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The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs?

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Posted by:   bobo 4/3/2006 4:00 AM

I smell massive suit coming.

Why?

Well, we just got the 2004 FTD info in on NFI (huge kudos to Tommytoyz), and it is shocking - way worse than I would have thought. One highlight that sticks out is that in Q4, the company's FTDs hit the mind boggling number of 3.143 million failed shares, in addition to a short interest up to 11.3 million shares - and this was on a company with about 25 million shares outstanding at that point.

Now, does anyone think that having 12.5% of your total outstanding shares as failed deliveries is bad for a big board stock?

Would that be a problem, you think?

Would that tell anyone that there is a major flaw in the system that is getting gamed by miscreants?

Try this - that number DOESN'T include any of the naked short sales from offshore. It doesn't include ex-clearing. It doesn't include desked trades. It doesn't include "open positions." It doesn't include any of the mismarked trades, where short sales are "mistakenly" labeled "long" - to keep them out of the SI.

So there were almost 40 million shares of NFI trading in Q4, not counting that additional number, which we can call X.

Call it a nice even 50 million. Why not? That is probably low.

So, does anyone have a problem understanding why NFI has been trading at a 100% discount to peer yields? Yes? No?

This is around the time that geniuses like Cuban and Mathews were insisting that delivery failures are not a big deal, and that most are as a result of the dog eating one's certificates, and whatnot.

3.143 million lost shares, steadily increasing trading day by trading day as the year progressed, from not that many in April, to millions by the end of the summer.

As the short interest was also climbing.

Seems like a huge amount of shares being created out of thin air to keep the price depressed, at all costs.

I can pick random periods where the price increased by $12, like from around November 11 to December 11, and note that, surprise, the FTDs declined by 500-600K shares.

How bad is it now? Who knows? Are we into a new season where this is running up from 1.8 million, where we left off, back to the 3 million or higher numbers?

This is just an isolated data point. You have to compare it to the legit short interest, and that gives you another data point. But the real way to tell is to compare the OBO and NOBO and ADP and DTC sheets, and see how many millions of share entitlements are out there that have no shares to support them - and even that is a bit flawed, because Malaysia and Canada and the Caribbean may not be reporting everything, but rather just netting. In fact, many of the clearing agencies could be netting, skewing the numbers to appear radically lower than they are.

So for all the apologists who say it is no big deal, and that naked shorts and manipulation can't keep a stock depressed for a long time, I've got news for you - you are now provably full of it.

This is a huge problem, and companies like NFI and OSTK are being eviscerated by a system that allows miscreants to eat its young.

That is despicable.

And true.
Copyright ©2006 Bob O'Brien
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Comments (37)
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By troydian on 4/3/2006 2:44 PM
where is the GOOD NEWS?
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By old duffer on 4/3/2006 2:46 PM
If the SEC and the courts can't bring a stop to this maybe the citizen investors should import some of those French choppin machines along with pitchforks and oil soaked straw torches.

Adding some crooked pols who have also looked the other way to the choppin parties.

NEXT?
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Sheep on 4/3/2006 8:40 PM
Thanks for your efforts to expose the corruption on Wall Street that robs ordinary citizens. Unfortunately, as bad as naked short selling might seem to be, it WILL turn out that, "You ain't seen nothing yet." The problem of corruption extends to the government.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By n-tres-ted on 4/3/2006 9:33 PM
None of this should have happened with honest enforcement of the securities laws by the SEC. I can see no excuse for it. Class action suits? Those are to recover private damages, to the extent private assets are available to answer. But enforcement of securities laws is the reason the SEC exists.

Here is how Dr. Trimbath viewed the SEC's culpability, from the earlier blog today:

14) Why do you think SEC chairman Donaldson chose to answer Senator Bennett's inquiries regarding naked short selling in closed session rather than in public?

Because he knows it’s a problem and couldn’t admit it in public without having his ceremonial knife handy. Because he knows that the problem described by NSS includes the problem of phantom shares, the proxy voting charade and the collapse of corporate governance.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By n-tres-ted on 4/3/2006 9:36 PM
Outstanding blogs today, Bobo. Thank you.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By InTheKnow on 4/4/2006 2:30 AM
Elections are coming up and those senators and representatives that have helped foster the nakeds shorting scam on US investors should be tarred and feathered and run out of office.

SETTLE THE TRADES or SETTLE IN JAIL!
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By STORMCHASER on 4/4/2006 3:28 AM
The fraud is perpetrated by the GOVERNMENT...the US GOVERNMENT...is raping its own citizens....who or what is going to end THAT........
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By hhawes on 4/4/2006 5:06 AM
Bobo (or Mary), how about publishing a chart overlaying the FTD's & NFI's pps for 2004. It would be an interesting visual.

Harry
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By justanoldfog on 4/4/2006 5:33 AM
Bobo and Tommytoyz, Great work in getting this uncovered from the DTC. It is quite clear now that all the pps antics by BS have been caused by Naked Short Selling and the government just stands by and does nothing except spout off that there is "no problem" and that the issue is not going away at all.
I will be writing to my Senators and Representatives again this week with the materials Tommy has gathered and expressing "outrage" at how the government agency, charged with protecting our financial markets, has allowed this "fraudulent actions" to continue without bringing Federal or State charges against someone.....
I would encourage all who read this board/blog to do the same.

I would also encourage anyone who reads this blog who is going to the NFI Annual Meeting to take this material and hand it personally to Scott Hartman and ask him what he intends to do about it. Proof is proof and this speaks volumes about how Naked Short Selling is hurting ALL shareholders, including the Management of NFI who own a significant number of shares as they so recently pointed out at the JPM conference presentation.

This whole thing of NSS sickens me about the NY financial markets and I sit here wondering where this will all lead to. Sure some folks are likely to get taken to court on criminal charges (way down the line), but in the mean time, Joe Public, the investor, has taken it in the shorts way too much at the expense of those who are perputrating this fraud. The DTC is complicit by their lack of action.

foggy.....

This is a call to action to everyone..... You have the data, now do something with it.....
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By hhawes on 4/4/2006 6:59 AM
I see on the NFI message board that Buyins.net has removed NFI from the Naked Short list. I don't understand. Is that right? Bobo, please explain this to me....still trying to understand everything.

Harry (aka Joe Public Investor)
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By teacheric on 4/4/2006 7:04 AM
I haven't checked, but if it is off the SHO list, it will be back on in about 13 days as they are just doing some moving around the ftd's. It's happened before with other stocks as well.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By embraceyourinnerhillbilly on 4/4/2006 10:46 AM
Nothing to see here folks, keep moving, move along now. Just let me lift the edge of the carpet here, so I can sweep this mess under the rug...

Going to be a lot harder for the regulators to keep pretending this isn't happening.
I wonder if Hartman, Anderson et.al. will ever address this.

Great work, tommy, bobo, mary and all the rest.
Has anyone ever explored the possibility of hedge funds being hired guns? By Lost Trust on 4/11/2006 1:16 PM

I mean these orchestrations are so obviously effective at putting a leash on a small cap company that it really makes you wonder if competitors ever "hire hedge fund gun" to impede their competition through the equity market.

So maybe some of these games are contracted campaigns (which of course never see paper). "You keep this company down below x market cap and we'll pay you this amount for every quarter you can do it... and whatever you make in the process of doing it is your gravy. We'll help you with the industry and market knowledge to devise a believable smear campaign."

Ok, maybe that's too hard to digest...but certainly it's not hard imagining a hedge fund using it's money to go long one company and then set up a short attack (naked or otherwise) on it's competition.

Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Sledge on 4/3/2006 3:11 PM
"I smell massive suit coming."

I've known about the naked shorting for years. I knew it was bad but never realized how bad or out of control it was. Those numbers are just shocking! When in the hell is someone going to step up to the GD plate and clean up this mess? UNREAL!

Even I'm shocked! We need several more 'go for the jugular' lawsuits to happen.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By gregcable2002 on 4/3/2006 3:12 PM
This friggen system needs fixin NOW,maybe some or all of these SHO listed companies can band together to get-r-done.You know what? I think we may just hear something to that effect soon.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By gary on 4/3/2006 3:13 PM
hang them and lets start with STU from the DTC,, put him with terriorists
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Mind Boggleling on 4/3/2006 3:21 PM
If you think the 12.5% FTD's is mind boggleling then what would you think of the estimated 100-300 million naked shorts in JAG Media Holdings that has a 40 million share oustanding float?
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By gregcable2002 on 4/3/2006 3:11 PM
we need these companies to band together and put a stop to it.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Cynic on 4/3/2006 3:58 PM
Where is the promised class action lawsuit for this week?

Also, wouldn't taking NFI or OSTK private kill the shorts? I recall reading that there are only 50,000 OSTK shares in public (non-insider non institutional) hands.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By InTheKnow on 4/3/2006 3:59 PM
We all want the FTD information, every last company and no one should be denied.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By bobo on 4/3/2006 3:59 PM
The real issue is that we have no idea how many fake shares are out there floating around. Could be 60 million if the offshore clearing and the ex-clearing are taken into account. We just don't know.

This can only happen in a system that lacks transparency. And I suspect much of it is criminal.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By bobo on 4/3/2006 4:03 PM
Cynic: Here on our watery sphere, in our dimension, "weeks" start with Monday. That is today. I believe that Patrick speculated that there would be a massive CA sometime this week. You have 4 more business days to go before you can get uppity.

As for taking OSTK private, that would be a super topic if this blog wasn't about NFI. The giveaway is in the title, and all the following words, where OSTK isn't mentioned once.

Thanks for the input.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Sparky on 4/3/2006 5:39 PM
Bob,

This has to be one of your best posts ever ... !! Anyone who's bought, sold, or refinanced an auto knows how much emphasis Buyers and Lenders place on Proof of Ownership, commonly called Title. In fact, Mortgage lenders even require Title Insurance, Lenders' coverage, to insure them against the mere possibility that the owner's/borrower's title may be clouded.

So why then is it that certain investors & funds can sell stocks they don't own, positions often having values far in excess of homes and autos, and do as they wish with the related sales proceeds just as if they had been true owners?

And because in the eyes equity analysts it all boils down to earnings per share (EPS), what good are compliance requirements like audited statements if the investor has no knowledge of true float size?

In the interest of greed, the vital connection between EPS and share prices has been sacraficed; and right under the noses of our trusted regulators.

IMHO, Sparky
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By golfwalt14 on 4/3/2006 5:42 PM
Great insight, great read. But it's kind of depressing to hear that there has already been years of discussion and acknowledgement of the problem by people who could have fixed it already, yet nothing has been done.

Meanwhile, stockholders get socked.

I can't see where any participant in the system would have an interest in settling trades, except the sappy investors. I can't see where people in government would care either--for example, Senator Bennett. (Did he disppear the subject or what?)

The only way I see to get relief is to keep doing what we're doing. It's a depressing slog, but what's the alternative?
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By jessathan on 4/3/2006 5:42 PM
Bobo - I recall a comment you made a couple of years ago that made sense. You found it hard to believe there were 10's of millions naked short given the low institutional ownership. - today this is just 36% of the legit shares.

Who bought all these legal and illegal short shares? are we to believe that we retail investors have soaked up these millions of shares?

it just seems tough to believe. what am i missing?
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By mhelburn on 4/3/2006 5:44 PM
Good job, Tommy and Bob. I put the numbers in quatro pro. The chart makes me sick. We were writing letters, telling the SEC that there was a problem and I heard back things like, "We don't have that information." "If the SRO's think they have a problem, they tell us!" At least they have our ear now. I'm sure that if they are investigating Rocker, they will investigate all of his trading.

Chink...that is the sound of the key being thrown away.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By jcline on 4/3/2006 5:44 PM
just think........ all of this now........ and what theyjust needed to do was

"settle the trades"

Massive coverup for massive fraud.....and they only dig their holes deeper the more they squirm. Do we have enough prisons to hold them all?
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Majordanger on 4/3/2006 5:46 PM
Those bad boys have pushed the NFI stock price so low the Dividend Yield is almost 17%. So they now use the "The Yield is too good to be true" argument to try to scare off investors and further depress the stock price.
Well I have been collecting the "too good to be true" Dividends for more than 4 years now.
Meanwhile the shorts pay for thier borrowed dividends by printing more fake shares.

This has become as obvious a greedy crime as televised looting of Plasma TVs goods.

no one is a awake at the switch.. No one claims to be responsible for the switch.
WAKE UP SEC!
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By dave on 4/3/2006 5:47 PM
Taking NFI private, for example, lets the shorts avoid a squeeze. No matter what reasonable number the buy out is at, it is probably less than they would have paid in a squeeze situation, specially if they've sold more shares than exist.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By teacheric on 4/3/2006 5:47 PM
Does NFI have this info, and if so, are they going to do anything about it? I thought I once read on the NFI board that Hartman said he would do something if ever there was proof. Looks like proof to me.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By robelita on 4/3/2006 5:24 PM
I had a good laugh a 'lil bit ago. I was watching Jeopardy (I kick butt in that game) and one of the subjects was government agencies and the answer was it protects investors-hmmmm. I started laughing out loud and then it got funnier as the contestants had trouble trouble with the question. Aaahhhh-got to make your own humor sometimes.

Here's a real brain-teaser:

The answer is : A systemic corruption affecting the very foundation of US stock exchanges nationwide.

Here's Waldo's clues: It involves the DTC, the SEC, the DOJ, some unscupulous hegde funds, some amoral journalists, seedy stock analysts and counterfeit stock (affectionately known as air-shares).

First to ring in on the buzzer gets to take the first stab.

The winner gets 1 share of CMKX stock-now there's some REAL incentive for everyone.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Cynic on 4/3/2006 5:48 PM
Bobo:
1. Not uppity, just impatient.
2. I thought this board was about NSS not about a particular stock. I've also seen other mentions of OSTK on this board.
3. If you are referring to this particular subject, realize that people will read the "stuff on top" and mostly ignore the "stuff below." So it makes sense to post on the most recent blog.
4. Other boards automatically push the blog with the most recent post to the top so that viewers can read the most recent comments. It is therefore natural to post on the top.
5. I also mentioned NFI in that same comment as the one about OSTK.
6. No, you don't need to change your website.
7. I am long NFI, tired of the BS from BS. I also don't trust that BS can't wangle their way out of this with some fancy options trading or having NYSE call a halt to trading to avoid the pummelling we wish on them (and increase in our pocketbooks), or or or.... They have plenty of money and they have obviously spread it around the NY financial press. Where else can they spread their money? Spitzer (Cramer's roomate, I think) and on and on. Hence, my moniker.

8. Finally, take a few days off. I think the tension is getting to you. You are doing a fine job.

Best Wishes to you and all longs.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By bobo on 4/3/2006 5:58 PM
Jessathan: There is no other answer that makes sense - the short interest is now known, as is the FTD position - so even if we assume that was it, institutional interest is what it is, or there are substantial violations going on - both are possible if the shares are held largely offshore, where niceties like SEC regs aren't observed.

Cynic: I was reading fast and doing two things at once. Apologies. This isn't a board, it's a blog, and the subject is whatever is the blog topic for the day. I try to keep it on topic - on days we are discussing OSTK, you will find much discussion on that, on days where we are discussing NFI specifically, I try to keep the discussion on point to NFI - nothing more testy than that. There have been attempts to hijack the thread and convert it to a company specific thread, or one on fundamentals when the topic is naked short selling. So merely some hyper-speed board monitoring.

I agree with Dave that taking either company private allows the shorts to win and lock in their profits with a cap on any downside, and penalizes long term holders that are waiting for a return to fair value. Further, companies that will require additional secondaries for liquidity don't have much of an option - especially if they are creatures of the tax code.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By Millerd1 on 4/3/2006 6:34 PM
Will you look at that April low swing, the NASD ruled buy-ins were working, and IMHO that was the drive for that winter/spring runup.

For those who do not remember the SEC told the NASD to stop forcing the buy-ins their way. Supposedly Reg SHO was under discussion and would solve the problem.

2005 to Feb 2006 IS OUR SOLUTION! Hey 5% FTDs is way better than 12.5% counterfeit shares anyday. Well done SEC idiots, I'm quite sure that is a sixty percent improvement in your book keeping minds!
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By HArold on 4/3/2006 7:04 PM
If you are correct shortsellers are being defrauded by brokerage houses on Wallstreet. If Brokerage houses are lending out to many shares to short, shortsellers and people long the stock are both victims.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By bobo on 4/3/2006 7:50 PM
HArold: How is a broker victimizing a short (who benefits if the stock price declines) by creating a virtually unlimited number of shares to sell? I'm curious as to your reasoning.
Re: The NFI Naked Short Selling Story - Is it bad when 12.5% of all shares are FTDs? By bobo on 4/3/2006 7:57 PM
Millerd: The other thing that was happening back in early 2004 is that you could short virtually unlimited numbers of naked shorts through Canada. Attorney friends of mine confirm that around mid-2004 that tightened up considerably, concurrent with the SEC calling off the NASD. I think what you are seeing is a matter of convenience - as it became harder to naked short sell in Canada and easier here, the numbers gradually shifted domestic, at least for some.

I've heard discussions where Canadian brokers have said, off the record, that some well known hedge funds would routinely call and say "I want to knock out 500K of XYZ naked" - and if they didn't take the order, they knew that the guy down the street would.

Still works that way in the Caribbean and Malaysia and Thailand and a host of other accommodating places.

I recommend everyone read Dr. DeCosta's piece on an aerial view of the DTCC for an explanation of the myriad entries into the system there are from abroad.

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