The NFI shareholders' suit against the prime brokers alleging naked short selling of that company scored a major victory today, when the motion to remand the action to Federal court was denied.
Why is that a victory? Because now discovery can proceed, and there is no obvious stalling mechanism they can employ. Federal court would have meant the SEC coming to the defense of the scumbags, arguing that they are exempted from suits like this by virtue of the SEC's jurisdiction. That isn't the case here.
That means all the trading records, the true size of the naked short position in the company, all the evidence, all the Yahoo basher IDs, any indication of a collusive scheme to drive down the price of NFI in which some or all the prime brokers participated, any indication of options MMs abusing their ability to naked short sell legally by "renting" their exemption to the hedge funds that have been so badly wrong about the company for coming up on five years....
All of it is now on the table.
All of it.
And I suspect that other cases will go forward now that this has been shown to be viable.
Suing the prime brokers is a great tactic, as they almost certainly have to be processing trades naked, and then failing to require shares be delivered. Question is how large will the damage model be? My hunch is that the O'Quinn group doesn't bring these for peanuts, and tackling the prime brokers is big game hunting. Expect more surprises ahead.
My belief is that a certain mobbed up options MM in the Midwest is busy renting out their exemption to the bad guys, figuring that nobody will ever stop them - wonder how that will go down when this is enlarged to include that sort of behavior in the collusive manipulation scheme? RICO, anyone?
Anyone that follows NFI or my blog knows how gamed that stock is, and today was a landmark manipulation day - the crooked MM processed almost a half million share reverse conversion to enable the bad guys to keep selling naked shares, a doltish professor at Babson who can't even read an SEC disclosure (he mixed up the number of shares a director sold with his total holdings) came out with similarly well-researched ideas for why the company should be short sold (as in a PR piece from an organization of highly questionable motives who predicts, surprise, a sub-prime meltdown; the off by a factor of 10 "sale" he alleges an insider made - shades of Gradient-style 10X math error research - and other pearls of idiocy). Herb published his year-end scorecard and magically NFI wasn't included, after he has been wrong about them for four straight years....
So it is obvious that the SEC won't do anything. But as I have argued long and hard, the plaintiff's bar will do what the regulators refuse to do. Apparently driving a solid company to a 22% dividend yield, with the reverse conversions happening in plain sight, as UBS walks the ask and bid down over a dollar (occupying both slots), all on no news, is just too frigging hard for these yuck yucks to grasp. Not that hundreds of complaints haven't been filed.
No, apparently the Rockers and SACs of the world have too much juice for the SEC to want to wrestle with, so the investors and the company are left to their destructive ravaging, unprotected and unpoliced. Fine.
Now let's see who is doing all the naked short selling, and who the clients are on whose behalf the trades are being booked, and which options MMs are engaging in flagrant manipulation, and what the real IDs of the crews of bashers that seem to descend on the short targets of a particular cartel of short sellers really are. And then let's see what a jury thinks about all that.
Discovery begins pretty much immediately, from what I can tell. This is a big one to watch, folks, as it targets the right deep pockets - the FTDs couldn't happen without their active participation. So now let's lift the curtain and find out how Wall Street really works.
Let the games begin.