Cutoff date for comments to the SEC?
September 19.
Latest letters being written to SEC, defending the illegal practice of naked shorting, by industry members? September 29.
If we were looking for an example of what is wrong with the SEC, this might be a good one. They continue to allow the industry to "fail to deliver" their comment letters, making late deliveries, with no penalties. The rules are made to be broken.
Ahem.
A particularly glowing sample of the sort of thing that is coming in from self-declared industry-side experts is the straw-man attacking, mis-construing piece, that claims the other comment letters say one thing, and then goes on to attack these claims. This is a popular rhetorical bit of trickery, as most are far too lazy to actually go and read all the comment letters, and see what they actually say.
Here is a breathtaking example of the genre. Really pearl before swine.
We have claims that are false. We have claims that obfuscate. We have straw men built to the skies. We have false assumptions, data mangling, arguments from authority, non sequitors. In short (no pun intended) we have the makings of a perfect Wiki article or 'lilGW tome.
Sorry. Couldn't resist.
Here are some of my favorites, from that letter:
"Try as hard as you might to avoid it, if you're involved in securities market operations you've no doubt been exposed to skirmishes in the ongoing guerilla war over alleged illegal naked short selling. This protracted battle is already a modern miniseries that has it all. Internet bloggers--almost exclusively promoting the idea that securities markets are corrupt--pursue an anti-"Wall Street" and anti-Securities and Exchange Commission agenda. They often lump legal and illegal short selling into a single category and then raise alarmist cries that our markets are fatally flawed.
State officials, perhaps most famously in Utah, move to usurp the SEC's authority and undermine the system of federal regulation that has made U.S. markets the envy of the financial world. The CEO of a Nasdaq-listed company who has become famous on the "anti-naked-short-selling circuit" stumps the country on a mission to stamp out an alleged conspiracy to bring down his company through illegal short selling. And last, but far from least, a cohort of plaintiffs' attorneys aided by paid litigation consultants probe courts around the country, hoping to find a judge willing to rule that state law trumps federal securities market regulation."
Wow. That sure is a mouthful. Can we spot the falsehoods and truth mangling? Let's start with "alleged naked short selling." Here's a guy writing a comment letter to the SEC, who is from the industry, and he can't even bring himself to admit that the hundreds of millions of delivery failures, and companies on the Threshold List, are there not because the dog ate the seller's certificate, but because of deliberate naked short selling. You will find this sort of spin doctoring throughout these pieces. Even as Cox admits that it is a problem in his speeches, and Harvey Pitt writes scathing op ed columns saying it is a real issue, we have the industry trying to paint it as claims amounting to, "I see dead people."
We then have the bit accusing us Internet bloggers of confusing legitimate short selling, and illegal short selling. Which is precisely what we have been complaining that the industry does, in an effort to mount the now famous straw man, "Short selling is legal and good for the markets" rather than having to say, "Selling and failing to deliver what the buyer paid for is fraud, and has nothing to do with legitimate short selling!" So here we have this fine gentleman misconstruing what the Market Reform Movement actually does, who ignores the years worth of effort on our behalf to segregate legal short selling from an illegal market manipulation process, and who makes a claim that is false on its face.
Not satisfied with this whopper, he then goes on to paint Patrick as a CEO who is claiming that illegal short selling is harming his company (something he has NEVER claimed) , rather than correctly stating that Patrick has been a huge proponent for market reform, who has in parallel sued a hedge fund and research firm for engaging in damaging business practices - specifically releasing false and misleading reports timed to allow the hedge funds to frontrun the data. Note what isn't alleged: the topic of the comment letter solicitation - naked short selling.
And last in this spectacular barrage of untruth, we have a swipe at O'Quinn, with all those dirty bad paid litigation consultants - you know, as opposed to the unpaid variety we are all accustomed to seeing Wall Street use - those unpaid ones being ubiquitous in the court and legal system.
All in just two short paragraphs. But that is really just the warm-up. Try this on:
“A recent example of this phenomenon is the promotion via the Internet of a comment letter to the SEC on Regulation SHO reforms. Touted by bloggers as unusually insightful, the comment letter characterizes all short selling as detrimental to investors, companies, and the markets as a whole. It puts forward numerous, inappropriate opinions and suggestions, including: forcing all failures-to-deliver to be closed at four days after the trade (T+4); automatically suspending or closing the Depository Trust & Clearing Corp. (DTCC) account of brokerage firms that default on the delivery of funds or securities by T+4; and giving power to the states to regulate the U.S. securities industry.”
I wonder what letter he is talking about? Which bloggers touted that letter as unusually insightful? It can’t be the NCANS letter or my follow-on. The NCANS letter deliberately separates legal short selling from illegal failure to deliver as a trading strategy, early in the letter, and is very specific about which behaviors are legal and appropriate, and which are illegal and manipulative. Has a separate section devoted to making that point, in the intro. So it can’t be that one, unless this commentator lacks remedial reading comprehension. Perhaps it is the one by the former Undersecretary of Commerce? Nope, that one doesn’t do so either. The one from the UT Securities Regulator? Uh uh. No, it doesn’t either. From Dr. Trimbath? Not that one. In fact, I can’t locate the letter touted by bloggers as significant that does this. This should be the first hint that letter only exists in the mind of the author of this late-comment screed.
Other things the NCANS letter doesn’t do?
“It puts forward numerous, inappropriate opinions and suggestions, including: forcing all failures-to-deliver to be closed at four days after the trade (T+4); automatically suspending or closing the Depository Trust & Clearing Corp. (DTCC) account of brokerage firms that default on the delivery of funds or securities by T+4; and giving power to the states to regulate the U.S. securities industry.”
None of the above. Not a one.
The NCANS letter mandates automatic buy-ins of failed deliveries at T+5 (gasp, you mean…requiring the industry to actually deliver in a prompt manner, as mandated in Section 17A? Madness, I say, madness! How dare they! HOW DARE THEY!!!), recommends meaningful penalties for chronic abusers of delivery requirements, including loss of licensure (ban the bad apples from the industry for repeatedly violating the law? Madness I say! Madness! Next you’ll want to ban embezzlers from being licensed accountants!), and proposes no additional powers for the states – they already have the right to pursue fraud, they don’t need additional rights. Perhaps the author doesn’t realize that every state has a securities regulator, which predates the 1934 Securities Exchange Act, and that those regulators have the ability to do something besides toss cards into a hat.
So, all in all, so far, a zero for factually or accurately laying out what the letter says, or what Patrick is doing, or how we approach the topic versus legal short selling.
This is a special sort of rib-tickler:
“However, with more than 30 years of experience in securities industry operations, and with an unbiased perspective on the current debate, I feel fully qualified to state that adopting proposals such as these would have severe consequences--intended and unintended. Our clearance and settlement system, which is a model for efficiency and effectiveness across the globe, would be disrupted; processing costs would increase; and regulatory authority would be Balkanized--all without providing a quantifiable benefit to individual investors or to the industry overall.”
Unbiased perspective? Given the first few paragraphs of misstatement, one can hear the very fabric of the universe stretching to accommodate that conceit. As to being qualified, how about the ability to read, and then accurately report on what you just read, for starters?
Given that the letters I can find don’t make any of the proposals he says they do, I can’t really comment on his statement that those un-requested amendments would cause great harm to an industry that is losing capital and IPOs at an alarmingly rapid clip – one of the sure signs of efficiency and effectiveness for a market.
“To elaborate on just one of the suggestions, the comment letter states that DTCC should "ensure settlement for all trades at T+3 and not allow failures beyond T+4." As a way to curtail illegal naked short selling, this proposal has the appeal of a simple solution to a complex problem, but it overlooks the realities of the marketplace. According to DTCC, more than 99.9 percent of trades settle on T+3, and 85 percent of those that do not settle on T+3 are cured by T+13. Since virtually all transactions clear in short order, it's logical to assume that the majority of the unsettled trades at T+3 exist for understandable and benign reasons such as unclear settlement instructions or mismatched information on the issue, quantity or price. They clear up relatively rapidly.”
Huh. So, when we see 65 million delivery failures per day on the NYSE at the beginning of Reg SHO, climbing as high as 132 million, and then finishing a year and a half later, at 65 million, those are happening for benign reasons, like unclear instructions or mismatched trade data? Ditto for the 585 million to 670 million failures per day on the OTCBB? After the trades have gone through CNS netting, which understates the problem by as much as 94% or more, and not counting any fails that go ex-clearing, or are netted internationally, or are pre-netted by the clearing firms before going into CNS? Wow. Who knew that after all those buckets catch fails, we still have many hundreds of millions per day, day after day, that fail to settle?
We won’t even go into asking where this clown pulls the 99.9% number from – another pure invention. The DTCC never said that. They claim 1% of all trades settle on time, not .01%. But it is unclear what they are talking about when they throw that number around. Do they mean 1% of all transactions they process fail to settle on time? Of trillions and trillions of dollars? Or do they mean of equity security transactions, AFTER 94% of the trades have been netted? The significance there being that it could be 20% per day, but CNS nets out 19%, giving an APPARENT 1%...
So even the basics of his argument are incorrect. Wrong number. Wrong predicate for his notion that this isn’t a big problem. Wrong wrong wrong. As is so much in this commentary.
It goes on and on, and finishes with this bit of folksy wisdom:
“Our system works and is healthy, and we should be guarded in changing it when there is no empirical evidence that it is in need of an overhaul. We should recognize that attempts at comprehensive reform tend to result in compromises, while implementing a series of improvements allows the market to absorb the impact of each change and evaluate the need for additional steps.
During a time when flawed ideas threaten to take root, it's critical that we remember this basic admonition: "First, do no harm."
Yes. All those flawed ideas like prompt settlement of trades, and meaningful penalties for violation of the rules, and investors receiving what they paid for.
This is a perfect example of what I call a “Type A” industry letter: It falsely says this isn’t a big problem (so why all the hair pulling if it is so small – why not just settle the trades and punish those that don’t) while simultaneously threatening dire consequences if anything is changed. It ignores that current Reg SHO has had ZERO impact in improving the delivery failure situation, which we know from the FOIA data. ZERO. On the OTCBB the situation is actually WORSE. And it misconstrues the content of the comment letters that lay out cogent, clear remedies for a problem that is causing untold damage to investors and companies, and which is contributing to an exodus of IPO activity and capital.
So, “First, do no harm” actually means, “Harm investors and companies all you want, but don’t cut into our cash cow by imposing any regulations that might actually halt the illegal activity.”
Any questions?