Here's the first in a series of articles from Investor's Business Daily - IBD.
It is largely positive, although I suppose I would have preferred a more frank approach to spelling out who in the system is lying to investors, and that the practice of NSS is illegal in most instances, and that investors are defrauded by those engaging in the practice.
But it isn't a perfect world.
Here are some pieces of the first installment, with my comments:
"Securities and Exchange Commission, prodded by corporate complaints and a few lawsuits, is looking into phantom shares -- though there's much debate as to whether it's a big problem.
There's no debate that it is a problem, and that the issue is complex. "Phantom" -- or "failed to deliver" -- shares of stock exist. This happens when an investor buys shares in a company but doesn't receive the shares for days, weeks or ever.
Two years ago, the SEC commissioned a report that found there were about 500 million phantom shares out there on any given day. The SEC now says the average number of failed to deliver shares have declined by 33% since its January 2005 launch of Regulation SHO (for "short"), which gives guidelines to govern short sales.
The phantom share issue sparks more debate with short, rather than long, sales. That's because of the nature of short sales, where investors bet a stock will decline.
That 33% decline isn't evident from SEC records obtained by IBD through a Freedom of Information Act request. (See graphs that accompany story.) IBD obtained data for May 2005 through June 2006, and those data show no declining trend."
Well, no, not actually. Whether the sale is marked short, or long, it is the investor getting screwed out of his money and delivered a big fat can of nothing that is the problem. Because Wall Street keeps the money, and then shucks and jives when it comes time for the exchange of product and money. Money stays in the system, investor gets nothing but a bogus IOU - THAT is the problem. The fraud part. Long OR short.
And there isn't a whole lot of debate as to whether it is a big problem. You basically have two camps: People who can count, and the financial system and regulators. People who can count run the numbers, as I have numerous times here, and go, "Wow, billions of dollars worth of securities are going undelivered every day while the money is kept by the brokers, and because of netting, it could well be tens of billions of dollars per day. If billions, or tens of billions, of dollars per day were disappearing from banks, would that be a "big" problem - I mean, would there be "debate" over how "big" the problem is? Then why when the same thing is happening in the stock market, is there suddenly some question about it?
Oh, and that last bit? That basically says that the SEC lied when it told everyone that the problem was shrinking rather than growing. Lied. As in misled. Stretched the truth. Told a whopper. Spun a yarn.
If the Federal Reserve got caught lying to the American Public, would that be a problem, do you think? How about the Center For Disease Control? If they told us the nation's blood supply was now safe due to the reduction of HIV in the system, brought about by their "new" reformed procedures, and then it turned out that the amount of HIV in the blood supply was actually as large or larger than ever, would there be an outcry, 60 minutes special, front page Washington Post expose?
But not when the SEC is caught in an equivalent lie. Here, we have silence.
Interesting.
"While preliminary data indicates that Regulation SHO appears to be significantly reducing fails to deliver without disruption to the markets, there continues to be a number of threshold securities with substantial and persistent fail-to-deliver positions that are not being closed out under existing delivery and settlement guidelines," SEC Chairman Christopher Cox said in July."
That would be the big fat lie. There is no preliminary data that indicates that. Any data available to the SEC in July would have shown that as of June, the problem was getting worse, not better. Only by carefully cherry-picking a select time frame and ignoring all other data could one even come close to defending that horsepoop - again, if the CDC cherry-picked the HIV stats in the blood supply to present a false and materially misleading picture to the public, would we all be so polite about calling them on it?
"In the last four days of June -- the most recent data obtained by IBD -- there were 400 million to 500 million failed to delivered shares a day in companies trading on the Nasdaq or over the counter. That's up from May 2005, when the number of phantom shares hovered between 300 million and 400 million a day.
"That's an enormous number," said Daniel Clifton, executive director of the nonprofit American Shareholder Association. "Our members are worried about it. They have been talking about it."
But that opinion is far from unanimous.
"It's not a big problem," said Jim Cramer, host of CNBC's "Mad Money" investment show. "The only people it's a problem for are really crummy businesses that desperately need their stocks to go higher."
Cramer refers to the fact that -- while every company's shares are sold short from time to time -- often the most short selling takes place with troubled companies or small, unproven companies. Because smaller companies have fewer shares -- are illiquid -- they're more prone to making the SHO list."
Huh. So 500 million shares are paid for by investors, and the sellers REFUSE to deliver them, instead keeping their money, but that isn't a big problem This from Cramer, who seems incapable of distinguishing between legal short selling, and naked short selling, which is illegal when it happens outside of narrow market maker exceptions. Jim basically obediently parrots the standard miscreant/Wall Street spin, seemingly oblivious to the nuances at play. This is a guy who was smart enough to make a fortune on Wall Street, and got a law degree, but who can't seem to get the most basic fundamentals of an essentially simple issue.
Jim. Sweetie. Millionth time. One is legal. The other is illegal. Against the law.
And as a reminder? 500 million shares undelivered in a largely illegal manner? Likely many times worse once the netting effect of the CNS system is accounted for...BIG BIG problem.
Here is the logic from the Cramer camp, not surprisingly representing the perspective of the hedge funds who make lots of money by this abusive and illegal practice:
Illegal trading that screws investors out of their money and leaves them nothing in return is OK, as long as you can make a case that the company they thought they were investing in has some warts. Further, 500 million shares (again, likely 20 times more once you factor in netting) representing $2 billion of illegally generated cash, EVERY DAY, is good, not bad. Good if you are putting it into your pocket. Not so good if you are the investor who is getting fleeced out of it.
Any questions?
"Short selling is a perfectly legal, much-used tool for investors. In short selling, an investor borrows shares and sells them on the open market, planning to buy the shares back later and then repay the original holder. Thus, a short seller makes money when the stock he shorted declines.
13 Days To Produce Shares
Naked short selling is the same thing -- except that the broker-dealer lending the shares doesn't have the shares.
Trades of stock are expected to conclude after three days. The SEC allows a grace period of another 10 days before a company appears on the Reg SHO list.
Critics say many failed to deliver shares simply don't exist and never did. Who benefits from this? Brokers collect commissions on the shares and collect interest when lending the short shares."
Again, another NY pub that just can't bring itself to say, clearly, NAKED SHORT SELLING IS ILLEGAL. Not unexpected these days, as there appears to be a moratorium on stating that simple, easy-to-grasp fact in writing. Like there's a taboo against it.
Imagine if extortion was treated the same way. "Extortion - a controversial practice some argue could cause issues for fair markets." "Not all extortion is illegal - for instance, the tax system takes money from folks, and threatens to lock them up if they don't comply." "Defenders of the practice argue that well-funded larger companies aren't affected by it, and it is only the sketchy little mom and pop enterprises, many of which are questionable anyway, that are the primary targets."
And who benefits? Why, the market manipulators who are allowed to withdraw funds as the stock falls. Again, they take the investor's money and deliver nothing. They keep doing that, and the price goes down due to all the artificial supply. As it goes down, there is extra cash (the difference between, say, the $50 the stock was sold for, and the $30 it sells for today) which is literally free money for the manipulators. It is literally printing money out of thin air for them. And "they" are hedge funds - the large, unregulated pools of money nobody wants to regulate.
Wonder how that slipped IBD's attention?
The article goes on to ignore all the comment letters from folks like NASAA and NCANS and securities regulators and academics and brokers and transfer agents and investors, and instead gives a few column inches to the self-serving propaganda from the industry.
Still, all in all, not a bad article, in the sense that they don't have a photo of Patrick with horns poking through his do, and in the sense that at least some of it is factually correct.
I'll count this one as a win for the good guys.