Post by fastwalker on Oct 3, 2005 9:29:39 GMT -5
October 3, 2005 (FinancialWire) Today, the NASD takes control of the over-the-counter bulletin board from Nasdaq (NASDAQ: NDAQ), and Nasdaq’s SmallCap market has been renamed Nasdaq Capital Market, moving companies such as Beacon Power (NASDAQ: BCON) on the Regulation SHO threshold list to a new market, and such companies as First Montauk Financial (OTCBB: FMFK) directly under the purview of the NASD, which has recently launched a regulatory offensive against illegal and manipulative naked short selling.
At the same time, despite the efforts of data extractors such as Global Securities, a division of Thomson (NYSE: TOC), the U.S. Securities and Exchange Commission, which is the leading proponent of corporate transparency, has been identified at the same time as the leading opponent of government transparency.
The SEC has refused public information requests more often than almost every government agency and department, including the CIA and Pentagon, according to a survey.
Of 3,830 information petitions received from lawyers, investors and others under the Freedom of Information Act, the SEC has granted only 34%. The survey was conducted by the Coalition of Journalists for Open Government. The SEC’s year-end backlog of 8,635 requests was also larger than all except four agencies.
“The SEC has never applied the same standards to itself that it applies to the companies it regulates,” Edward Fleischman, a former SEC commissioner and now senior counsel at the Linklaters law firm, was quoted as saying.
“This is an agency that has never done very much disclosure about itself.'”
According to the survey, the CIA and the Department of Defense, by contract, fulfilled half of the information requests. The Pentagon had received 77,256 requests.
The SEC did not decide on 93% of over 9,000 requests received in its last fiscal year, and is totally jammed up now.
Global Securities Information said it had filed over 9,000 FOIAs and now has a backlog of over 6,000 pending.
SEC speakers have recently talked about corporate governance filtering throughout a public company according to the “tone at the top.” The secretive tone at the top appears to be filtering through two of its regulated SROs, NASD and the NYSE, to their co-owned Depository Trust & Clearing Corp.
The DTCC., reportedly itself under NASD scrutiny for its controversial stock lending program that some, including an 11 state state North American Securities Adminitrators Association task force headed by Connecticut’s chief securities officer, and former NASAA president, apparently believe facilitates the illegal naked shorting industry, has been very secretive about the status of shares for individual companies, stonewalling even companies’ efforts to determine their true ownerships and short positions.
Brokerage and clearing firms are apparently under intense NASD pressure to settle failed short trades in Regulation SHO threshold securities or have their clearance firms do it for them at possible substantive losses.
The NASD is in turn acting under political and regulatory pressure from the 11-state task force.
Lambiase had publicly asked the SEC to “fix” the DTCC “problem” as it was considering the adoption of Regulation SHO last year, but taking a page from numerous U.S. Senators, he and other state regulators have grown tired of waiting for Regulation SHO to do more than simply shine a magnification light on the massive fails-to-deliver problem.
DealFlow said NASD officials are concerned that stock loan programs are being used to settle failed short trades in Reg SHO threshold stocks, which must be closed out voluntarily or through forced buy-ins within 13 days. “The regulators are concerned that the stock loan are being used instead of market purchases to provide the shares needed for settlement, creating new transactions that will ultimately fail to settle as well.”
The state regulators, DealFlow said, have been “highly critical of the SEC's decision to ‘grandfather’ settlement failures resulting from naked short sales up to levels that trigger threshold status under Reg SHO.”
NAASA was particularly concerned about Regulation SHO, because it excluded the small cap market from any meaningful regulation. “NASAA said the proposal included replacing the so-called ‘tick test’ with a rule that would provide a uniform price test using the "consolidated best bid" as the reference point for permissible short sales. This, however, would not address problems relating to the naked short selling of smaller, less liquid securities, because , NASAA argued, the requirement of the consolidated best bids meant it could not be applied to securities that were not subject to real-time consolidated quotes. That included Nasdaq Small Cap, OTCBB, and Pink Sheet securities.
NASAA also questioned the wisdom of grandfathering settlement failures under the threshold level, asking why the SEC was willing to permit significant settlement failures at all.”
“While there are instances when settlement may be legitimately delayed, existing regulations provide for extensions for settlement. If the Commission continues to allow settlement failures, it may well facilitate the harm that the proposal is designed to remedy,” Lambiase warned the SEC.
According to DealFlow, Lambiase urged the SEC to reconsider its stance regarding the role of the stock borrow program operated by the Depository Trust Corp. (DTC). NASAA wrote that as a threshold matter, NASAA believes that the Commission should explicitly prohibit the DTC from lending more shares of a security than it actually holds. The utility of the overall proposed rule would be severely impaired unless the Commission undertakes to implement such a prohibition."
Brent Baker, an attorney with Woodbury Kesler in Salt Lake City and counsel to naked shorting target and eight-month old threshold list company Overstock.com, previously spent 14 years at the SEC, including time in the Division of Enforcement, was quoted as saying he believes that the SEC tried, with Regulation SHO, to put "their finger in the dike" but failed.
“Three or four years ago naked short selling was being perpetrated by promoters in the micro cap world," he says. "they would publish 'exposes' on the Internet... and they would bring pressure on these little companies."
“However, short selling has changed,” noted DealFlow. He believes the SEC does not realize that abusive short selling practices have been adopted by others and are now built into business models of large, mainstream hedge funds.
Meanwhile, the NY Post has reported that traders in Nasdaq stocks are racing to beat a rumored regulatory deadline to close out their positions — or take huge losses as clearing firms do it for them.
“Naked short sales are trades executed without borrowing stock beforehand. Naked short sellers can overwhelm an orderly trading market, since unlike traditional short sellers, there is technically no limit to how much stock can be sold short illegally, noted the Post.
The Post also reported recently that the NASD and numerous state securities regulators, led by Ralph Lambiase of Connecticut's Division of Securities and Business Investments, have vowed to increase scrutiny of naked short sales.
“A buy-in is the worst possible development for a short-seller, since he has to accept any price given,” it stated.
It seems that everytime the DTCC, which is also the target of numerous lawsuits brought by failed companies and a scorching expose in Investment Dealers Digest, gets under pressure, it begins striking out blindly in all directions. FinancialWire can often determine when the heat has been turned up because it is among the media, also thought to have included Dateline NBC, that begins to receive threats from the organization.
In February, the DTCC interfered with FinancialWire’s distribution to Investors Business Daily, and in the past week it sought once more to interfere with another distribution, saying that FinancialWire receives monies for its editorial coverage of the naked short selling issue.
Marshal Shichtman, Esq., attorney for FinancialWire, has been in touch with Proskauer Rose, the outside counsel for the DTCC, warning it of slander, tortuous interference with FinancialWire’s business and because the DTCC is owned by two SROs, the NASD and the NYSE, of First Amendment violations.
Shichtman will be similarly warning the SROs and the directors of the DTCC of what he terms their risks associated with the ruthless, reckless and irresponsible actions of their clearance entity.
In a letter to constituent investor advocate Dave Patch, whose persistence in criticizing Federal regulators over the past several years for shareholder losses at the hands of illegal manipulators was at times a lone quest, often covered only by FinancialWire, Connecticut Division of Securities Director Ralph A. Lambiase, the immediate past president of the North American Securities Administrators Association outlined for the first time the efforts a “working group” of state regulators have been undertaking to assail abusive market practices that Lambiase said has been directly responsible for “an unmistakable loss of investor confidence by the arguably millions of investors who have lost their monies.”
It was an unusual move by Lambiase to outline the states’ enforcement plans in a letter to Patch, who has been vilified and scorned by many top regulators and institutions for his efforts, which includes the maintenance of a website, www.investigatethesec.com .
Lambiase said that his efforts, and efforts of others, such as Tanya Solov, Director of the Illinois Securities Department, Tanya Durkee, Deputy Commissioner, Vermont Department of Securities, and Rex A. Staples, General Counsel for NASAA, was stimulated by Patch, and an ever-growing group of concerned citizens who have “continued to champion the issue of reform in the naked short selling area for so long,” and added that it has been those grassroots efforts that constitute the “primary reason we are beginning to see reform of any sort.” Lambiase was clear in stating that it is “your determination and persistence in seeing that this wrong is righted is in part responsible for my interest, as well as that of other state regulators.”
Lambiase, whose initial letter to the U.S. Securities and Exchange Commission stated that the SEC needs to look at the role of the Depository Trust and Clearing Corp. in allowing these abuse practices to continue, said that it seems “clear that had the SRO’s and the SEC exercised greater diligence in enforcing pre-existing rules, Reg SHO would likely have been unnecessary.”
He said his working group has begun meeting with SRO’s and issuers alike, and that it will “continue to exert substantial effort to remedy the remaining abusive practices in naked short selling until we are confident at the state level that the companines in our communities and citizens that invest in them will no longer be the possible targets of abusive naked short sellers.”
It had been previously rumored that the reason the NASD has been issuing subpoenas to a dozen or more brokerages over their “fails to deliver” and their failures to enforce buy-ins is due to those regulating at the Federal level not wanting to be trumped again by a state investigation such as occurred in several Spitzer reform efforts.
Lambiase so far appears to be taking the posture that the state group is ready to step in if the Federal regulators do not, thus “inspiring” the current efforts rumored to be occurring at the Federal level.
To make the point, he told Patch in the letter obtained by FinancialWire that “there remains a substantial distance between REG SHO and the ultimate goal of including substantive protections for small business issuers.”
It is these small businesses in our communities, Lambiase pointed out, “who take entrepreneurial risks to grow their companies through listings on the OTCBB and Pink Sheets. These small businesses not only provide employment for the residents of their communities, but also offer the general public the opportunity to invest in local businesses with promising products or services.
“While it may be true that a number of small companies lack the financial depth to succeed, they are nonetheless entitled to succeed or fail by their own honest business decisions and not as a result of the corrupt acts of abusive short sellers.
In what some believe is another swipe at the secretive DTCC, he said that “without transparency, we cannot, as yet, precisely identify each small business that failed as a direct result of abusinve naked short selling nor quantify the exact number of jobs lost to our local economies when these companies are forced to close their doors.”
In what is an unmistakable prod to the SEC, Lambiase said that institution is “moving slowly forward as Reg SHO in its current state is studied and debated seemingly ad infinitum. While slight modifications to the existing Rule may result from such an approach, a far more threatening pattern of abuse is certain to continue unless wholesale reforms are made to remedy the concerns of the small business community.”
He said that even Congress, whose members have also called the SEC on the carpet for the slow progress associated with Reg SHO may in fact be missing the point that “abusive short selling poses a direct threat to the economic well being of small business and the entire community.”
The 11-state task force reportedly was in serious strategy sessions a few weeks ago.
The New York Post quoted one regulator as saying there is “an epidemic” of naked shorting. Regulation SHO has made that evident for the world to see. Numerous U.S. Senators have called the Regulation fully ineffective, and have repeatedly called upon the SEC Commissioners to get the practice under control.
The Post said that an SEC official confirmed to it “that no complaints have been brought in the nine months since Regulation SHO went into effect.”
It quoted one state securities regulator, Bill Reilly of Florida, as saying he expects the increased effort will result in more voluntary compliance from dealers, as well as enforcement activity.
That may or may not resolve the DTCC “problem.” Recently a stock transfer agent, Transfer Online Inc., had asked then-SEC Chair William Donaldson to put a stop to the control the Depository Trust & Clearing Corp. and Automatic Data Processing (NYSE: ADP) are fast gaining over the transfer business, and to demand DTCC transparency.
Excerpts from the letter, posted at www.faulkingtruth.com/Articles/LettersToEditor/1012.html , states: “Over the years as the amount of shares held at DTC has increased it has become more and more difficult to determine who owns the shares, who is trading them and if the trading is proper. This trend, and the resulting problems I will detail below, continues to increase because a minority of the total number of shareholders are reflected on the books and records of the corporation, most activity takes place behind the wall of ownership that is designated as Cede & Co. and neither the company nor the transfer agent has any access to the underlying information.
“Furthermore, DTC recently managed to put through a rule change (Release No. 34-50758A; File No.S7-24-04) that prohibits a transfer agent from representing any company who seeks to withdraw from the DTC system. This change effectively leaves companies with no voice or choice in the management of their stock and their ability to have any transparency as to what is actually taking place in the market in regard to their stock.
“I receive calls from companies seeking information as they watch millions of shares trade in a single day, who watch their share price decrease in value and who have no access to information regarding who is behind the trading of these shares, or if in fact the trades are at all legitimate. As the system now operates, most companies have a large percentage of shares on their books registered to Cede & Co.
“Given the importance of shareholder voting and communication one would assume that the same requirements placed on transfer agents as to accuracy and reporting would be placed on ADP and Cede & Co. as they usually hold or service the majority of the shares owned in any given company.
“I have found; however, that when presented with the tabulation reports from ADP the share totals they report sometimes exceed the total number of shares outstanding for the company. Let me restate this because it is a very important part of my concern about a system that is more and more headed in the direction of increased control by DTC. The shares presented by ADP, that are the shares voted by the brokers on behalf of the shareholders for whom they hold accounts, EXCEED when added to the shareholders of record the total number of shares outstanding.
“Where are these extra shares coming from? Why are there no controls on the number of shares held in the nominee name Cede & Co. vs. the ownership on the books and records of the brokers and why is the company not privy to any information unless it pays whatever fees it is told it must pay by the organizations that control the data?
“In fact, as the system is evolving, DTC is de facto becoming the largest transfer agent in the industry even though it is an organization formed by and working for the interests of the brokerage community. If, ultimately, the S.E.C. is in place to protect investors then this issue can not be ignored because in the end when the market is completely under the control of the brokers and the organizations that represent them then the market can neither be transparent nor fair.”
The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in its media censorship.
DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);
Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).
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