The following showed up in my email today. I will abridge it, as it is fairly lengthy, but the salient point is that we have yet another broker, this one Canadian, who has been a busy lad, naked short selling like it's nobody's business. The commentary in the middle is from Dave Patch.
"IDA imposes $1,000,000 fine on Union Securities Ltd. and bans John P. Thompson from UDP designation
Tuesday April 18, 2:12 pm ET
VANCOUVER, April 18 /CNW/ - A Hearing Panel of the Investment Dealers Association of Canada (IDA), appointed pursuant to By-law 20, has imposed discipline penalties on Union Securities Ltd. (Union), an IDA Member firm, and John P. Thompson, at all material times the Chief Compliance Officer and Ultimate Designated Person of Union."
Then words words words. The list of charges includes failing to establish reasonable guidelines for sales compliance; Allowing trading in dummy accounts for US Residents controlling them through Yukon Holding Corporations; Short selling US securities without borrowing (Naked Short Selling); Failing to adequately supervise its representatives; Failure to cooperate with the investigation; and appointment of a regulator-approved monitor.
Here's the verbiage relating to the naked short selling scheme, along with Dave's wry observations:
"Short Selling US securities:
On December 2, 2004, the IDA published Member Regulation Notice MR 0320, advising Member firms that the US Securities and Exchange Commission (SEC) had adopted Regulation SHO under the Securities Exchange Act of 1934. Members trading directly or indirectly on US markets were advised to adjust their trading practices to comply with this rule and that failure to do so may be considered a violation of By-law 29.1. One of the goals of SHO was to establish uniform "locate" and "close-out" requirements in order to address problems associated with fails, including potentially abusive "naked" short selling, such as purposely driving down the price of a security.
IDA Compliance staff identified a number of securities at Union that were not properly located by Union and consequently the firm was not able to deliver. In certain stocks, the failures by Union to document the "locate" were continuous (emphasis added)."
(Dave: But by US Laws, the member firm is responsible for insuring a locate exists prior to executing the trade - NASD Rule 3370. Most OTCBB stocks are non-hypothecatable so how do the Canadians short OTCBB Securities?)
(Bobo: Interesting question - if the stock isn't shortable, at least not legally, the only way to do so would be to do so illegally, never borrowing, and just selling in limitless quantities without ever intending to deliver anything. Sound familiar?)
"During the Short Selling Period, Union executed short sales for certain OTCBB companies without proper "locate" procedures being done. In each instance, Union relied on the US market maker to perform the "locate" and relied on the US market maker to document the "locate". By relying on the US market maker, Union failed to properly perform and document the "locate". In certain instances, Union continued to short threshold securities with fails outstanding for a period of 13 or more consecutive settlement days without pre-borrowing.
Although Union obtained advice from US counsel that market makers could perform and document the "locate" function on Union's behalf, Union acknowledged that it failed to adequately implement proper controls and procedures with respect to short selling US stocks in accordance to SHO and MR 0320, and therefore violated IDA By-law 29.1."
Huh. So no borrow, no locate, no problem. Sounds like a good gig. Kind of like printing money. Wanna bet 100% of it was done via ECNs? You know, those fun automated exchanges that aren't regulated by any of the SROs? And don't you wonder who was doing all this? I mean, guys like Jeff Mathews insist that they don't know how to do it, and that nobody "legit" would do it, and yet, here we have it being done as simply as picking up the phone and placing the sell orders! Who knew?
And for the final bit:
"As a result of their misconduct, Union has agreed to pay a fine in the amount of $1,000,000 and will, over the next three-year period, retain the services of Grant Thornton LLP or another similarly qualified external compliance consultant acceptable to the IDA, to review and test its compliance systems and policies; add at least one external independent director to its Board of Directors; refrain from operating any accounts for corporations for which the purpose of incorporation is to circumvent registration requirements; and ensure that it creates and maintains an audit trail including documentation of its "locate" of securities for any short sales and acknowledges that the threshold limits set out in SHO apply to it and will ensure that all such short sales are not in violation of the threshold rules referred to in SHO."
Here's my short synopsis: We have been routinely violating SHO and a host of other rules for years, made untold millions doing so, and now we have to pay some crummy little fine and promise to be good.
And people wonder what is wrong with our markets. Let's see, you can just FTD long or short and nobody will do anything, you can desk trades and misrepresent stock as having been bought for your customers and nobody will do anything, you can sell naked via Canada or Malaysia or the Caribbean and nobody will do anything, you can abuse market maker exemptions and nobody will do anything, you can move your fails ex-clearing and nobody will do anything, you can put all your shares, including the retirement and cash accounts into the NSCC's stock borrow program and have them lent out illegally, and nobody will do anything (it is run on the honor system), you can just get lawyered up should the regulators ever come knocking and refuse to provide evidence and nobody will do anything (this works even better if you can claim to be a member of the press and can get the SEC to dance for you) - and I've only touched on a few of the ways the system screws everyone.
Now don't you wish I was drawing cartoons, rather than exposing this?