I had a chitty chat with a friend today, and he informed me, in passing, that the DTCC had been served with subpoenas in two states over the last few weeks by the securities regulators in those states – specifically, Utah, and Connecticut.
The subpoenas were related to the naked short selling issue.
What is surprising is that the response from the DTCC to these subpoenas was, to quote my friend, “They gave them the middle finger.”
Now, last time I checked, if a securities regulator in a state wants to know things about your affairs, and there is nexus in the state, you don’t have the option of saying nah, don’t think we are going to honor the subpoena.
Especially if you are a private company, which the DTCC is. They are not an arm of the Government, they are a private clearing company owned by a bunch of NY banks and brokers. And their FAST software is on every broker’s back office desktop, owned by the DTCC and licensed to the broker, so they ARE doing business in those states – there’s no way to argue that they aren’t. And their broker participants are doing business in the states as well, and the issues they are clearing are Utah and CT issues, so there is no basis for saying, “Buzz off.”
Now, how out of control is it getting if the company that clears stock trades feels that it doesn’t have to honor state securities regulators’ subpoenas? I didn’t think that was a choice. And yet the subpoenas went out, and were ignored.
What does this tell us?
First, it tells us that the DTCC has something it obviously feels it needs to hide. Second, it tells us that it feels that it doesn’t have to obey the rule of law. Third, it says that the naked short selling issue that so many are spending so much time arguing doesn’t exist, IS a real issue that the states are taking seriously, and the first volley has been fired. Remember that the states are the organizations that took the brokers to task over the analyst scandal, and the mutual fund front-running scandal, etc. So it isn’t like their authority is in question.
So by what right does the DTCC flip-off the States when they deliver the subpoenas?
Dunno.
But it is not the last we will hear about this – I sense that the state regulators don’t take kindly to having their authority pooh-poohed by a private corporation. That seems like it is a collision with a rude awakening.
And for those hedge funds and clearing brokers that are actively using naked short selling as a trading/manipulation strategy, this should be your wake-up call.
On a related note, I have noticed that the new tact of the naked short selling apologists is that, “There isn’t enough proof that the FOIA requests are evidence of illegal activity” – they are taking the position that there has to be a higher standard of proof than that.
What further proof would be sufficient, is not defined.
It is just that there are possible explanations for some FTDs, which don’t involve illegal activity, thus no matter how convoluted and tortuous the reasoning to make everything innocent, they take the stance that they are all, or mostly are, innocent – or rather, that there isn’t “convincing proof” that they are illegal. The curious thing is that none of these apologists confront the evidence that there is NO way that delivery failures like what are taking place in OSTK are mostly innocent – they simply ignore that. They take the classic pseudo-scientific stance that there are other possible explanations for anything, thus the obvious explanations can be avoided.
Fossil evidence could have been created by a divine being to test our faith. The Holocaust could be a fraud perpetrated to drum up sympathy for one group and demonize others. There are endless variations to this argument from ignorance – you simply declare that whatever evidence that is presented is inadequate to prove anything, and don’t articulate any issue in a way that is provable or testable. Non-falsifiable statements are classic pseudo-science, and the statement that there isn’t convincing proof that there is an illegal naked short selling problem is just that – because no proof is “convincing,” by declaration of the skeptics. Another way of saying this is “I know what I know, and any new data will simply be discarded as inadequate.” This is not the realm of logic anymore, it is the realm of metaphysics. There is a necessary underlying belief, which no amount of evidence is satisfactory to dislodge or alter. It is the antithesis of science and logic – metaphysics.
Some examples: FOIA requests show hundreds of millions of FTDs in NYSE and NASDAQ stocks, concentrated in just a few companies? It’s possible that is all legal. Those stocks lost 50% or more of their market caps since being on the list? It's possible that has nothing to do with illegal downward manipulation. OSTK CEO unable to get his shares for 60 days? Could be innocent fails. No way to legally generate innocent fails for that time? No system is perfect.
And so on.
Classic metaphysics. Why do bad things happen to good people? Alien overlord controlling all events to make it seem as though we have free will, but secretly persecuting some good folks. Homeopathy based on flawed 19th century notion that diluting elements to the point where there are no traces of the element in water has a healing effect if the water or placebo tablet is taken? Science still can’t explain everything, and neither can medicine, thus it is possible that the underlying healing property’s explanation will surface later. As long as there is no embarrassment to ignoring evidence that is difficult for any sane person to discount, you can be a meta-physicist too. It’s easy. Simply say, “That proves nothing,” regardless of what is said. Smirk like Mathews if you want to really feel Wall Street about it.
It is the logical equivalent of putting one’s fingers in one’s ears. Because the objective is not to understand, it is to stick to the agenda, regardless of what is introduced. And it is the last refuge of those that have been spanked badly by the facts. If they simply declare that no proof is adequate to convince them, than by definition they are un-convinceable. That’s why they can’t articulate what would serve as convincing proof – there is none, for them.
For everyone that was waiting for the explosive blog tonight, this wasn’t it, although this is a big one – it isn’t every day that the DTCC gets subpoenas related to naked short selling, and bitch slaps those delivering the paper. The explosive blog is awaiting a few more tidbits of info with which to season it – trust me when I tell you it is worth the few days it will be delayed. I thought I would have all the data I could want by day's end, but I want to get all the info before I break it here - this is the kind of thing you want to get 100% right.