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How is Naked Short Selling Fraud?

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Posted by:   bobo 1/29/2006 1:05 PM

 

I got involved in a discussion on the Yahoo message boards which questioned my assertion that naked short selling is fraud – specifically, the other party indicated that there couldn’t be fraud, absent damages.

Which got me thinking – what are the damages?

And here’s what I came up with: The damage is the entire value of the FTD. Why?

Because it is un-sellable once you know that it is an FTD, from a moral and ethical standpoint, not to mention a legal one. Why? Because an FTD is a counterfeit.

Why is it a counterfeit?

Well, simple, really. It is represented to the buyer, by the seller, as the genuine article – that is why it commands full price.

And yet it is no such thing – it has none of the rights associated with a genuine share – voting, the right to legal redress, etc. Just doesn’t – because it isn’t a share. It is something else.

The industry calls this non-share a share, in the interests of keeping everyone believing that as long as the same name is used, that it is the same thing, and you can keep right on trading, no harm done.

Only it isn’t the same thing. It is a counterfeit, a facsimile that is represented as genuine, but in point of fact isn’t.

Because this occurs electronically, the average person’s eyes glaze over at this point – because there is no easy way to tell what an electronic counterfeit is, much less visualize it. However, if you imagine it in the real world with paper stock, it is easy.

The seller offers for sale a “share”, and the buyer agrees to buy it. His account is debited the funds, and the seller promises to deliver the share in 3 days, and then doesn’t.

So no share delivered. Nothing in the box marked “account” with the buyer’s name on it, if you lift the lid and look inside.

That is the fraud part. But in order for there to be fraud, there needs to be damages. Where are they? Let’s keep on following the trail.

The buyer is told that he now has his “share” in the account – and nobody ever really goes and looks at the share – they just take the broker’s word for it. But it isn’t just the broker’s word. The broker actually sends a statement through the mail, and over the internet, which shows a share in the buyer’s account. Which is a claim on a share in the vault at the DTC. Eliminate that claim and collapse it, and it is a share. Fine. But no share was deposited with the DTC to back up that claim. THERE IS NO SHARE CERTIFICATE IN THE BUYER’S ACCOUNT “BOX”.

So what is that “claim on a share that doesn’t exist”, but is represented as a “share” to the next person, when the seller wants to sell the “share”? Is there a market where claims on shares that don’t exist trade with full disclosure that no share exists to back them up? No. There isn’t. There is only the market where genuine shares are bought and sold.

So the system needs to treat those facsimiles as genuine in order to affect trades, or you couldn’t sell the facsimiles.

But wait. The facsimiles weren’t authorized by the company as shares. They don’t have any rights attached to them. They aren’t genuine shares.

And yet they are represented as such when you buy them from the holder of the FTD. Nobody tells you that you aren’t getting a legit share – it is represented as genuine, in order to separate you from your money – because otherwise you wouldn’t pay anything for it, as it has none of the qualities of a legit share.

Huh.

So, is there a word for a facsimile, which is not genuine, being used as a surrogate for a genuine article? Specific to securities, for instance?

Yes.

It is, “Counterfeit.”

Here is the code section. 18 USC, section 514. Says that trading in these “counterfeits” is a Class B felony, and which describes how to identify a counterfeit – what the characteristics are:

 

“Section 514. Fictitious obligations

       (a) Whoever, with the intent to defraud -       

(1) draws, prints, processes, produces, publishes, or otherwise makes, or attempts or causes the same, within the United States;       

(2) passes, utters, presents, offers, brokers, issues, sells, or attempts or causes the same, or with like intent possesses, within the United States; or       

(3) utilizes interstate or foreign commerce, including the use  of the mails or wire, radio, or other electronic communication, to transmit, transport, ship, move, transfer, or attempts or causes the same, to, from, or through the United States, any false or fictitious instrument, document, or other item appearing, representing, purporting, or contriving through scheme or artifice, to be an actual security or other financial instrument issued under the authority of the United States, a foreign government, a State or other political subdivision of the United States, or an organization, shall be guilty of a class B felony.     

(b) For purposes of this section, any term used in this section that is defined in section 513(c) has the same meaning given such term in section 513(c).     

(c) The United States Secret Service, in addition to any other    agency having such authority, shall have authority to investigate offenses under this section.” 

The bold sections are my emphasis.

I’m sure the legal-minded will argue that there is no intent to defraud. Huh. Really. Then why represent it as genuine to the buyer, other than to get their money for the article you know isn’t genuine?

That is the fraud part.

And the aiding and abetting counterfeiting, or rather the trafficking of counterfeits, would be the selling the facsimile once you are aware it isn’t the genuine article.

Now, a lot of folks address this by saying, “but everyone is doing it.”

I am reading the code, printed above, and I don’t see language that says “unless everyone is doing it, or Wall Street decides to do this on a large scale.”

Because it doesn’t say that.

So where is the damage that constitutes fraud? The purchase price, for which you received a facsimile, and which once you understand it is a facsimile, I would argue makes you a party to counterfeiting if you try to resell it.

Now, there are certainly greater legal minds than mine out there – what am I missing? I’m not a lawyer, but how is an FTD, in your account, represented to you as a genuine share, not a counterfeit in every aspect of the above description?

Anyone? Have I gone off the reservation here, or does the code say what it appears to?

In which case, wouldn’t the trafficking of FTDs, represented as real shares, be simple counterfeiting, albeit electronic? Just as if you could figure out a way to credit your bank account with a hundred thousand dollars of electronic dollar representations, which you just created on your computer?

Help me out here. Gary Weiss and the gang that say this is all silly are busy mocking this line of reasoning, with no clarity or rebuttal afforded. But here, where adults are in attendance, I’d like to hear from informed folks who know the law. Their arguments come down to: "everyone's doing it", or "Wall street doesn't call them counterfeits, so they aren't, even if they 100% match the code's description of counterfeits", or "nobody is enforcing that law W/R/T securities, so it is OK to violate the law whole cloth."

Does anyone have a problem with all this? Doesn't it start to seem like if you have enough money and power you can simply violate the law, constantly, and pay to have your violations ingnored or grandfathered, and then cite the lack of prosecution of the violations as proof that the rules don't apply to you?

And of course, I’m always interested in everyone else’s comments, as well. But I would LOVE to hear from attorneys who can disabuse me of my reasoning, or confirm it.
Copyright ©2006 Bob O'Brien
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Comments (48)
Re: How is Naked Short Selling Fraud? By bobo on 1/29/2006 2:05 PM
For those that are interested, here is the definition of Counterfeit from the DOJTITLE 18 - CRIMES AND CRIMINAL PROCEDURE
PART I - CRIMES
CHAPTER 25 - COUNTERFEITING AND FORGERY

Sec. 513. Securities of the States and private entities

STATUTE:

(a) Whoever makes, utters or possesses a counterfeited security
of a State or a political subdivision thereof or of an
organization, or whoever makes, utters or possesses a forged
security of a State or political subdivision thereof or of an
organization, with intent to deceive another person, organization,
or government shall be fined under this title (FOOTNOTE 1) or
imprisoned for not more than ten years, or both.
(FOOTNOTE 1) See 1994 Amendment note below.
(b) Whoever makes, receives, possesses, sells or otherwise
transfers an implement designed for or particularly suited for
making a counterfeit or forged security with the intent that it be
so used shall be punished by a fine under this title or by
imprisonment for not more than ten years, or both.

(c) For purposes of this section -

(1) the term ''counterfeited'' means a document that purports
to be genuine but is not, because it has been falsely made or
manufactured in its entirety;

(2) the term ''forged'' means a document that purports to be
genuine but is not because it has been falsely altered,
completed, signed, or endorsed, or contains a false addition
thereto or insertion therein, or is a combination of parts of two
or more genuine documents;

(3) the term ''security'' means -

(A) a note, stock certificate, treasury stock certificate,
bond, treasury bond, debenture, certificate of deposit,
interest coupon, bill, check, draft, warrant, debit instrument
as defined in section 916(c) of the Electronic Fund Transfer
Act, money order, traveler's check, letter of credit, warehouse
receipt, negotiable bill of lading, evidence of indebtedness,
certificate of interest in or participation in any
profit-sharing agreement, collateral-trust certificate,
pre-reorganization certificate of subscription, transferable
share, investment contract, voting trust certificate, or
certificate of interest in tangible or intangible property;

(B) an instrument evidencing ownership of goods, wares, or
merchandise;

(C) any other written instrument commonly known as a
security;

(D) a certificate of interest in, certificate of
participation in, certificate for, receipt for, or warrant or
option or other right to subscribe to or purchase, any of the
foregoing; or

(E) a blank form of any of the foregoing;

(4) the term ''organization'' means a legal entity, other than
a government, established or organized for any purpose, and
includes a corporation, company, association, firm, partnership,
joint stock company, foundation, institution, society, union, or
any other association of persons which operates in or the
activities of which affect interstate or foreign commerce; and

(5) the term ''State'' includes a State of the United States,
the District of Columbia, Puerto Rico, Guam, the Virgin Islands,
and any other territory or possession of the United States.
Re: How is Naked Short Selling Fraud? By browntrout on 1/29/2006 2:15 PM
Of course it is fraud. The rest of the crowd on the other side knows that they are committing an illegal act to manipulate securities and perform other illegal functions. I think the industry does not want all of these illegal trades rescinded like they should have always been when identified. When the investor purchases a security, and the seller is misrepresenting the purchase, selling something that does not exist, or baiting and switching with a lessor item(read-no voting rights); the seller has the right to demand rescission of the trade and damages on top. Dr. Byrne should ask to have recent purchases rescinded of OSTK and compensation for the pain and suffering endured. Notice all the attacks on his credibility since revealing the delivery problem. Now do you understand why the brokers, MM's, and the DTCC refuse to produce this information without major court battles. If you examine the trades and discover any illegal trades, the other side of those illegal transactions has the right to their money back. Talk about Pandora's Box. In the case of EATC it is my understanding once the case reached the NY State Supreme Court the DTCC was forced to turn over the information subpoenaed. The MM's and brokers also refused to turn over the information claiming that they would be revealing personal info about their clients. Once the info was released it became obvious they had been lying. Most of the trades were not in client accounts but proprietary accounts. It is my understanding that the information when matched with the DTCC court ordered information provides massive incriminating evidence. I did not see that mentioned in the DTCC's most recent press release. I think the fear of 10,000 companies now demanding and receiving like information might just be making them a bit uncomfortable. But hey the anti-NSS are all either nut cases, participating in a fraud, "loathsome con artists" , idiots or worse. So says Gary.
Re: How is Naked Short Selling Fraud? By bobo on 1/29/2006 8:55 PM
On the Yahoo board, Marc the Shark posited that NSS isn't fraud due the absence of damages. Specifically, he listed the 5 criteria in California that are required for there to be fraud. Another poster, while I was out at dinner, responded to Marc's bit, and I am reprinting it here.

First, the relevant bit from Marc's message:

"The basic elements of fraud in California are:

1. misrepresentation
2. scienter
3. intent to defraud
4. justifiable reliance
5. damages

Without each of these elements a claim of fraud fails."
---------------------------
Then, the response, from Rezurch:

"OK let's go....

1. Misrepresentation - In some cases, a naked short seller is representing that he/she is either the legal owner of stock (that he/she does not have) or has legally borrowed (which he/she has not done) to sell into the market. If the seller has a PIPE CD, he/she is supposed to convert the PIPE and deliver the stock promptly. It is not legal to aggressively short sell a stock and tell the owner of the IOU, "it's ok, I have a convertible debenture." (NOTE: It is also not legal to NSS with no ability nor intention to deliver, as part of a trading strategy)

2. scienter - A person may pass on counterfeit shares, when ignorant of its being counterfeit, and is guilty of no offense; but if he knew the shares to be counterfeit, which is called the scienter, he/she is guilty. (Note: once aware of the likelihood of owning counterfeit shares, if sold, there is scienter. Additionally, if the NSS perp is knows it is NSS, there is clear scienter)

3. intent - well if you know you are selling something that you don't have, can't get, can't legally borrow and/or have no plans to immediately convert to comply with rules of A/D....you have intent...enough said there

4. justifiable reliance - the victim doesn't know the representation is false.

when you buy counterfeit stock that artificially dilutes the float...that is precisely what the above refers to

5.damages - clearly, the shareholder is damaged due to dilution of their interest without compensation; the company is damaged, as the value of the shares is artificially depressed (supply and demand) and lest we get into voting rights.....

5 for 5....

it's fraud "
----------------------------

Comments?

Oh, and I will add that the turds that are clogging the OSTK board around every 90 seconds per post, on average, all weekend, are going nuts over this.

As is Gary, who has taken to posting outright lies about me on his blog - claims I post here under multiple identities (Sweetie, please - I know nobody is commenting on your blog, because nobody is reading it, but...well, most everyone here has been on Yahoo for years under the same IDs.So that is a flat out lie, as is the bit about censorship) and that I censor dissenting opinion. Apparently Gary has mistaken me for himself.

But in the spirit of fairness, a friend of mine suggested that I create a section of the site called Doggerel, where one can view the "censored" posts and evaluate what has been expunged from the main discussion. Not a bad idea, so I will get to work on it - thus none of the turds can claim to have been censored, merely re-distributed to a more appropriate neighborhood.
Re: How is Naked Short Selling Fraud? By Rtway on 1/29/2006 9:05 PM
Home depot will get you a better deal than 4 bucks a pop for posting something that no one understands or cares about. At least at home depot you get a discount and a 401k and maybe learn something.
Re: How is Naked Short Selling Fraud? By tbs_theman on 1/29/2006 9:45 PM
Think about the guilty parties. The MOST guily party HAS to be the DTCC:

"The basic elements of fraud in California are:

1. misrepresentation
2. scienter
3. intent to defraud
4. justifiable reliance
5. damages

NFI is the best example. The DTCC has to collect dividends from NFI's transfer agent. They also have to collect PILs from the stock-borrow program.

Anybody get a PIL in a cash account? In their IRA account? After all, the stock borrow program uses all the cash account shares - correct? It has to. The broker loans out their margined shares. So all the cash account shares sit at the DTCC.

The DTCC and the broker misrepesent (#1) the PIL as a DIV. This is intentional. Myself and several other posters have a 1 - 3 week delay in getting their DIVs and dividend re-investment. It makes sense that this is from a converted PIL.

That pretty much covers #3 as well.

As far as damages - Cash accounts are due a lender fee when their stocks are lent out. The DTCC / brokers give those whose shares were lent out the fee. You just get a lower stock price.
Re: How is Naked Short Selling Fraud? By Rtway on 1/29/2006 10:01 PM
Last week the comedy act of Cramer and Greenberg out of a clear blue sky, yeah right, after Netflix gave a positive quarter, Herbie trashed the stock with bobble head Cramer aggreeing with him and advised to dump this thing. Netflix has had to cost the Nakeds a fortune so far. How far can they bleed on this or is that they can,t cover. HMMMM
Re: How is Naked Short Selling Fraud? By whosyouruncle33 on 1/30/2006 1:32 AM
bobo: In your 5:15 PM post on 1/29/2006 you state that "Ther is no such thing as a naked long, you would have to be allowed to buy the stock and not deliver the cash to pay for it - something no broker will allow".

Doesn't this need clarification, to recognize the role of "buying" stock on margin? I imagine many longs buy stock on margin, to increase the leverage of their buying power, without any immediate intention to pay cash for the transaction. Of course the B/D puts a limit on such purchases by having margin requirements of perhaps, say, 50% in a particular stock, and the cost of having been given the margin.

Legal short selling is constricted by the amount of stock available, the requirement to locate and borrow the stock, and the cost of having been given the power to sell short. Isn't this the counter side to buying on margin, but with much more levreage granted to the short seller?

It would seem that the main difference with a NSS is that the inherent market constraints that prevail in legal "buys" on margin or legal short selling are eliminated in a NSS, and the "supply of shares to be NSS is infinite.

I am probably overlooking some obvious fact, and would appreciate your comments.
Re: How is Naked Short Selling Fraud? By rvac106 on 1/30/2006 2:12 AM
"Redistributed to a more appropriate neighborhood."

I am cracking up. How does MG put it? ROTFLMAO!

Well done, D. You have my permission to carry on.

re: MDS's interchange w/you on the OSTK board earlier: His argument, sorta, in that an FTD is not a fraud per se if you never deliver it? I believe it's actually called 'stealing.' In that the money is debited from your account, no argument there, but nothing, if I may repeat, NOTHING is exchanged for your money. Some might also identify it as a 'confidence game,' which, I think, is also illegal.

'Redistributed.....' A classic.......

RVAC
Re: How is Naked Short Selling Fraud? By tommytoyz on 1/30/2006 5:21 AM
1. Of course naked short selling a a fraud as very well summarized by Rezurch on the OSTK board and summarized above.

2. Are FTD's counterfeit in a constitutional way?
a) Between and amongst the brokers/dealers/clearing and settlement services - no
b) Between the brokers and their customers - yes

The brokers and the clearing services know that they only have an FTD and what that entails, no secrets amongst them there. They know the score.

However, if a brokers holds FTDs of a particular stock, the paper and electronic statements transmitted to clients are knowingly false. The FTDs are counted and treated as real shares to clients, when in fact they're just FTDs.

If the broker exceeds the allowance under SEC 15c3-3, then this misrepresentation on the part of the broker to ALL his clients who own that particular security is :

Utilizing interstate or foreign commerce, including the use of the mails or wire, radio, or other electronic communication, to transmit, transport, ship, move, transfer,a false or fictitious instrument, document, or other item appearing, representing, purporting, or contriving through scheme or artifice, to be an actual security.

Retail clients access the markets only through brokers, not through the market directly, so the clients always technically buy and sell TO or FROM their brokers.

If the broker has already reached his 15c3-3 limits, and he keeps crediting his clients with "real" shares anyway as he received more and more FTDs or IOUs, and he lacks the shares as mandated by the SEC, then that's fraud as defined above.

I'd also add, that the brokers are not acting on their fiduciary duties to their clients on the contrary - they're acting in contrary to their clients best interest but assisting in destroying the price of their clients assets.
Re: How is Naked Short Selling Fraud? By bobo on 1/30/2006 7:39 AM
Whosyouruncle:

Buying on margin puts your shares into the lending pool at your broker. It also uses your stock to collateralize the margin loan.

Buying "naked" would involve being allowed to buy stock and not pay for it - you could just fail to deliver the cash. In a naked short sale, the seller fails to deliver the share. In a naked long, the buyer would fail to deliver the cash. One of these is stringently guarded against on Wall Street as it jeopardizes money in the broker's pocket, the other is endemic as it allows more trades to be processed, at the expense of the retail investor.

As to Rtway, doesn't that seem like the right way to deal with turds trying to disrupt the board? Put 'em in lockdown, where we can all go and stare at them if we like - but we aren't obligated to do so.
Re: How is Naked Short Selling Fraud? By bobo on 1/30/2006 8:40 AM
Bill Mann on Bob O'Brien:

For the record, I admire Herb's work as well, though my current status as a shareholder in Overstock and in NovaStar should suggest strongly that I do not always agree with him.

"And I sure as hell am not a journalist, though that is an honorable profession.

I find this to be an interesting habit of the folks who believe there is a massive conspiracy: assigning or inventing facts to fit their preconceptions. It's one of the reasons why I think Bob O'Brien is at best a dangerous blowhard."

I am apparently a dangerous blowhard. Huh. The Easter Bunny is now apparently a topic of discussion on the fool boards.

Of course, Bill also believes that Herb is doing admirable work. Says so in the same post.

Now, Herb routinely distorts and selectively filters data in order to make a company look bad, refuses to change things that are called out to him as being factually incorrect, and wrote 32 articles in one year about NFI - for which there is some good info that builds a case for front-running - I believe that is linked from the shorts page at NFI-info.net.

If that is admirable, and saying, "settle the trades as the law mandates, and show us the data" is being a dangerous blowhard, fine - I'm OK being on the side of Bill's opinion curve that I land.

I note that the guys who call me names typically don't have a lot in the way of hard data to cite, and usually resort to ad hominem attacks.

Gary Weiss's lies about my posting on this forum using multiple identities is one example - there is no possible proof for that contention, as it is false, and yet this supposedly responsible journalist floats it as though it were fact. When you have one side of the discussion routinely lying and such, I suppose it is easy to like being on the opposite side of the table.

I have chosen not to give Gary any more of my bandwidth here as his antics have degraded pretty quickly into childish whining for attention, and his agenda is clearly to get his little book some attention. He correctly recognizes by the amount of traffic here that we have a large and growing readership that dwarfs his blog's, and he is trying to insert himself here as part of the discussion. That won't happen.

But it does amuse me that I now have my own full time bashers assigned to me on the message boards, and that Bill Mann is writing love letters about the Easter Bunny.

What an odd world indeed...
Re: How is Naked Short Selling Fraud? By whosyouruncle on 1/30/2006 10:01 AM
bobo: You state that "Buying on margin puts your shares into the lending pool at your broker. It also uses your stock to collateralize the margin loan."

When you say "your shares", aren't these the ones you have BEFORE those you're "Buying on margin"?

As you also state "Buying 'naked' would involve being allowed to buy stock and not pay for it - you could just fail to deliver the cash". What cash? You just said it was "the margin LOAN". When I get a "LOAN", I don't pay cash.

If I have 1000 shares of a stock fully paid for in a cash account, and then buy 500 more shares of that stock on margin, as I understand what happens, my original 1000 shares will now be put into a margin account and "into the lending pool" at my broker, along with a credit in that account for 500 more shares...not with any real shares, and not with any CASH. Yes, my original 1000 shares will "collateralize the margin LOAN", but where is ANY cash from me to match the 500 new "shares" that show up in my account?

When you buy on margin, do you "deliver the cash to pay for it"? Help me out here. What am I missing?
Re: How is Naked Short Selling Fraud? By Financial_circus on 1/30/2006 10:21 AM
whosyouruncle-- "my original 1000 shares will "collateralize the margin LOAN", but where is ANY cash from me to match the 500 new "shares" that show up in my account?" Your account is debited for the purchase on margin and the CASH is forwarded to pay for your purchase.
Re: How is Naked Short Selling Fraud? By whosyouruncle on 1/30/2006 10:42 AM
circus: Thanks for your input. Could you explain "the CASH is forwarded to pay for your purchase"? I understand the "debited" part. But what entity forwarded the Cash to pay for my purchase? And how does it balance its books (and with what) to match the cash it forwarded? As you can see, I know little of such market details. TIA
Re: How is Naked Short Selling Fraud? By bobo on 1/30/2006 10:49 AM
The cash is forwarded to the clearing firm to be exchanged for shares - the NSCC intermediates the transaction, acting as the contra party. They take your cash, and pay all the commissions, and then release that cash to the seller assuming the shares are delivered.
Re: How is Naked Short Selling Fraud? By rtway on 1/30/2006 11:47 AM
To Bobo, in regards to isolating the trash. That is why they made garbage cans. If your so inclined or curious to know what smells like s--t, you can pop the top of the garbage can and re-affirm that there is in fact s--t in there. I never was a great fan of garbage, as are most people who have a life. I think it is great to put them in their can, as far as wanting to see the contents, I rerally don,t know why, but hey everybody has their own ways and that is what makes for debate.
Re: How is Naked Short Selling Fraud? By bobo on 1/30/2006 12:25 PM
Precisely my thinking. If someone wants to go look to see what I have "censored" they can go look at the posts of the poor "victims" of my oppression. Once you have seen enough "you're a coward" and such posts, one quickly gets the idea that what is going on is not censorship as much as it is "scrubbing the bowl." There will always be a certain segment of the cyber community who are bugfuck crazy, and stalk, or berserk, or clog, either for fun, or for pay. I have no interest in denying them the opportunity to share their views, unlike Gary, who simply doesn't post anything that shows him to be a dimwit - the vast majority of his comments, I'd bet, judging by the feedback from folks here who posted thoughtful, well-articulated comments, only to have them censored as "baloney."

The Internet is weird. It really is an amazing equalizer. The established media hacks can be quickly shown to be in the pockets of special interests (most who are interested in covering this topic do so with an agenda in mind, and it isn't something that came to them in a burst whilst at mickee dee's), and the wonks they have thrown at this as cyber-mouthpieces quickly get their heads handed to them by folks like the Easter Bunny. That has to suck, as no matter how many times their crews of paid bashers insist that they are triumphing.
Re: How is Naked Short Selling Fraud? By tommytoyz on 1/30/2006 12:34 PM
We should be as accurate as possible when making accusations of fraud, IMHO. So in that spirit, and in MHO, I'd like to clarify a few details correct before we get out heads handed to us for being inaccurate :

1. Buying
Just because an investor buys on margin, does not mean all his shares are legally lendable. On a dollar value basis, a broker may only lend out $1.40 worth of margined shares, for every $1.00 in margin balance.

So even if I have a margin requirement of 50% with my broker, not all shares would be legally lendable. If he did, the broker would be lending out $ 2.00 for every $ 1.00 of margin balance - clearly too much.

The limiting factor is SEC 15c3-3. There is a specific formula to how much a broker may lend and still be within legal limits. If the broker is within these limits, it would be impossible to prove fraud on the part of the broker, as it usually says somewhere in the broker agreements that he may lend out per lawful limits and that the statements can reflect that.

However,
On an aggregate basis, if the broker is outside SEC 15c3-3, then he's massively liable to ALL his clients and committing fraud to them by knowingly sending out false and misleading statements to his clients and passing off IOUs and/or FTDs as real shares - when in fact the broker knows that not to be the case.

2. Selling
The sellers who intentionally fail to deliver are also committing fraud, not to the brokers, but to the buyers of the security who purchased or SOLD their shares in reliance on the data from the consolidated tape. The failing sellers cause false reporting and"trades" of "shares" for a certain amount that they know to be FTDs and induce buyers to mostly sell by flooding the market with false data of real sales and/or a falling price because of the sudden "supply" of "shares" for sale that are reported electronically and visible for all to "see".

This transmittal of false data to the market as a whole, through the reporting of sales of real shares, is a fraud as defined by current codes quoted by Bob. The fact is, that the FTDing parties are not trading or offering real shares to the consolidated tape and the market, these are FTDs and know to be just that in advance and deliberately in order to seemingly flood the" supply" induce real sellers to sell in a panic. All sellers relying on this false data, generated by the FTDing market participants, are victims.

It's not just the buying aspect, it's the aspect of inducing to sell, that makes FTDs so harmful to investors and companies.

In real estate, "block busting" is scaring property owners into selling by promoting discrimination and claiming that the prices of their properties will fall in the future.

The FTDers are doing equally trying to induce sellers to sell by spreading lies through the market reporting services, like the through the consolidated tape.
Re: How is Naked Short Selling Fraud? By whosyouruncle on 1/30/2006 1:04 PM
bobo: Thanks for your response. If I understand you correctly, the cash that is forwarded by my broker to pay for the 500 shares the seller is supposedly delivering, is in the amount I was debited (less commissioins); in other words, my IOU. There was no cash in my account before the transaction, and after the transaction, the net liquidating value of my account is the same as it was before(less commissions),and I now have a debit balance to offset the new 500 shares that show up in my account.

If, say, the price for the shares was $30, I had $30,000 value at the start for my 1000 shares, and after the transaction,leaving aside commissions, I have a $30,000 net liquidating value for my account, with $45,000 value for my 1500 shares credited to my account, less $15,000 debit balance for the margin purchase of the extra 500 shares.

As I see it, I have not delivered the cash for the shares, I have agreed that I owe my broker that amount of money, without any time limit on that loan of money. There must be another way to state this other than "I have to deliver the CASH" in order to purchase the extra 500 shares. which confuses the whole transaction for me as I never had the cash, and was using the margin loan to acquire them.

HELP.
Re: How is Naked Short Selling Fraud? By financial_circus on 1/30/2006 1:16 PM
Uncle!
Re: How is Naked Short Selling Fraud? By bobo on 1/30/2006 2:29 PM
Whosyouruncle:

That may be the way you see it, but that isn't how your broker sees it. The proof is that he is charging you interest on the margin loan, the cash proceeds of which were sent to the NSCC to be exchanged for shares...
Re: How is Naked Short Selling Fraud? By tommytoyz on 1/30/2006 4:54 PM
I also have to add to my 2 points above that the selling broker of FTDs is selling an unregistered security.

I have to agree with Bud Burrell on that.

So we have

1. Buying Brokers,
Sending out false account statements
2. Selling brokers
Sending out false data to the market to induce others to sell
3. Selling brokers
Selling unregistered securities

That about sums it up for me
tommy
Re: How is Naked Short Selling Fraud? By InTheKnow on 1/30/2006 11:41 PM
The SEC makes a big deal about company insiders selling unregistered shares and the penalties can be unusually harsh.

Can you imagine the SEC grandfathering the selling of unregistered shares? Or have they?
Re: How is Naked Short Selling Fraud? By InTheKnow on 1/31/2006 12:20 AM
Since the SEC has grandfathered all shares sold and not delivered prior to the cutoff date then:
Since the shares were not delivered then how does the SEC know or anyone know if these were unregistered shares? The only thing the SEC can do is to force delivery to find out if these shares were unregistered!
The SEC is here to uphold the law and not to help people circumvent it!
Re: How is Naked Short Selling Fraud? By bovinepoor on 1/29/2006 2:24 PM
The 'out' appears to be fairly simple--to those that want it to be. Fraud requires intent. But brokers don't hold shares; they hold rights to shares in common. The illegal FTD and the legal borrows and, yes, even the real shares, are all held somewhere other than in your account. What you have in your account is simply a count of what you are entitled to. It isn't a share. Therefore, when someone sells FTD that IOU goes into the pot and is mixed and stirred. The mechanism was created when the market maker was allowed to naked short and because they can still do it the mechanism still exists. Therefore, because no share or share record or IOU for a share can be uniquely identified, there can only be a vague recognition that what you, a buyer has rights to isn't what you thought you bought.

Look at the full universe of holders who 'think' they have shares. Let us look at NFI. 30 million real shares, plus 10 million shares borrowed and resold short. Add to that legal naked shorting (but for only 13 days) by the market maker and the illegal strategic naked short and or naked long sales and voilà! Maybe 50 million entities that think they 'own' shares. But, except for those holding certificates there's no way to link a ownership-count in your account to any actual share. If you think you own 1 million shares you have instead rights to 1/50th of the pool of share records--of which only 30 million are 'real'. And, inasmuch as nobody knows who owns what or which then it's impossible to say your broker committed fraud in selling those right to you.

I know, I know; makes one's head hurt to just think about it. Three years ago I though I owned shares. Then I thought my broker owned shares. Now I find out, except for folks with certificates that only Cede & Co. owns shares and every one else has rights in common. And, re my example above when there's 50 million NFI rights but only 30 million real shares, I guess that means when you sell or buy you are actually getting 3/5 of a share and a bunch of promise to make everything right some day.

Fraud? Intent? Intent could probably only be proven if you could nail the selling agent that knew they were adding illegal, new, FTD to the pool. Everyone else that trades in them after that initial sale is off the hook because there's no linkage from a transaction to a share.

How to fix it? Make all sales carry the electronic equivalent of a certificate, complete with registration number. That would fix it. Then, if someone sold what were not shares it would definitely be counterfeiting and then it would be off to jail (or at least a wrist-slap).

bov
Re: How is Naked Short Selling Fraud? By InTheKnow on 1/29/2006 2:28 PM
I wonder? If the DTCC had shares, how would they feel if everyone just sold those shares and took the money and never delivered them?
How about selling seats for the NYSE and never delivering them and telling the buyer... hey just sell it to someone else! Would that be OK or would your ass land in jail?
Re: How is Naked Short Selling Fraud? By Jeff on 1/29/2006 2:32 PM
If I buy a share of stock, ask my broker for delivery of it in paper form, wait wait wait and wait some more, am I technically naked long the stock until I get my cert? If not, why not?
Re: How is Naked Short Selling Fraud? By nonny on 1/29/2006 2:38 PM
Naked long would be buying it on margin without borrowing it first. Nothing to do with what you said.
Re: How is Naked Short Selling Fraud? By InTheKnow on 1/29/2006 2:46 PM
How about this one... Since every public company has to insert a safe harbor statement when they issue PR's and filings, then when you purchase stock the broker should be required to insert this statement on the confirmation:

"THE STOCK YOU PURCHASED MAY NOT EXIST AND MAY NEVER BE DELIVERED TO YOU, THEREFORE ANY VOTING RIGHTS ASSOCIATED WITH THIS STOCK ARE NULL AND VOID!"

See how many people are going to buy stock when they see that fine print.
Re: How is Naked Short Selling Fraud? By Jeff on 1/29/2006 3:27 PM
I don't see what buying on margin has to do with anything but, regardless, people buy stocks on margin all the time so that should be a non-issue. Until I get my cert I've still technically purchased something I don't really own. With all this talk about how hard it is to get certs it seems there are lots of naked long purchases out there. If you disagree, what do you call this apparently common occurrence?
Re: How is Naked Short Selling Fraud? By bburrell on 1/29/2006 3:51 PM
This is right on target. Securities Fraud occurs whenever an unregistered security is sold. During the 20 years I was on the Street, this was an absolute compliance red flag. Illegal Sale of an Unregistered Securty has always been forbidden, by Sections 5 and 6 of the Securities Act of 1933, and by provisions of the Securities Act of 1934.

The Criminal cause you cite from 18 USC 514 is well known, and it makes NO provisiion for exceptions to this law, and particularly no exemption for such coiunterfeiting when it is electronic, as opposed to by other means. I recommend everyone read the complaint of Eagletech, which caused the Federal Judge in his de-registration action to forward his complaint to the full SEC Commission, said hearing to occur on Feb 13.

I have written about this, as have others, and I have NEVER seen one refutation based on law, not from anyone including lawyers who should know the rule. In fact, when I did my original pieces, I ran them by both Securiteis and Constituional lawyers and law school professors, none of whom could find any holes in the logic. I further suggested Wes Christian and others utilized the services of a Constitutional Law Professor at Georgetown for such causes.

The SEC is trying to get the same standing for its laws as the IRS takes on its laws; i.e., that such laws are only administrative guidelines which they may disabuse themselves of at their discretion. They have proven they aren't responsible enough to be given such discretion, most particularly over property rights of individual investors. Has everyone forgotten their grotesque failures of oversight from Enron, Worldcom, the tax shelter years, et al? Does anyoone really believe that Sarbanes Oxley will cause the organization and personnel of the SEC to act any differently now than they did before? Has there been the adjustment in the SEC's budget they have sought? Who will enforce SOX? Will the SEC divert already insufficient assets from their personnel in enforcement? Will 500 cases become 400?

The SEC claims to handle about 500 cases a year. That is the same number before SOX. What has changed? The ultimate answer? NOTHING! Just 50 more new shorting cases would break the back of their prosecutor and investigator base. All they can do is make the easy cases, with a bias to those benefitting the Industry over individual investors. When they make a case, where is the RESTITUTION?

Like I said in one of my earlier pieces, I know what the word restitution means, I just have never seen it from a real securities fraud Federal Case, particularly after the lawyers take their cut off the top.

There seems to be an institutional fear of offending the Industry, even as they engage in the wholesale rape of individual investors. What the FTD issue really threatens is not just capital formation processes, but even more importantly, it threatens the entire class of activities we call market making and arbitrage with extinction. How? By killing off the long term, buy and hold investor. EVERYONE needs to understand that if they go away, the parasitical industries reflected in Hedge and Arbitrage Funds, and for the matter, Market Making, will die with them. Yet these parties still seem compelled to bite off their noses to spite their faces.

I am not advocating an end to these activities, but they must not be the tail wagging the dog. Depending on which number you use, Hedge Funds are a $1 Trillion marketplace, of some $11 Trillion in institutional assets, say 7 to 9% of all mutual fund, retirement and other assets. Yet they generate 50% of all commissions and volume.

Moreover, these funds act in concert all the itme, violating the provisions of CJS 22, 22A and 46, which address criminal syndicalism, treating such conduct as both Insurrection and Sedition, Class A Federal Felonies. DOJ has clearly given a pass on such issues to scum. For what purpose?

This is the worst constitutional crisis I have seen the US face since the Ex Post Facto 1986 Tax Reform Law. These asses wopld throw the 5th Amendment in a trash can if given the chance. They have rigged the game to prevent such cases from reaching the Supreme Court. Only one small company has focused on Constitutional Issues. Why is that? The violation here are in your face, patently arrogant. Two sayings pop to mind. Pride/Arrogance goeth before the Fall, and Right Makes Might.
Re: How is Naked Short Selling Fraud? > Jeff By bovinepoor on 1/29/2006 4:03 PM
Margin has nothing to do with this. Maybe I mortgaged my house to buy stock instead of mortgaging (margining) stock to buy stock. Or, maybe, I mortgaged (margined) stock symbol XXX and bought stock with symbol YYY. Same difference. There's no linkage.

Your term 'naked long' has no validity as you use it. When transactions occur they are required to be labeled long, short or short exempt. The long and short label is attached at the time of sale and is set by the selling agent. You as a buyer don't have anything to do with that. You as a buyer can't say--I only want to buy long shares or only buy shorted shares. It's just not allowed.

A naked long is a sale identified as a long sale after which no share is produced by the settlement date (on or before T+3). A naked short is a sale identified as a short sale after which no share is produced by the settlement date (on or before T+3). Notice the similarity--in fact, they are the same. It's just the seller's identification that makes a (naked) sale long or short. In fact, the DTCC readily admits they don't know the difference between the two. And, at the point of fail, they are, indeed, identical. A sale of something that was not produced. And, at point of initial sale they are, indeed, a fraudulent act.

bov
Re: How is Naked Short Selling Fraud? By Jeff on 1/29/2006 4:06 PM
Bud, banks typically keep about 10% of their deposits in cash. If every customer demanded their accounts liquidated in cash do you not think a bunch of people would be waiting quite a long time for their paper money? Our world for better or worse is increasingly electronic. Just because one can't rectify the electronic with the tangible does not indicate a counterfeit. Your argument is silly.
Re: How is Naked Short Selling Fraud? By InTheKnow on 1/29/2006 4:22 PM
Jeff... Easy:
I sell you the Brooklyn Bridge (I don't own it and can't deliver it) FRAUD!

I sell you a stock (I don't own it and can't deliver it) FRAUD!
Capesh?
Re: How is Naked Short Selling Fraud? By Rtway on 1/29/2006 4:35 PM
Hey Jeff, ever hear the term apples and oranges used for comparisons? Next time you trade your car in for your next car try to do it without the title, however they ordered my car on a computer. Auction off a collectible at Sotheby,s without certificate, won,t happen. Try to insure your home without ever having a title search, etc etc.
Re: How is Naked Short Selling Fraud? By Jeff on 1/29/2006 4:42 PM
BOV, very good point that a naked long and a naked short are one in the same! If a market maker will allow me to sell something they can't or won't borrow for me, what would prevent this same "unscrupulous" person from allowing me to buy something they can't or won't deliver? As many more shares of stock are purchased rather than borrowed, would not this indicate the procuring cause of most naked transactions are from stocks purchased?
Re: How is Naked Short Selling Fraud? By rtway on 1/29/2006 5:00 PM
It seems were trying again to split hairs instead of looking at a crime. In order to collect your insurance monies due you if your car is stolen you have to prove you own it. The state has a registered title on file. Same for your house. Same for collecting on life insurance, one had to be born. To collect on stock certificate LEGALLY you need certificate. Try to collect on life insurance without a deathcertificate or even better, forge a death certificate,. make a claim , your ass goes to jail.
Re: How is Naked Short Selling Fraud? By bobo on 1/29/2006 5:15 PM
Jeff - are you trying to clog the thread? If so, it won't be tolerated - fair warning. Neither will being insulting. This is for civil discourse, and I have a hair trigger this week after the clogging attempts earlier in the week.

A failure to receive would be where you buy something and don't receive it. A failure to deliver is the opposite side of that - the failure to deliver the stock. There is no such thing as a naked long - to have one, you would have to be allowed to buy the stock and not deliver the cash to pay for it - something no broker will allow - they are always quick to make sure they get paid on Wall Street.

And Bud is not incorrect - your tone is insulting with him, not reasoning. His point is that in the stock world, there has to be a one for one correlation between a real share and its electronic counterpart. If there isn't one, as in an FTD, it creates out of thin air a share, or electronic pseudo-share, which then trades in the system - that is counterfeiting. Because it is electronic doesn't change the critical elements of the test - is it represented as genuine? Yes. Does it have any of the qualities or rights of a genuine share? No. Was it authorized by the issuer? No. Is it being exchanged for cash? Yes. Is it a fake trading as a genuine article? Yes.

The creation of a debt instrument or security out of thin air, unauthorized by the issuer, is counterfeiting, regardless of what technology is used - paper and ink, xerox copier, computer.
Re: How is Naked Short Selling Fraud? By Jeff on 1/29/2006 5:26 PM
No, comparing a tangible item like a bridge to something electronic is apples and oranges. You neglect the fact a middle man is involved here, namely the market maker. Say you just happen to find such an unscrupulous MM who will sell or deliver you counterfeit shares you never have to reimburse or pay for. Say we have a thinly traded stock ABCD selling for a penny. If you short it mercilessly, the best you can do is get it to 0. But if you can just keep buying and buying, if it goes to $1, isn't that a much better return on your "investment"? So, barring you have convertible debentures, what's the incentive to manipulate from the short side?
Re: How is Naked Short Selling Fraud? By bobo on 1/29/2006 5:50 PM
Jeff. fair warning second time. This is becoming gibberish.

Your statement that comparing something electronic to a material item is apples and oranges is wrong, and easily proven as such. Dollars are tangible paper things, and yet increasingly are electronic representations - credits and debits in electronic accounts. Thus they are easily converted - the electronic item is a derivative of the material thing. Simple. That is how money got started - instead of carrying around 100 pounds of gold, you could carry around a gold certificate worth 100 pounds of gold, and instantly redeemable for it. Converting that certificate to electronic is simple - as long as there is a one for one ratio of electronic certs and material certs. The disconnect is that the equivalent of electronic certs are being created by the system, which isn't authorized to do so. Only the issuer can issue a share, electronic or paper. Both are surrogates for a slice of equity in the company. That is what gives the item value.

Trading in items that represent failed deliveries, but treating them the same from a systemic standpoint as genuine shares, creates an electronic un-registered security.

Those that argue that it doesn't are trying to create a rhetorical deception - I'd frame it this way:

In what way are long term FTDs, trading in the system, DIFFERENT than an electronic counterfeit? Answer: They aren't.

And your scenario is specious - there is no MM who will buy infinite quantities of stock for you and never require payment - name one. You can't. The animal doesn't exist.

The reasons for shorting from $1 to $0 is that you get to use and keep the difference between the shorted price and the current price. This is all basic.

It seems to me like this is turning into a clogging attempt. Maybe I'm wrong, but if I see any more of this sort of nonsense, you will be going into the "must approve comment before posting" pile - I don't want readers to have to wade through an infinite number of off-base hypotheticals or impossiblities. Sorry if that causes offense. Again, maybe I have this wrong. But again, fair warning. There is no strike three here.

OK?
Re: How is Naked Short Selling Fraud? By Jeff on 1/29/2006 6:05 PM
Bobo, I suppose debate=clogging to you. That's a shame. MMs make money on the spread, so it really doesn't matter whether you are the buyer or the seller since the transaction has one of each. Did you really not know that?
Re: How is Naked Short Selling Fraud? By Rtway on 1/29/2006 6:12 PM
I,ve heard this play book before. The magician is trying to get you to look at the the waving right hand while he is furthering his cause with his left hand of mindless confusion.
Re: How is Naked Short Selling Fraud? By bobo on 1/29/2006 6:16 PM
Debate is fine. I did know about the MM. I never said they didn't make money on the spread, and futher asked you to provide me with one example of an MM that would allow you to buy without paying him, which you didn't.

I did say that I am getting sick of insults, like "I suppose debate=clogging to you" - which supplies no information value of any sort, other than to insult.

I also recognize that the last sentence of your post is intended to be insulting, as it pretends that I didn't know that, something fundamental I clearly do, and pretends incredulous puzzlement. So of the four sentences of this post, we have the first, intended to be insulting, the second, intended to be condecending, and the fourth, intended to conclude that I am uninformed about something I am not uninformed about.

That about does it for me. This is not debate, nor does it shed illumination on anything. It is nothing more than being insulting, and clogging the thread. I don't censor opposing views, and I don't censor different perspectives, but I also don't allow posters to come on and be insulting.

I will from here on out be reviewing your posts for this type of behavior - if you can express yourself without being insulting you are welcome here. If not, there is Yahoo, or Gary Weiss's blog. But not here.
Re: How is Naked Short Selling Fraud? By Rtway on 1/29/2006 6:29 PM
Thanks for putting dignity above all else, that,s what makes this sight unique and a pleasure to go to.
Re: How is Naked Short Selling Fraud? By bburrell on 1/29/2006 6:51 PM
Jeff's behavior is reminiscent behavior on Raging Bull, or Anthony@Pacific's Elgindy site on Silicon Investor, an unflushed hole if there ever was one. His tactics are identical to bashers, attacking a message not sent when he can't respond to the facts. I have posted to one Board more than three times in my life, specifically to aid the DOJ and one other Gov Agency in identifying key sources related to terrorist issues linked to that site. When I had accomplished my objective satisfactorily, I left the site.

Leaving the site wasn't as easy as I thought it would be. First, the psycho's on that site (A@P) engaged in rejection/revenge syndrome. Then they posted personal information on me on that and other sites, all of which was wrong. I forwarded all of their names to a cooperating witness for DOJ, and their names were all traced for further investigation (if the ball wasn't dropped!). I will probably never hear what happened to them, if anything

Juvenile name calling from people like Jeff doesn't insult me. One, I don't care what others think (?) about me or what I write or say. Two, others opinions of me when they are not my peers are of no interest to me.