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Huge Naked Short Selling Prosecution - Finally

Location: Blogs Bob O'Brien's Sanity Check Blog    
Posted by:   bobo 4/4/2006 4:00 PM

Here's an article that describes it all. Proof positive that naked short selling and stock manipulation go hand in hand. After what seems like a lifetime, the SEC is finally going after a few of the perps.

I could rail about this for hours, or point out that if only one out of God knows how many miscreants get prosecuted, there is effectively no deterrent value.

But I won't. Read the article. It speaks for itself. There isn't a lot of mystery to this - these guys serial killed companies and made who knows how many millions doing so, and so far have been walking around free as birds, with the ringleader getting a wrist slap.

Defies description.
Copyright ©2006 Bob O'Brien
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Comments (19)
Re: Huge Naked Short Selling Prosecution - Finally By Financial_circus on 4/4/2006 8:41 PM
Your SEC in action! Only when forced to do something. In the mean time they continue to allow rampant naked shorting on a scale of a thousand times what they are prosecuting. What does that say about CHRIS COX at the SEC? Where are the buy-ins now? Cox is only prosecuting these SMALL timers because the SEC is complicit in the REFO mess. IMPEACH CHRIS COX NOW!!
Re: Huge Naked Short Selling Prosecution - Finally By hhawes on 4/5/2006 4:04 AM
I do not think this is the action that Byrne was referring to last week, do you? I was looking for a real bombshell, but this is old news.
Re: Huge Naked Short Selling Prosecution - Finally By gregcable2002 on 4/5/2006 4:36 AM
To those in public office who have knowledge of a crime and stand by as if nothing is going on is a crime.I know these roots run deep and the dogs are let loose so beware.These hounddogs have great noses and can pick up a scent from far off.
Re: Huge Naked Short Selling Prosecution - Finally By lenofus on 4/5/2006 4:38 AM
This is not "old news". This is the SEC wrapping up four and one half years of investigation they probably didn't want to do, and now prosecuting. They are telling you principals are a target. Failure to supervise will get you in a mess. That means the management of the majors and their personally deep pockets are fair game for RICO. This is racketeering. It is NOT old news.
Re: Huge Naked Short Selling Prosecution - Finally By mhelburn on 4/5/2006 5:04 AM
One of the serious problems of the SEC is the lack of continuity. Who is responsible for not cleaning up the Rhino/Refco mess is 2003? Badian was fined just as Harvey Pitt left and William Donalson took over. Does it really take 3 years to investigate something as large as this or was Rhino put on the back burner after the fine and not looked at again until Refco blew up? They had the guy with all the information 3 years ago, so why did they wait until now? Was anything done about this case while Donaldson was in office? Then Refco blew up in August of 05, 3 months after Cox was installed. Although we can call Reg SHO a failure of enforcement, without the publishing of the SHO list, we wouldn't have had the proof that there was illegal naked shorting going on. Without SHO, the press would have created a special name for naked shorting that pretended it wasn't happening. They would have called it something like "pseudo borrowing of stocks"

The Rhino guys are being looked at again because the SEC has a locked up case against them and the guy who rolled is still available. What is crystal here is that Rhino is just one firm and Refco was dirty and willing to do this for other clients. The client list there is like the client list at Gradient. Did Refco solicit clients like Gradient did? Did they show the clients how they could manipulate the price of security to get their business? Did Refco get a pass by its underwriters just so the underwriters could collect the fees?

One young auditor brought Refco down. He noticed the funny loan on the books. It took two months and the CEO was arrested. Two months. Most legitimate companies with any means try to avoid crooks. The activities at BAWAG are being uncovered. These are dirty guys. What was wrong with the BOD of BAWAG to let the CEO give his son hundreds of millions of dollars to lose and then no audit to uncover it? Was the BOD complicit? How did they have money to lend Bennett when he needed an overnight loan to try to cover his ass? Why did they feel such a loan was reasonable? Was BAWAG so dirty that Bennett was able to blackmail BAWAG for the money or was Bennett so smooth that he was able to scam the crooks at BAWAG?

Here is a site that advertises that the SEC uses them. They claim to have put out a warning on Refco in 2001. https://www.world-check.com/portal/mod_perl Of course, they had a warning on Refco in 2001, that is when the SEC fined Refco..

The SEC does a great disservice to honest people everywhere by doing half a job and letting crooks off with fines. They will bring in the DOJ now, but had they done it initially, maybe some investors would have been spared.. Bennett will go to jail, but they were allowed to roam the market for 5 extra years and do 5 years' worth of damage.
Re: Huge Naked Short Selling Prosecution - Finally By dave on 4/5/2006 5:42 AM
This is worth repeating as Refco acted as a clearing brokerage.

90% of US brokerages net their trades through a clearing brokerage before it gets to the DTC.

DTC (Cede & Co.) is the "actual owner" of the shares. The clearing brokerage (Adler Coleman, MJK, Refco) is the "beneficial owner".

Your brokerage has a contract only (if the contract is broken, it is breach of contract, not criminal) with the clearing brokerage. You have a contract with your brokerage.

The courts have ruled that these tier two clearing brokerages have no fiduciary responsibility to you as you don't have a contract with them. Also, they are not regulatory bodies. That means, they are free to facilitate massive, obvious fraud, generating huge fees, with no downside to themselves.
Re: Huge Naked Short Selling Prosecution - Finally By dave on 4/5/2006 5:55 AM
As far as I know, no one has gone to jail for this. The people behind it had previously received fines from the SEC, but that didn't stop them from making windfall profits on our backs.

Effectively, they did a "pump and dump", then rather than sell the shares into the market, they lent them to get collateral which they kept.

It was run by a Saudi arms dealer, Adnan Kashoggi and collapsed shortly after 911.

How a clearing brokerage fails:

"In the daisy chain, Native Nations received 7.2 million loaned GenesisIntermedia shares, in turn loaned the shares to the MJK and MJK Clearing reloaned the shares to at least four brokerages"

"...a 'rogue employee' had doctored its books to hide the identity of the person or entity that had loaned the 7.2 million shares, and that $60-million was now 'missing,'"

http://getnj.com/onlygameintown/messages/823.shtml
Re: Huge Naked Short Selling Prosecution - Finally By bburrell on 4/5/2006 6:31 AM
I have not seen a case go to criminal charges after a large fine. John Fiero should have been indicted. Not only did that not happen, he didn't have to pay the fine according to several sources, including purported statements from some Costa Rica based players.

The indictments of three no names is no win. There were supposed to be some 40 related prosecutions criminally. WTF?
Re: Huge Naked Short Selling Prosecution - Finally By sec fines on 4/5/2006 6:36 AM
It's worse than that. I'm told a lot of times the SEC is unable to collect the fine as the money has left the country.

One problem is the SEC has no authority to lay criminal charges, but if the SEC is dealing with it, the DOJ seems to avoid getting involved for some reason (unless it is Martha Stewart).
Re: Huge Naked Short Selling Prosecution - Finally By sec fines on 4/5/2006 6:38 AM
Bud, sorry, I see you said the same thing. Many fines go unpaid and are written off.
Re: Huge Naked Short Selling Prosecution - Finally By n-tres-ted on 4/5/2006 7:25 AM
Bobo, I see no mention in the Reuters article of "naked" short selling. No mention of "counterfeit" shares, no mention of FTDs, etc. The prosecution is described as use of short selling to manipulate the stock price. That circumstance leave the general public unthreatened; only the shareholders of Sedona are victims. No mention of RICO. Do you see it otherwise?
Re: Huge Naked Short Selling Prosecution - Finally By dave on 4/5/2006 7:37 AM
They call that a limited hangout.

"Yes, there were some brokerages that colluded with one tier 2 clearing house to short one particular stock where there short was technically covered by the death spiral debenture agreement."

The more focussed we keep this on the DTC's right to exist, the right of brokerages to own their own clearing divisions (huge conflict of interest), transparency and most of all, the share counterfeiting, the sooner the powers that be will fix it.

They literally don't have enough heat right now. From their point of view, there are a handful of bloggers whining about the problem on a handful of websites, but the vast majority of the public doesn't care about the problem.
Re: Huge Naked Short Selling Prosecution - Finally By dave on 4/5/2006 7:44 AM
Netting occurs at a number of levels:

1. A brokerage has customers that own 50,000 shares of Microsoft and other customers that are short 10,000 shares of Microsoft. They only need to own 40,000 shares and they keep them at a tier 2 clearing brokerage.

2. The tier 2 clearing brokerage has brokerages underneath it that are net long 500,000 shares of Microsoft and others that are net short 100,000 shares of Microsoft. They only need to own 400,000 shares of Microsoft at the DTC.

3. The NSCC then can borrow those 400,000 shares. From the clearing brokerage's point of view, the beneficial owner is the introducing brokerage and they know nothing of IRA accounts, cash accounts, etc. They are free to lend out the whole block.

4. Whoever buys those shares can then lend them again in a long daisy chain.

5. Believe it or not, even with all this slack in the system, trades still fail!!!


Is this system a problem considering I did a bit of research and don't think this has ever been revoked:

http://www.nysedata.com/nysedata/asp/factbook/viewer_interactive.asp?hidCategory=4

September 21, 1931 The New York Stock Exchange suspended short selling, removing the ban on September 23.

Ferbruary 18, 1932 Members prohibited from lending customers' securities after April 1, 1932, without separate authorization in writing.

Effectively, the customer's property, INCLUDING IRA AND CASH ACCOUNTS is lent out by the tier 2 clearing brokerage.
Re: Huge Naked Short Selling Prosecution - Finally By Patchie on 4/5/2006 8:10 AM
Tell me this is not still happening across the markets:

After Spinner, Drillman and Graham completed their sales of Sedona stock, Spinner asked Badian whether he was concerned that Sedona's stock price would begin to rise now that they had ceased their selling pressure on the stock. Badian remarked he was not concerned because he had a particular market maker "in the way" to
keep the price fiom rising.

This was a well orchestrated, well oiled machine. Where is that market maker?
Re: Huge Naked Short Selling Prosecution - Finally By n-tres-ted on 4/5/2006 8:53 AM
Patchie, does that MM get "in the way" simply by naked shorting to the full extent necessary to make sure the pps does not rise? If so, how does the MM cover without losses?
Re: Huge Naked Short Selling Prosecution - Finally By dave on 4/5/2006 9:16 AM
This is a line of research worth pursuing. Who is the market maker and how did they do it?

Market makers are allowed to counterfeit for "legitimate market making purposes", but are supposed to cover within thirty days.

I've seen market makers sit on the offer on some stocks and not budge no matter how much stock comes at it. There is no double printing, so I am pretty sure the sales are coming directly from the MM.

They seem to never cover - only ever on the sell side.
Re: Huge Naked Short Selling Prosecution - Finally By n-tres-ted on 4/5/2006 10:49 AM
Is the SEC, US Attorney, aware of the evidence you mentioned above about the MM "in the way?"
Re: Huge Naked Short Selling Prosecution - Finally By Patchie on 4/5/2006 11:31 AM
That statement was part of the SEC complaint.
Re: Huge Naked Short Selling Prosecution - Finally By By G. Rosey on 4/15/2006 on 4/15/2006 6:08 AM
Hey, what goes around, comes around! The guys in the wrong path, will get what they have coming. It takes time, but, it happens.

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