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Electronic Trading Group Versus The Prime Brokers

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Posted by:   bobo 5/12/2006 4:00 AM

Hedge funds suing the prime brokers for naked short selling.

Who would have thought we would see anything even remotely like this a year ago?

Click here to read the complaint.

Now, I have an opinion about all this. It is a cynical, ugly opinion, one that views the Byzantine world of Wall Street with distrust.

I believe that this suit's sole purpose is to establish a straw man for the hedge funds to use in order to deflect blame from them for the naked short selling crisis.

They sue the brokers. They can then get a lot of mileage out of taking the position that. "It's not us - it's those evil brokers that are the bad guys."

Then, when the suit gets tossed, the brokers can say, "It was never us - that was all wrong, and the suit being tossed proves it!"

It is the ultimate way to clear both culpable parties. Everyone has a bad guy they can point to - because we now know that failing to deliver is happening on a massive scale in some stocks. The FTD data from the FOIA request on NFI shows how ugly it can get. There's no denying it any longer, so plan B has to be, "Blame it on the other guy."

I would love to be proved wrong on this. But I'm betting that the lawyers for the brokers already have their defense in place, and are eagerly awaiting their opportunity to shred this to pieces.

All the lawyers get paid.

Lots of theater and drama. Lots of outraged accusations, and for Wall Street, the ultimate happy ending: All that naked short selling was NO ONE's FAULT!!!

Want to take bets on this one? Print this out, date it, put it on the wall.

That's how this one is going to go down. Everyone is innocent - except nobody is going to return all the money stolen from investors...you know....because it is really nobody's fault....

Maybe we will see some smirking penny on the dollar fine, so the regulators can appear to have done something as well. Dunno. That's a wild card. And irrelevant.

But you can bet that nobody will be admitting any guilt, at any step. That won't change.

Hope I'm wrong.
Copyright ©2006 Bob O'Brien
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Comments (33)
Re: Electronic Trading Group Versus The Prime Brokers By upwardmo on 5/12/2006 10:23 PM
Bobo, you may be right (and probably are) anout the true purposes of this lawsuit. Nonetheless, it may prove useful for us. In reading it, the pleading basically echoes everything the anti-naked shorters have been saying for years, and even quotes some of the same sources (such as Boni). The plaintiffs are saying we are right about the extent and nature of naked shorting, the uselessness of Reg SHO, the complicity of the DTCC and the brokerages, the ineffectualness of the SEC, the unfairness of the grandfathering provision, etc.

Of course, they (the hedge funds who are the ostensible members of the plaintiff class) are leaving out any sense of their own complicity. Which defies plausibility, since they obviously stood to benefit from naked shorting. But it does raise an interesting question: to what degree ARE the prime brokerages the main force behind naked shorting, as opposed to the hedge funds. In some cases (Rocker being a likely example), the hedge fund seems to have the motiviator behind the naked shorting. But it's quite possible that in many other cases hedge funds that were shorting stock had no idea the prime brokerages were failing to deliver. After all ,the prime brokerages are profiting handsomely from the naked shorting, so they always have an incentive to fail. For many hedge funds, though, that incentive was absent--and plain vanilla shorting MAY have been all they were intending to do.

I don't have a lot of hope that this suit will go anywhere. But if it at least proceeds to discovery (unlikely, I know), the findings could prove very helpful to the rest of us. In any case, the suit exists as further affirmation of what we have been saying all along: that naked shorting is real, it's endemic, and it involves many if not most of the biggest players on Wall Street. Such publicity can only help us.
Re: Electronic Trading Group Versus The Prime Brokers By teacheric on 5/12/2006 11:17 PM
I remember years ago when I first bought my first stock, I asked the guy at Dean Witter,what if no one wants to buy my stock when I want to sell it? He assured me it would sell "at the market." So, looking back on it now, let's imagine I had bought some stock that traded 50,000 shares per day, and I had 2,000 shares to sell. I sell at the market. I'm assuming the shares will sell regardless if there is a real buyer out there. Is this the brokerage pretending to buy my shares at a price, only to sell later at a higher price. Do the brokerages sit around all day and manipulate prices up and down to get in and out of trades for maximum profit? So if a stock starts getting bought up, but they need the price to stay low, could they just be stating that you're buying shares but really not doing anything because they don't want the price to get away from them? Perhaps, later, once they've successfully driven the price down, they'll finally buy your shares back. I say screw liquidity. Eliminate everyone but the buyer and the seller. If there is no one to buy your stock, then lower the price or wait for a buyer to come along. Forget the market makers and everyone else. Keep it simple: one buyer for one seller.
Re: Electronic Trading Group Versus The Prime Brokers By bobo on 5/13/2006 10:44 PM
Short seller: So your statement is they are doing this action on contingency? Really! That is interesting. Who suggested it to them, and how do you know what you purport to know?

Could someone call them on Monday and chitty chat with them about their fee structure and such and report back? Not that I don't trust anonymous board comentators....but still....
Re: Electronic Trading Group Versus The Prime Brokers By Anotherman6 on 5/13/2006 10:48 PM
Bobo has a point here. How do we know what is smoke and what is not?

BTW, this out of order posting stuff is annoying.
Re: Electronic Trading Group Versus The Prime Brokers By oldfeller on 5/13/2006 11:08 PM
Selective enforcement of laws has weakened all laws since laws were invented. What we are dealing with is non enforcement of rules which were supposed to be enforced by SRO`s. Arguably not even real laws. The money is gone, it`s not coming back. This same game has been going on since the market was invented. It`s nothing new. Twas always thus. The only thing different now is the number of people aware of how the game is played and more importantly who the players are. It is becoming pretty hard to hide financial misdeeds in the digital age.
Re: Electronic Trading Group Versus The Prime Brokers By bbhindyou on 5/14/2006 5:13 AM
I just read about a plan to turn the real estate market into a system where a average investor can buy 'shares' of a pool of morgages. This is supposed to make it more equitible for the little guy who wants to invest in real estate. HMMM lets get cynical . The next big score for selling naked shorts? Have the players depleted the market to a point where they want a new asset base to plunder? I said it before and I will say it again the game of lets get all the money WILL continue and the players will find a new way to play as the old game gets exposed or becomes less profitable.
The Prime Brokers By short seller on 5/15/2006 4:27 AM
Do you want the hedge funds to win discovery against the brokers?
Re: Electronic Trading Group Versus The Prime Brokers By Old Duffer on 5/15/2006 5:12 AM
short seller,

I have got to the point that I want both the hedgies and the prime brokers lined up agaist the wall and shot! As well as the government crooks, both elected and appointed, who conspire in this treason hung or have their heads lifted from their shoulders. The whole system is broke and corupt.

I am deadly serious!

Pain enough?
Re: Electronic Trading Group Versus The Prime Brokers By bobo on 5/15/2006 10:30 AM
N-terested.

Sure. All good. Quite possibe.

But I have yet to see anything out of Wall Street's mouth that even passes as a semblance of truth, thus taking a skeptical view seems the most consistent with the last 100 years of history.

I would love to be proved wrong, and have discovery commenced.

Again, I don't think that is going to happen. Call it a hunch.
Re: Electronic Trading Group Versus The Prime Brokers By clearthinker on 5/12/2006 11:39 PM
I totally agree..this is orchestrated....i suspect that many class action lawyers re in bed with the other side and perpetrate a game of fraudulent finger pointing to create the illusion that something worthwhile is taking place...

don't believe the smoke
Re: Electronic Trading Group Versus The Prime Brokers By Inthe Know on 5/13/2006 3:57 AM
Like I once said "Where are all the customers yachts?"
Re: Electronic Trading Group Versus The Prime Brokers By J on 5/13/2006 4:20 AM


Ok, Bob...

After reading the complaint:

I'm going to bet against you on this one and say that this will go forward, and it will be a grudge match between these two camps. I don't think that this is going to end in "no fault" as you suggest.

Time will tell as always, but it feels different this time. Obviously they are both at fault, but the Hedge Funds have wisely struck first, and laid out exactly how this arrangement was working between them and the brokers.

There's no putting that back in the box now, and I think it will blow up in both of their faces.
Re: Electronic Trading Group Versus The Prime Brokers By lenofus on 5/13/2006 4:36 AM
Your scenario cannot happen if the public weighs in. You have done a tremendous job along those line.s The snakes will try to slither away. It is up to the public now. Byrne, O'Brien, they've done their work.
Re: Electronic Trading Group Versus The Prime Brokers By JLB on 5/13/2006 4:51 AM
Bobo, IMO, the hedge funds would not have been able to get away with committing the fraud that they have without the consent of these prime brokers. I think the combination of pending lawsuits from victim companies, the prospect of stricter regulation on the horizon, and the subpoenas that have been and will be handed out soon, have forced the Hedgies to strike first.
With so many companies stepping up to the plate recently and taking extraordinary measures to counter the naked short positions in their stock (cert pulls, cusip changes, dividends, lawsuits), perhaps the miscreants sense that it's only a matter of time before the regulators are fooked into taking action. I think these are some of the reasons they chose to "strike first"
I can't wait to see whether the prime brokers will volley a series of countersuits. It would be very interesting to get the other half of the story from this dirty little secret. In any event, I think any publicity that is generated from this is benificial to us and will erode the cloak of secrecy that has allowed this crap to go on in the first place.
Re: Electronic Trading Group Versus The Prime Brokers By snoozern on 5/13/2006 6:33 AM
Is ETG suing because they lost money in shorting due to NSS promulgated by the prime brokers?

Or are they suing because they didn't make as much as they would have if those nasty prime brokers hadn't charged them all those fees?

I haven't read the whole complaint but they are talking about treble damages and the thought crossed my mind - what are their damages if they made a profit on their trade(s)?

WAAAHHHHH? He took some of the candy that I stole from Suzie!!!!!!!!

Good grief!

Regards,
Rick
Re: Electronic Trading Group Versus The Prime Brokers By mhelburn on 5/13/2006 6:47 AM
How do you prove damages? The real loss is with the shareholders who didn't get the price they deserved in lending the shares. Yes, the brokers charged for services and products that they didn't deliver and they did it in concert. But what did it cost the shorts in the terms of economic loss? Either they made money on the trades or lost money and they paid fees that were unjustly earned. I think that if they can prove the case, they will get their fees and treble damages.

The bigger case here, which if this goes to discovery, is which stocks were naked shorted and which shareholders were deprived of the adequate compensation by the brokers charging interest on fake shares. When this case is proven, it opens up the case for shareholders who didn't get the value. There is no reason that the hedge funds shouldn't be compensated and the shareholders, also. The only funds that won't join in are the ones who acted in concert and with knowledge of the naked shorting. Those who communicated that they knew what was happening and are beholding to the brokers in the market manipulation will not join the suit. Those who told their brokers to sell with unbridled fury after buying puts are not going to come forward.

If this is an honest hedge fund and they dislike the antics of Wall Street as much other honest investors do and they pursue it, it is a win. The lawyers won't profit until they win and they have presented some reasonable arguments. The size of the class will be determined by the number of honest people involved.

Perhaps as this unfolds, and the institutions who were lending real shares will bring suit. Someone like Dremen. It all depends on who is sleeping with whom.

Re: Electronic Trading Group Versus The Prime Brokers By upwardmo on 5/13/2006 6:52 AM
Snoozern, the damages they are assering in the complaint (as I read it) are three times all the fees they were charged for shorting, when the shares were never actually borrowed by the brokerages. Which, as we know, probably amounts to tens if not hundreds of billions of dollars.

Let's make sure we get our share too! Maybe we can piggyback on this lawsuit?
Re: Electronic Trading Group Versus The Prime Brokers By mhelburn on 5/13/2006 7:06 AM
Rick,
I hope this is an honest suit and not smoke. The hedge fund has an absolute right to expect the broker to act according to contract. The contract calls for borrowing of real shares within a specified length of time. Whether the hedge fund made or lost money is irrelevant. It would be like someone collecting insurance premiums when they had no intention of paying claims. You contract for something and although you didn't suffer a loss, you believed that you were covered when you weren't. It is fraud. The illegal enrichment of the brokers will be very easy for the jury to see. Whether the hedge fund profitted more or less.. immaterial. The brokers did not provide what they contracted to provide. They are crooks and it will be obvious to a jury who will see this as an attack on the market system and the country. The jurors, who probably now don't know squat about the market, will have plenty of time to learn. The reason they don't know is that the defendents have kept all this a secret.. and now it is out there in large type.
Re: Electronic Trading Group Versus The Prime Brokers By InTheKnow on 5/13/2006 7:31 AM
Why don't shareholders start a class action against all the brokerage house for the FTD's, the voting fraud etc.

We can hire MW.... naaaaaaah!
Re: Electronic Trading Group Versus The Prime Brokers By rtway1 on 5/13/2006 9:25 AM
I hate to be a cynic, but I beleive this is all a waste of breath and ink if their is no rainbow at the end. By that I mean if nobody doles out the justice end of this circus of deception, this is nothing more than smoke and mirrors. I couldn,t aggree more with you Bob on this one. I beleive in my opinion that Cox will do nothing more than stall this whole investigatory process off until after the elections and even then will stick a wet finger into the wind to see where the campaign fund winds are blowing. If somebody can give me one shred of hope that Spitzer, Cox, or these civil suits will lead to a jail sentence of years and not months along with massive fines to be given to shareholders, I still think it is all a scam meant to bullshit to fool Joe Public again and again and again. We need a real Elliot Ness or a revolution, our government is broke.
Re: Electronic Trading Group Versus The Prime Brokers By Wonder Boy on 5/13/2006 9:38 AM
have no idea how the suit will turn out, but I do see some positives.

The suit comes from 'insiders' and not us (the foil hat crowd.) It lays out the problems exactly as they have been stated by us 'weirdos' and places the blame directly at the feet of the SEC, Congress, the DTCC, etc. where it belongs. It further points out the ineffectiveness of Reg SHO and the flawed thinking behind the 'grandfather clause'. The lies that have been promulgated by several of the SEC spokespeople are open for the public to see. Some of the inner workings of Wall Street have been exposed and this may be the impetus for putting a halt to this 'self regulation' garbage. Self Regulation = NO Regulation.

The problem now is to get this into the public eye and not let it be hidden by the media. the SEC, Congress, the prime brokers, etc. The hedge funds can whine, but it is the investors that have been truly stolen from.
Re: Electronic Trading Group Versus The Prime Brokers By n-tres-ted on 5/13/2006 10:08 AM
Bobo,

I doubt the suits of this nature are going to go away that easily or quickly. Simply a dismissal of the suit would not provide a definitive defense for the hedge fund against any charge/complaint of wrongdoing. In fact, the hedge fund's own allegations open the door to shareholder suits against the hedge fund by those who bought the shares that were never delivered, as admitted by the hedge fund.

I'm inclined to think the hedge fund is motivated to file the suit partly by SEC investigations of NSS, so as to make the SEC think the hedge fund was not a part of the conspiracy to FTD.

But, in any event, the allegations of this complaint are interesting and useful. This hedge fund appears to have data on FTDs that I have not seen previously. Look at the allegation, e.g., of paragraph 36, which says 259 million shares of FTDs occurred on NYSE and NASDAQ on December 22, 2004. That amounts to 18.6% of the total volume traded on NYSE that day. Assuming NASDAQ traded about the same volume that day (I don't have the NAS vol), that means about 9% of the total volume traded that day on the two major public exchanges were FTDs. That is not a negligible level of FTDs by any stretch of the imagination. When that level of FTDs occurs every day, it is not difficult to see the entire system of stock trading undermined through accounts filled with "entitlements" rather than shares.
Some comments By other_opinions on 5/13/2006 11:17 AM
Given the claims in the suit, I'm not certain it is a smoke screen, but it could be.

Echoing other comments, even if it is, it can still be of use to use because of the material that may come out in court filings and discovery. In addtion, it makes basically the same claims that have been made here and other places, so you can now point to a court filing by a participant instead of just other anti-naked short blogs.

It's interesting that they are using the anti-trust act to go after the brokerages. I'm not as familiar with that as I would like, but I imagine that its claim significantly changes some of the rules. If they should actually win a suit using the anti-trust act, then it makes it very difficult for the justice department to continue to ignore anti-trust violations.

Another interesting aspect is that it is claiming class action status. If it is a smoke screen, then that is the perfect way to do it. Any further similar lawsuits could just be rolled into this one as a single action. However, if it is a smoke screen, then there is also a danger there, because other class members can challenge or fight any settlement.

Moreover, the class is only going to be short-sellers--or perhaps even just short-selling brokerages. ETG is less a hedge fund and more a brokerage providing service to hedge funds or day traders. That means the class of shareholders are not represented. Thus, discovery in this, even if the lawsuit goes nowhere, can still provide a wealth of information for a shareholder class action lawsuit, which could include claims like:

artificially depressed prices

lack of fiduciary duties

fees charged for no service

voting dilution
Re: Electronic Trading Group Versus The Prime Brokers By antny@singsing on 5/13/2006 1:37 PM
I have more faith than that. Has anyone checked out the NITE board on Yahoo? Those guys have a history of SEC run ins and now it's being said they had 107 mil in FTD's last quarter. a HUGE increse from the previous quarter. Any comments?
The Prime Brokers By short seller on 5/13/2006 1:55 PM
this is an anti trust cases seeking recovery of unjust enrichment there need not be damages

The plaintiffs firm works on contingency so not "all " get paid

The dtc is just the Shell game the brokers are all the players around the table . the dtc is a nonprofit. the defendants made 20 % of their net from stock loan

this suit can only target nss instances when hedgie sought a locate and therefore was charged a fee. a short sell with an affirmed borrow hapens in a type 3 account therefore any nss that was executed in a type 3 account is a naked short ONLY because the borrow was bogus. This of course does not stop hedgie from counterfeitng a share by executing a naked short in a type 1 or 2 account but he would then be doing so without the knowledge or complicity of the broker. My guess is not all naked shorting is 1 or the other but both. The sub 5$ stuff done by the low brow hedgies or non recource loan scum but the big names MSO NFI OSTK are done by high profile guys with broadly known short positions, so well known the must be maintained in a type 3 account you cant journal stock for a 1or 2 to a 3 the only way it gets in a 3 is executed in a 3. That cant be done without the broker and his alleged locate.

you gain credibility by demonstrating youve done your homework before the conspiratorial spout
Re: Electronic Trading Group Versus The Prime Brokers By bobo on 5/13/2006 3:22 PM
Huh. Hey Short Seller - Is the lawfirm that brought the suit working on contingency? Do you know if that is the case or not? Just want to know if you've done your homework.

Of course, if I was really sneaky and conniving, there are any number of ways to structure disguised payments - a nod nod, wink wink agreement that costs will be covered would be one, an understanding that the suit won't be tossed, but rather settled with no admission of guilt might be another.

But the best question would likely be, is the firm that brought this suit billing and being compensated while they do the work, and if so, by whom?
Re: Electronic Trading Group Versus The Prime Brokers By SamIam on 5/13/2006 3:34 PM
Bobo, there is now way of knowing how many cases Milberg got back door compensation for, either, if any occured. Unless you could track every offshore account ever created for links, anything is possible. I would bet on your side. Of course the suits are going to look convincing, and of course they are going to be hotly contested. But you want to bet they never see discovery?
Re: Electronic Trading Group Versus The Prime Brokers By thelimeyone on 5/13/2006 4:49 PM
I have a different theory. I think the name of the game is protect the super rich behind the hedge funds at all costs. even if it means suing their freinds the BD's, & behind the scenes the hedge funds will reimburse the BD's.this will just be the cost of doing business. thereis abigger picture here, while we all get hung up on NSS & ftd's, they will be laughing at all the confusion they have caused. look at wall st history, they are not a one trick pony. when the dust has settled they will move on to other scams, or already have or are planning to. the scam itself is not important it's the continuation of the game, & the game is to keep cheating to steal more money from the average joe, who they no doubt regard with complete contempt into their pockets, & so on & so forth. their is no end to this only constant vigilance on our part & the ability, nay our duty to spread the word. tlo.
Re: Electronic Trading Group Versus The Prime Brokers By Wonder Boy on 5/13/2006 5:33 PM
Thoughts on more public exposure----

CBS and Ms. Stahl had a good reception with their first 'show' on naked shorting and the network despises Bush. Perhaps we can 'en masse' encourage them to look at TASR, OSTK, and NFI as examples. All have good management, all have been shorted by the same folk, all have had SEC investigations, all have been on the SHO list 'forever', all have been 'bashed' by the media and the beloved 'message board bashers', and, I think, that all have been sued by our buddies at Milberg, Weiss. To further the point, this lawsuit is interesting since it is from an 'insider' and could expose many of the failures of Govenment and Wall Street. I don't guess the two could be related in any way---or could they be?

A LOT of pressure on the media and the legislators may just produce some results. Worse case, the public becomes more educated in how they are being screwed and they will definitely be mad.
Re: Electronic Trading Group Versus The Prime Brokers By mhatmccane on 5/13/2006 5:41 PM
I hope the suit goes forward and more hedge funds pile on. The hedge funds are paying PIL to BDs for nonexistint shares in addition to borrowing costs in NFi's case and maybe some others. When I remember the slide that Dr Bryne showed in looking at the BD holdings at the DTC vs. the "entitlements" in their accounts, we're talking real money. And now, the SEC has given Dr. Byrne a pulpit to preach the gospel.
The Prime Brokers By short seller on 5/13/2006 5:58 PM
They are working on contingency . Just like the last large antitrust case brought against the brokers, the 96 nasdaq collusion case that settled for $1B.

Ask them. Their phone number is at the bottom of the complaint you posted

Doing homework is harder than being a message spout.

But say I am right, they are working on contingency - If they win the motion to dismiss their complaint they will have discovery into the broker's loans and withdrawals to the SBP - do you want them to win or lose?


Whose side are you on?

Discovery (truth - but maybe not your answer) or dismissal (no discovery no answers)
Re: Electronic Trading Group Versus The Prime Brokers By mhatmccane on 5/13/2006 6:16 PM
Just as an aside, I have noticed that when GS (Goldman Sachs) announces a large new position in Ostk (2/12/06) or NFI (05/10/06), you can expect a bear raid shotly thereafter. The announcement is really just "loanable" shares.
Re: Electronic Trading Group Versus The Prime Brokers By n-tres-ted on 5/13/2006 7:43 PM
The premise that dismissal of the ETG class action suit somehow would serve ETG's interests, and therefore ETG might collude in such an outcome, does not hold water so far as I can see. Based on ETG's allegations, ETG has real and substantial damages - probably some realized and some prospective.

Since ETG says it has paid large fees for borrowing shares that were sold short but never delivered by the prime brokers, ETG has damages or is exposed to potential liabilities as follows: since ETG paid for loaned shares which were never delivered, ETG is entitled to be put in the best position of the following: (a) refunded the fees paid; or, (b) have the required shares delivered presently by the prime broker at the prime broker's cost; and (c) prime broker must imdemnify ETG from any liability to shareholders who purchased the short sales, plus any liability incurred to the SEC for violating securities laws. If the prime brokers conspired together as alleged, the antitrust violation woud treble the damages.

One more point. If ETG wanted this lawsuit dismissed, it would never have filed it as a class action. Doing so places broad duties and limitations on the actions of the lead plaintiffs and counsel, at least it does when the class gets certified by the court.

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