Tommytoyz's "Dividend Capture Plan" Causes the SEC and Wall Street to Pucker Up

That was the question that Tommytoyz posed when he structured this idea, and requested a comment letter from the SEC on it. We had knocked it around, refining the pros and cons of it, and my feeling was that the SEC would simply crush anyone attempting to lawfully profit from Wall Street's criminal and contemptuous conduct. Tommy came up with the idea of testing the idea formally by requesting a position from the SEC. Brilliant, actually. So off went the letter.

His idea is simple, really. Secure the dividend rights to a company's stock from a majority of shareholders, and then invest into the company, with the intent that the company pay out 90% of what was received, as a dividend.

The investors would not have any rights to sell the stock, and would be precluded from doing so, or in any way benefiting outside of capturing the dividend. Wouldn't own it. Would be a dividend investor, period. All within the legal limits of what you are supposed to be able to do in the markets. Sounds pretty straightforward, right? Again. Nothing illegal.

Here's the key to the idea's appeal. On companies where the system has created 200, 300, 500, 1000% or more share entitlements than actual shares issued by the company, the brokers would be required to pay the dividend to all the entitlement holders.

Simplified, if a company had a million shares issued, and you were able to get 3 million entitlement dividend rights from consenting shareholders, you could invest ten million dollars into the company, and the company would pay out $9 million of it as dividends ($9 per share), keeping $1 million for their trouble, and the investor would see $28 million in dividends. Rinse next month, and repeat. It would add up pretty quickly. Maybe next month, invest $20 million. Whatever you feel like tripling. Have fun with it.

And nobody wants to sell shares - the investors don't own any. In fact, it would be best if the shares stayed flat in price - nobody but long speculators would benefit from a price rise, and that isn't what the investors are - again, they don't even own the shares, merely the dividend rights. So they don't want those that they secured the rights from to sell - they want them to hold forever, in exchange for some compensation. They want it to go on forever. So what it isn't is a manipulative device to increase or decrease the value of the shares.

What it is is a mechanism to exploit the exploitation by the brokers who see fit to sell 10 times the outstanding shares of a company, figuring that there is no appreciable downside to doing so. The hypothetical dividend capture investors would make money from knowing these ropes, by merely appropriately targeting companies that have been victimized by having untold amounts of their shares created out of thin air, for the benefit of Wall Street,

Read his request to the SEC. He spent a lot of time on the phone with them today, and they basically wouldn't comment - even though supposedly they have no particular interest in whether brokers are profitable or not, or get themselves in binds via illegal activity or reckless abuse of loopholes - theoretically, in a fair market, Tommy's strategy would be the balance to counter that abuse, sort of the equivalent of shorting the short sellers and brokers and extracting a perennial tax on those who abused us.

So it is OK for them to take trillions from our savings and depress the value of our shares and never deliver and to defraud us of ownership rights. That's just fine. But if you are like Tommy and want to turn the tables, and financially benefit by lawfully extracting financial benefit from researching and investing in companies where this would work, you can expect the SEC to knuckle punch you in the throat.

I think we should all be asking why pros can steal our money using technical niceties, but when we attempt to derive financial benefit from spotting the worst of the crooks in action and holding their feet to the fire to fulfill their dividend obligation, the alarm bells start sounding throughout the SEC. They wouldn't even respond to this request in writing, as though even acknowledging the collosal systemic risk the system has created for itself whilst ripping us off might create a firestorm.

So the SEC won't even decline to offer an opinion letter on it in writing, as that would be evidence that they know about this and could be shown to be aware of the illegal rigging of the system, as well as their blatant favoritism of the industry over the protection of investors.

Maybe everyone should write the SEC, citing this idea as one you are interested in trying (we can start a partnership if you like, and invest therein - a hedge fund - to do it - there's a funny idea), and for which you want a formal opinion on from the SEC. If they say you can't do it, have them cite the specific reason why - supported by the relevant code. Remember, nobody involved wants to sell shares, or even own the shares. The company wants the $1 million to use as working capital, so there is a benefit to them. Shareholders benefit as that increase to the book value would theoretically increase the value of their holding.

And the investors would have a financial perpetual motion machine, fueled and paid for by the crooks, until the crooks on Wall Street stopped printing shares in their back rooms.

Simple concept, that. Create actual material disincentives to defrauding investors - you could lose money doing it if our little hypothetical investment group took you on. Imagine. An actual downside to crime.

And while you are at it, ask the SEC why they would be against something so simple, that actually benefits and protects investors in the company, benefits the company, and encourages integrity in the market by serving as a powerful reason NOT to counterfeit shares or get in too deep taking investor dollars and delivering nothing.

Why would  regulator object to the crooks getting caught in their own criminal scheme, and having to pay the price of doing so?

Ask them.

And tell them to put it in writing. If they try to argue 10b5, they are full of it. It isn't.

If they disagree, have them explain why, in writing. Remember, theoretically, they work for you.