling activities, making great efforts to ensure their transactions do not trigger threshold designations. This might be done by having their fails not extend past five days after settlement or focusing trades involving fewer than 10,000 shares or volumes less than .5% of the issuer’s number of outstanding shares. Traders also recognize that they can execute short sale transactions (and any resulting settlement failures) that cause a company to be listed as a designated security, without being subject to the consequences of the settlement failure: the trader would not be required to be closed out under Regulation SHO.
::o Market makers. Market makers have incentives to facilitate non-market making trades under the guise of market making. This may include proprietary trading by the market maker, speculative trading strategies customers, and otherwise assisting customers in avoiding the requirements of Regulation SHO.
72.192.56.93 05:19, 13 October 2006 (UTC)
thread_title:  North American Secuties Administrators Association