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Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

Location: Blogs Bob O'Brien's Sanity Check Blog
Posted by: bobo	8/5/2008 4:29 AM
The DTCC. To hear them tell it, they are powerless to deal with NSS, acting more as a vessel through which stock flows. They ignore that they are an SRO, chartered with regulating the business conduct of their owner/members. They pretend that they don't become the intermediary, and thus the contra-party to the trade to both buyer and seller, and thus in full control of buying in failed trades (if they wanted). They pass self-serving rules that declare they can't force a failing member to buy in the fail, even though they are chartered with ensuring timely clearance and settlement. And for years they have been claiming that NSS is basically a non-issue, while their press geeks and counsel employ mind-numbing doubletalk. Read the explanation of what the press release that follows describes. It is unbelievable, and yet typifies the DTCC's behavior. It is a huge part of the problem, and yet it continues to pretend to be an innocent bystander. That wouldn't have worked in any court in the land, and it is astounding that it is being attempted yet again, even as the SEC apparently wakes up to naked short selling as the systemic risk to the market we have for years claimed it to be. I would suggest that if the SEC wants to understand what is going wrong in the US market, they have but to read a press release like this one. This is frigging nuts. Really. And yet, no SEC or Congressional action. Question is, why? Why can the DTCC basically engage in securities fraud, or at least actively aid and abet it, and yet no regulator or AG takes action? How broken does this have to be before our protectors do their frigging job? ================== A LESSON FOR HEAVILY NAKED SHORT SOLD CORPORATIONS A SYNOPSIS OF THE BELOW ARTICLE 1) Grifco International, Inc. owns 75 million shares of Coil Tubing Technology, Inc. and they wish to dividend out this asset to the owners of their 40 million shares outstanding. 2) Each share of Grifco owned will therefore receive 1.89 shares of Coil Tubing. 3) Grifco’s 40 million shares are partially held in “street name” at the DTCC and partially in registered format wherein the shareholders hold their own certificates, perhaps in a safety deposit box. 4) The DTCC holds in “book entry” format 68 million shares and thus a large % of these book entries are associated with failures to deliver. For instance, if 10 million shares of Grifco are held in a registered format by their purchasers in certificate form then 30 million would be held in “street name” at the DTCC and thus 38 million of the book entries held at the DTCC were in a failure to deliver status. The DTC division of the DTCC acts as the “legal custodian” of these 30 million shares (an estimate) and is well aware of the disparity between the 30 million shares in their custody and the 68 million “shares” held in an electronic book entry format on the books of their participants. They learned of this disparity during the dividend process. 5) Due to the enormous amount of deliver failures held at the DTCC (28 million shares plus the amount held in certificated form by registered shareholders) there obviously weren’t enough dividend shares of Coil to go around if all shareholders of Grifco were to receive 1.89 shares of Coil per Grifco share owned. 6) The securities laws clearly state that any short seller that is short any shares of an issuer on a dividend record date must match that dividend. 7) Instead of forcing their DTCC participants holding the short positions (failures to deliver) to deliver the missing dividend shares of Coil, the DTCC management told Grifco to contact the shareholders that didn’t receive their dividends to sign a waiver waiving their right to these dividends. Obviously very few would comply as they had legally earned these dividends. 8) DTCC then demanded that Coil Tubing, whose shares were being dividended out by Grifco but that otherwise had nothing to do with the dividend distribution process, to go out and buy additional free trading shares in the market or supply the missing amount out of their treasury despite the fact that it was clearly the responsibility of those short the stock of Grifco on the dividend record date to match the missing dividend shares. 9) Grifco obviously refused this DTCC order as it would have been very damaging to their shareholders because of the dilution, as well as very expensive. 10) DTCC management then issued a statement on 7/10/08 that unless it received the necessary shares within 21 days that they were going to proactively reduce the size of the dividend distribution from 1.89 shares of Coil per Grifco share owned to 1.29 shares per Grifco share owned. They did this despite the fact that it was clearly the responsibility of those DTCC participants that were short the stock to match the dividend. 11) Coil Tubing refused to play ball with this DTCC mandate and filed suit against the DTC and Grifco itself claiming that Grifco should have been aware of this massive discrepancy. In reality Grifco management has no idea of the levels of delivery failures in their shares held at the DTCC or outside of the DTCC in an “ex-clearing” format. 12) The judge issued a temporary restraining order forbidding the DTCC from adjusting the Grifco shareholder’s accounts from 1.89 dividend shares per Grifco share owned to 1.29 shares of Coil per Grifco share owned. QUESTIONS THAT ARISE 1) How dare the DTCC attempt to transfer this debt from their DTCC participating owners/participants (those with the short positions) onto the shoulders of either Coil Tubing, or Grifco and their shareholders? 2) How dare the DTCC allow their participants to run up a massive level of delivery failures equaling 28 million shares plus the amount held in registered format, in a corporation with 40 million shares? 3) How dare the DTCC try to get Grifco investors/shareholders to sign a waiver denying them of the dividend their purchases earned? 4) How dare the DTCC management force the shareholders and management teams of both firms to shoulder the financial and time burden of this litigation, just to receive what was owed them? 5) How dare the “legal custodian” of these shares (i.e. the DTC division of the DTCC) treat the “beneficial owner” of these shares, to whom they owe a fiduciary duty of care, in this reprehensible manner? 6) How dare the “legal/nominal owner” of these shares, CEDE and Co. the nominee of the DTCC, treat the “beneficial owners” of these shares (to whom they owe a fiduciary duty of care as the surrogate “legal owner” for which they were appointed only as a means to streamline ownership transfer without cumbersome deed-like instruments) in this fashion? 7) How dare a “qualified control location” capable of granting compliance with the critically important “Customer Protection Rule” (Rule 15c3-3 of the ’34 Act) treat the “beneficial owners” of these shares in need of this protection in such a manner? The “Customer Protection Rule” mandates that the purchasing broker/dealer “promptly obtain and maintain the physical possession or control of fully paid for and excess margin securities” on behalf of their client, the investor, or keep them housed at a location, like the DTCC, that will obtain the physical possession or control of them on their behalf. This clearly was violated by the DTC. 8) How dare the DTCC acting in the capacity of a “Self-Regulatory Organization” (SRO) defined as “An entity, such as the NASD, responsible for regulating its members through the adoption and enforcement of rules and regulations governing the business conduct of its members” refuse to regulate the “business conduct” of its abusive participants that refused to deliver the shares of Grifco that they sold, as well as the dividend shares of Coil Tubing that they clearly owe? 9) How dare the DTCC with the Section 17A (’34 Act) mandate to “Promptly and accurately clear and settle all securities transactions” refuse to settle these transactions after these archaic delivery failures were brought to their attention? Once the enormity of this delivery failure situation was brought to the attention of DTCC management, the correct course of action was obviously to firstly force the perpetrators of this massive fraud to buy-in the shares of Grifco that they'd previously sold, but refused after inordinate amounts of time, to deliver. Secondly, those short the stock on the dividend record date would obviously be on the hook for the dividend shares. This is the type of corruption in the naked short selling arena that U.S. investors are up against in the DTCC-administered clearance and settlement system in use in the U.S. THIS IS BUT ONE OF DOZENS OF REASONS WHY YOU NEVER HOLD SHARES IN DEVELOPMENT STAGE CORPORATIONS IN “STREET NAME” AT YOUR BROKER/DEALER, ESPECIALLY IF THEY ARE ABOUT TO DISTRIBUTE DIVIDENDS. YOU SHOULDN’T HAVE TO GO TO THE EXPENSE AND HASSLE OF FILING SUIT IN ORDER TO RECEIVE A DIVIDEND CLEARLY OWED TO YOU. THE RECENT PRESS RELEASE Coil Tubing Technology, Inc. Files Suit Against Grifco, Grifco’s former President and DTC SPRING, Texas, Aug 01, 2008 (BUSINESS WIRE) — Coil Tubing Technology, Inc. (”CTBG”) (OTC:CTBG), its majority owned subsidiary, Coil Tubing Technology Holdings, Inc. (”CTTH”) and its President & Chief Executive Officer, Jerry Swinford, have filed suit against Grifco International, Inc. (GFCI.PK) (”Grifco”), Depository Trust & Clearing Corporation (”DTC”) and the former president of Grifco, James Dial (the “Defendants”). As previously disclosed in CTBG press releases, DTC contacted CTBG in late April 2008 regarding issues associated with Grifco’s distribution of its 75,000,000 shares of CTBG in August 2007. The distribution was effected through a stock dividend of CTBG shares to Grifco shareholders as of the record date of May 1, 2006. Grifco announced that each of its shareholders would receive 1.89 shares of CTBG stock for each share of Grifco stock held as of the record date. Thus, the stock dividend was premised on Grifco having approximately 40 million shares outstanding on the record date. However, according to the DTC’s records there were approximately 68 million Grifco shares outstanding and held in book entry form on the record date. Additionally, there were a yet undisclosed number of shares outstanding held in certificate form, which are not included in the 68 million share total, and which may have not been included in the distribution by Grifco. Mr. Swinford was one such record shareholder of Grifco, who did not receive shares in Grifco’s distribution. CTBG believes that all three Defendants were aware of the shortfall in shares in August 2007, but allowed the stock dividend to go forward. When CTBG was contacted by the DTC regarding the shortfall in shares in April 2008, it immediately took steps to have Grifco contact shareholders who did not receive shares in the distribution and obtain signed waivers of their right to receive shares in the stock dividend. To date, a limited number of such waivers have been obtained; however, because of Grifco’s failure to obtain waivers from a sufficient number of shareholders, DTC demanded that CTBG acquire additional free trading shares in the market or issue additional free trading shares to satisfy the shortfall. Acquiring additional shares in the market is both financially and logistically impossible and, because CTBG does not have a registration statement on file allowing it to issue additional free trading shares, filing such registration statement would be expensive, time consuming, and subject to SEC approval. Additionally, issuing additional shares of CTBG would substantially dilute the interests of CTBG’s existing shareholders. On July 10, 2008, DTC issued a Stock Dividend E-Mail Alert that stated it had not received sufficient shares from Grifco in order to affect the stock dividend at the rate Grifco announced. DTC further stated that unless it received the necessary shares by July 31, 2008, it would unilaterally adjust the ratio of shares received in the stock dividend from the rate originally declared, 1.89 shares of CTBG common stock for each share of Grifco common stock which shareholders of Grifco held, to a reduced rate of approximately 1.293870 shares. By demanding that CTBG provide sufficient shares to satisfy the shortfall or unilaterally adjusting the ratio of shares issued, DTC was attempting to force CTBG to suffer the consequences created by itself, Grifco and others. Grifco and DTC were in possession of the relevant information when the stock dividend was issued. Because the adjustment threatened by the DTC would irreparably harm CTBG and its shareholders, on July 30, 2008, CTBG filed suit against Grifco, DTC, and Dial. Additionally, CTBG sought and obtained a temporary restraining order to restrain the DTC from adjusting shareholder accounts. Following the hearing, counsel for CTBG, Jess W. Mason, stated, “Judge Stovall’s Order today maintains the status quo and prevents DTC from adjusting any accounts until a further Order of the Court. A temporary injunction hearing will be held before the Court on August 22, 2008.” About Coil Tubing Technology, Inc. (CTBG) CTBG is the result of a reverse merger with IPMC Holdings Corp. which occurred in November 2005. After the reverse merger and until about a year ago, CTBG owned all of the outstanding shares of CTTH and currently owns 95.2% of CTTH’s outstanding shares of common stock. CTBG has historically conducted essentially all of its operations through CTTH and its subsidiaries. About Coil Tubing Technology Holdings, Inc. (CTTH) CTTH was formed as a holding company of several operating companies in 1999 and continues to have two wholly owned subsidiaries. Through its primary subsidiary, CTTH specializes in the design of proprietary tools for the coil tubing industry, concentrating on four categories of coil tubing application: thru tubing fishing, thru tubing work over, pipeline clean out, and coil tubing drilling. CTTH and its subsidiaries were founded by Jerry Swinford, an oilfield tool designer with more than 25 years experience in the creation of oilfield tools. Mr. Swinford continues to serve as CTBG and CTTH’s director, CEO and president. Forward-Looking Statements Certain statements in this release, and other written or oral statements made by CTBG and CTTH, including the use of the words “expect,” “anticipate,” “estimate,” “project,” “forecast,” “outlook,” “target,” “objective,” “plan,” “goal,” “pursue,” “on track,” and similar expressions, are “forward-looking statements” and are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance, or achievements of the company to be different from those expressed or implied. CTBG and CTTH assumes no obligation and does not intend to update these forward-looking statements and takes no obligation to update or correct information prepared by third parties that is not paid for by CTBG or CTTH, respectively. SOURCE: Coil Tubing Technology, Inc. CONTACT: Coil Tubing Technology, Inc. Attorney-CPA (Corporate Counsel) John Akard Jr., 832-237-8600 or Mason, Coplen & Banks, P.C. (Litigation Counsel) Jess W. Mason, 713-785-5595 or Bruce A. Coplen, 713-785-5595
Copyright ©2008 Bob O'Brien
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Comments (41) Add Comment

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By mfm1021 on 8/5/2008 9:08 AM
Stunning?Shocking? A Twilight Zone story? Nah, just the reality of the huge flaws in our settlement system and the total dirth of exisiting regulation enforcement. America, you make me proud. The judicial system is the only hope. What's the likely sequence of events following a judge's order to the DTCC to require those short the stock to fund the dividend? Mayhem. Anarchy.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By Spellchekk on 8/5/2008 11:02 AM

The arrogance of the DTC is astonishing.

Imagine that scenario. DTC allows 30 million phantom shares in your company to be sold and not located or delivered. That lines the pockets of criminal hedge fund operators and clients. When your company attempts to reconcile the shares, the DTC issues an order that you increase your share count to make up for the discrepancy - at great expense to your company and with massive dillutive effect on your shareholders.

Sickening. Thankfully, they filed suit against the DTC and have a sensible judge willing to block the DTC's unilateral action while the lawsuit proceeds. This could be a landmark case.

Chekk

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By bobo on 8/6/2008 7:22 AM

If you go over to the Sentinal's website and look at Ian's blog there, you will find the usual lilGW aliases, Sam Antar, basically the whole gang of short apologist/feces slingers working that board over to make it unreadable, and to take the dialog away from whether NSS is a large problem or not.

This is typical of how they have played for the last few years. Tar and feather anyone who dares point out the math, or that the problem threatens the financial system's stability.

Fortunately, it would appear that someone at the SEC finally got it, as I am hearing positive things from that direction for the first time in a decade. So all the obfuscation and misdirection in the world won't cover this up if they actually start imposing real reforms.

The math is stunning when you consider it. $8 billion now in FTDs per day, and 98% of all trades net, so that is post netting. Per the DTCC, $31 billion or so trades per day after netting, maybe a bit less on lower days. That means 25% fail, not including ex-clearing fails, and internationally netted fails. Now apply that number to the total trading volume per day, pre-netting, and the number becomes hundreds of billions. Is that correct? Nobody knows, or rather, those that do aren't talking. The DTCC could easily show the raw data pre netting, and declare this to be a small problem, but they don't. Instead, they talk percentages of all trading, and they lump corporate debt into the equation to make the total larger, thus the percentage smaller. And they use post-netting numbers.

That this sort of opacity is being used in what should be a transparent clearing and settlement system is frightening. It's frightening because this isn't the secret to the A-bomb, but rather just how many buy-sell transactions actually result in the buyer getting delivery of what he paid for. Why is that so super secret?

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By zinkley on 8/6/2008 10:15 AM
Corrected link for post above By Sean on 8/6/2008 7:04 AM http://www.thestandard.com/news/2008/08/04/overstock-com-ceo-im-not-vindictive Make sure to read all of Patrick's comments, below the actual article.

DTC to destroy evidence of Naked Shorting?

By Build a Bear Raid Workshop on 8/6/2008 10:10 AM

Don't know if you have heard about this announcement yet but the DTC is rolling out a plan to allow firms to destroy "non-transferable securities certificates." Here is a link to the original document:
http://www.sec.gov/rules/sro/dtc/34-49930.pdf

Beginning on Sept 1, 2008 firms will be allowed to start destroying the evidence, er, I mean the "non-transferable securities certificates."

I smell a rat. This could be one vehicle for burying the bodies from the tech crash before everyone wises up.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By Dr. Jim DeCosta on 8/6/2008 10:08 AM

Great discussion you guys! Here's a snip-it from my book #4 on NSS. The concept of "novation" and the role of a CCP is critical.
The SEC has a Section 17A (a) (2) (’34 Exchange Act) mandate wherein Congress directed the SEC “having due regard for the public interest, the protection of investors, and the safeguarding of securities to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities”. (Section 17A (a)(2), 1512 U.S.C. 78q-1(a)(2).

As the U.S. clearance and settlement system evolved the DTCC and its subsidiaries including the NSCC and the DTC both before and after they amalgamated in 1999 to form the DTCC have been very busy promulgating various rules ostensibly as part of their never-ending quest for “Enhanced efficiencies”. In these “Quests” they have either been mandated by acting as an “SRO” or have “Volunteered” to act in about 18 different “Efficiency enhancing” capacities and thus they wear about 18 different responsibility “Hats” as it were after taking on these roles.

The question that begs to be asked is has the SEC shown this “Due regard for the public interest, the protection of investors, and the safeguarding of securities” mandated by Congress as they continually signed off via their Section 19 B responsibilities on ALL of these theoretical “Efficiency enhancing” measures while the DTCC was clearly morphing into a self-serving but extremely “Efficient” front for the organized theft of the investment dollars of American investors. Another question that arises is has the SEC successfully COMPLETED their congressional mandate of facilitating the “Establishment of a national system for the PROMPT and accurate clearance and SETTLEMENT of transactions in securities” or is this a work in progress that direly needs to be put back on track towards completion.

These “Efficiencies” sought after by the DTCC management through the years include acting in the following capacities again theoretically ONLY for reasons related to the quest for “Enhanced efficiencies” and NEVER for any reasons related to perceived or actual “Self-dealing” on behalf of the DTCC’s owners/”Participants” in order to acquire “Leverage” over and access to the wallets of the investors they act as the “Gatekeepers” to the markets for.

ACTING:

1) As the “Central Counter Party” or “CCP” which acts as the “Contra party” to veritably all transactions done on Wall Street. In this capacity the DTCC management has attained UNFATHOMABLE power, unfortunately not fully appreciated by the SEC, to “DISCHARGE” the obligations of its own “Participants”/bosses/owners acting as the buyer and seller involved in a securities transaction in exchange for the NSCC division of the DTCC “ASSUMING” these obligations on behalf of their “Participants”/owners. In other words the NSCC subdivision of the DTCC’s role is to “Discharge and Assume” obligations or “D & A” ostensibly ONLY for reasons associated with the quest for “Enhanced efficiencies” provided by the U.S. clearance and settlement system being based upon the concept of “Novation” and the use of “Central Counter Parties” or “CCPs”. In clearance and settlement systems based upon “Novation” the “CCP” steps in between the buyer and seller and “Novates” (Creates anew) 2 new contracts. One promises that the CCP will deliver the shares on T+3 to the buyer while the other promises that the CCP will deliver the buyer’s cash to the selling party. The obligation to deliver both the cash and the shares on T+3 remains intact it only got transferred from a relatively easy to identify, easy to sue and easy to hold accountable pair (one buying firm and one selling firm) of the 11,000 individual “Participants” of the DTCC that owe a fiduciary duty of care to their client to the nearly impossible to sue and hold accountable NSCC subdivision of the DTCC itself, the “Alter ego” made available for any individual abusive DTCC participants to assume while perpetrating securities frauds.

Why is the NSCC so tough to hold accountable? Because they are too inextricably linked to the very foundation of our financial system and any rocking of this gigantic boat may have untoward consequences in terms of SYSTEMIC RISK as well as deleterious effects on the already anemic investor confidence levels. In other words they’re too important to be sued no matter what crimes they may be facilitating, knowingly or unknowingly, on behalf of their individual owners/bosses/”Participants”. This “Quasi-immunity” further emboldens the commission of these heinous crimes as abusive DTCC participants feel insulated from any legal or regulatory repercussions since they are but one participant amongst 11,000 b/ds and banks forming the DTCC which is in turn acting “Exempt from the law” due to its incredible “Importance”.

When stealing from investors it is much wiser to be acting as one of 11,000 DTCC “Participants” in essence granted “Circumstantial immunity” due to their “Importance” then it is to act as an individual b/d that might be held responsible for theft from its clients, perish the thought. The key then is for abusive DTCC participants to paint the relatively immune DTCC proper as the responsible party for any misdeeds committed by the individual participants while DTCC management is busy catering to the financial needs of its individual participants. After all, the individual participants are “Just following the rules of the DTCC which were all approved by the SEC at one time or another”.

Through “Novation” and the use of the NSCC as the “Central Counter Party” the individual DELIVERY and payment OBLIGATIONS of abusive DTCC participants selling nonexistent shares right and left while constantly refusing to deliver that which they sold is officially “Discharged” and now the relatively immune NSCC is on the hook for “Assuming” these payment and delivery obligations. Keep in mind that “Executing” on these OBLIGATIONS is a totally different matter than “Assuming” them and later we’ll see how the DTCC management actually has the audacity to plead to be “Powerless” to “Execute on” these OBLIGATIONS even though they were the party that earlier “Discharged” these obligations of their owners. Notice the similarity to a “Shell game”; under which “Shell” is the obligation currently hiding under? After all, what’s the SEC or Congress going to do when the NSCC refuses to “Promptly execute” on these obligations that they “ASSUMED”, fire them and shut down the markets for a year or two until they can find somebody else to clear and settle literally quadrillions of dollars worth of trades annually? That’s what it means to be “Too important to be sued or held accountable”. So what did the SEC and the Congress do when the NSCC did indeed refuse to follow through? Congress did nothing and the SEC opened up “Comment period” after “Comment period” in between which Reg SHO full of loopholes you could drive a truck through became the law of the land. What did it finally take to get the SEC to appreciate the effects of naked short selling on SYSTEMIC RISK issues and to finally provide some “investor protection”? It took a well-organized “bear raid” involving a flurry of delivery failures aimed at Bear Stearns coincident with organized rumor mongering as well as a precipitous loss in the market capitalization of the 2 critically important government sponsored enterprises (“GSEs”) Fannie Mae and Freddie Mac for the SEC to finally provide some investor protection albeit selective in nature in regards to Delivery Failure Related Abuses (DFRAs) and Abusive Naked Short Selling (“ANSS”) related frauds. In other words it took a near financial system meltdown.

Basically the way the game has been historically played throughout the history of the DTCC is to get as many self-serving rules incorporated into the DTCC’s and the NSCC’s nearly 800-page book of rules and regulations while the SEC is nodding off and rubber stamping everything that crosses their desks and then since the SEC has no power to add to or abrogate (delete from) the rules of any “Registered Clearing Agency” like the DTCC then the individual DTCC participants can always profess that they were just following the rules of the DTCC and if the DTCC proper gets into trouble then they can always proffer that the SEC already approved of this particular program like the “Automated Stock Borrow Program” (“SBP”) and its self-replenishing lending pool of securities or the “RECAPS” program with its ability to extinguish delivery failures and roll back their age to zero. We saw this exact phenomenon in regards to an Amicus brief filed by the SEC in a naked short selling case against the DTCC which we’ll review shortly. The DTCC management’s possession of the power to “Discharge” the obligations of their own bosses/owners represents a CONFLICT OF INTEREST beyond description UNLESS the SEC responsible for the establishment of this “national system for the prompt and accurate clearance and settlement of transactions in securities” while “having due regard for the public interest and the protection of investors”, were all over every single trade in which the NSCC division of the DTCC refused to PROMPTLY “Execute” on the obligations of their participants which they recently “Assumed” i.e. follow the congressional mandate “To “Promptly settle” all transactions” by T+3 barring any “Legitimate” reason for not meeting this timeframe. Why is this intense scrutiny by the SEC so critical in providing investor protection and market integrity? Because the DTCC “IS” the sum of its component 11,000 participating broker/dealers and banks. That obligation was transferred from 2 fraternity “Brothers” to the fraternity headquarters itself which is not “At arm’s length” and it is in turn owned by the 2 fraternity brothers as well as 11,000 other fraternity brothers plus the NYSE and the NASD.

One can only imagine the CONFLICTS OF INTEREST present when an organization is given the power to forgive the debts of its component members/owners or the power to indefinitely postpone the payments of those debts until such time that the debts become a moot point i.e. until the buyer of the nonexistent shares that never got them delivered turns around and sells them to somebody else. Thus the “Time” increment between the instantaneous “Assumption” of the obligations and the “Execution” on these obligations is critical for a variety of reasons associated with investor protection and market integrity as well as those reasons regarding the SYSTEMIC RISKS associated with any artificially induced delays between trade date and the date when delivery of that which was purchased is finally made i.e. “Kiting” or “Free riding” related crimes and abuses. THE “ASSUMPTION” OF LITERALLY QUADRILLIONS OF DOLLARS OF OBLIGATIONS ANNUALLY BY AN ENTITY TOO “IMPORTANT” TO BE HELD RESPONSIBLE FOR ITS OWN ACTIONS REPRESENTS AN INVITATION FOR FRAUDULENT BEHAVIOR WITHOUT EQUAL AS HISTORY HAS CLEARLY SHOWN.

One has to remember the study of Evans, Geczy, Musto and Reed in 2002. Their research showed that only one-eighth of 1% of even “mandated” buy-ins were ever executed by DTCC participants. With statistical aberrations like that one must ask how can this be true. Well, if a “black box” like the NSCC is allowed to “discharge” the delivery obligations of its owners/bosses in exchange for “assuming” them and then later plead to be “powerless” to “execute” on them then statistical aberrations like that are going to occur.

But how about the broker/dealer with the “failure to receive” on his books? Where does he fit in? First of all it’s not the “introducing” (not self-clearing) broker/dealer that has the FTR on his books; it’s his clearing firm. The clearing firm gets the cash equivalent of the missing shares to do with what he pleases. He’s not about to order a buy-in which might tweek off his fraternity brothers. He’d rather have the use of the money than an electronic book entry gathering dust.

Note that in a securities transaction the buyer’s broker that charged a commission and therefore is acting in an “Agency” capacity has the fiduciary duty of care to make sure that the client that paid him a commission got delivery of that which it purchased. I’ll review Rule 15c3-3 and its role later on in this regard. This “Investor advocate” role of the buying b/d was also supposed to be “Assumed” and “Executed” on by this “Contra party” especially while acting as a qualified “Control location” (as per 15c3-3 of the ’34 Act) known as the NSCC as any fiduciary duty of care cannot be legally “Extinguished” at will even in the name of “Enhanced efficiencies” being provided by a “Central Counter Party”. It is important to focus on ALL of the obligations and duties that were to be “Assumed” and “Executed” on “Promptly” by the NSCC while theoretically “having due regard for the public interest and the protection of investors”.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By Maynard G Krebs on 8/6/2008 9:23 PM
Is there any more compelling reason as to why the "system" needs to be dismantled and rebuilt from the ground up?

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By kevin on 8/6/2008 9:24 PM
I notice a few long links are getting cut off. Just go to http://www.tinyurl.com, put in your long link and it will convert it into a link you can post here that won't get cut off.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By bobo on 8/6/2008 9:28 PM
Azkole: No, but then again, it won't matter, as all the data will still be obtained via discovery, and the damage model will remain the same. So why complicate matters by trying to introduce the DTCC into these relatively tight cases? Just my opinion, one never really knows...

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By ACT_NOW on 8/7/2008 6:25 AM
We need an independent auditor to go in and inspect the DTCC books NOW.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By 5 part read on 8/8/2008 3:17 PM
http://www.ecclesia.org/forum/uploads/bondservant/BankingScam.pdf

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By captdale on 8/8/2008 3:16 PM

Bobo - You said : Fortunately, it would appear that someone at the SEC finally got it, as I am hearing positive things from that direction for the first time in a decade.
-------------------------------------------
..... at the SEC finally got it,........... What in the world are you saying ? That the SEC was and is innocent in all this market manipulation crap and they just now are seeing the light ? You KNOW better than that. Why are you cutting them one bit of slack by "talking nice" about them now ? Nobody there "finally got it". Crap, they were and are in on it from the very start or it could not have happened in the first place. The only reason they are "oh so very surprised to learn of this travesty" is they have got their tits in a ringer as we say down south and the escape routes are closing up. The SEC is trying to throw someone under the buss but not them selves. I asked two of the NASD commissioners in a meeting if the NASD had the authority to enforce REG SHO when the NSS crap was really out of hand for both overstock and novastar and both answered "we most certainly do !". However, they took no NO action to correct anything. We all know what happened to novastar and overstock is holding on by their bloody fingernails. Nothing significant has changed. So my question is valid, why on earth are you cutting any of the bastards any slack when they would be publically executed in many other countries for pulling this "crimes against society" ? I'm tired of talking nice to these no good, low life scum. I wonder if I can be more clear on that point.........

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By captdale on 8/8/2008 3:25 PM

bobo - I appologize for the rant. I am just so very sick of all this crap. You are so very right on. My country is seriously broken and I just don't see any way its going to be fixed. Like you said, if your reading this then you are the fodder and your stolen earnings of a lifetime of hard work are not going to come back. The crooks get to keep the proceeds, the best Government that money can buy will guarantee that and the middle class worker gets to pay for it. Are we not blessed to live in the best country in the world. The citizen could fix it by voteing the bastards out of office but the Ron Paul's so far do not stand a chance and the citizens are too damned lazy to care.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By RMR on 8/8/2008 3:13 PM

I DUGG and reposted this discussion at DIGG under the title: Govt-enabled Wall Street Fraud Threatens Financial Disaster
thesanitycheck.com — and summarized it: Investors are being criminally abused by the SEC and Wall Street as COX admits that a run on investment banks could bring collapse because (in blatant violation of 15c3-1 and 15c3-3 of the SECURITIES LAW), broker-dealers secretly hold ONLY FRACTIONAL RESERVES of customer investments, broker IOU's instead of the actual shares you thought you bought!

DIGG accepted it but mine appears to be the only DIGG under the new or old subject title. As Bobo has indicated, it is to our advantage to spread the word as far and wide as possible. If all the posters here add their voices and DIGGS, we optimize the exposure. Note the DIGG button immediately following BObo's commentary above.

Also, if you google "Govt-enabled Wall Street Fraud" Bobo's commentary comes up first on the list:

Digg - Govt-enabled Wall Street Fraud Threatens Financial Disaster
Investors are being criminally abused by the SEC and Wall Street as COX admits that a run on investment banks could bring collapse because (in blatant ...
digg.com/world_news/Govt_enabled_ Wall_Street_Fraud_Threatens_Financial_Disaster - 24k - 21 hours ago - Cached - Similar pages

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By davidn on 8/8/2008 3:15 PM

"Approximately US$1.8 trillion worth of trades remain outstanding and unsettled globally every business day, contributing significant credit and operational risk
exposure to the trading participants."

http://www.touchbriefings.com/pdf/1417/kumar.pdf

Or from the DTCC's own website:

http://www.dtcc.com/downloads/leadership/whitepapers/settlement.pdf

FAILS AND RECLAIMS
This shortfall in effecting STP is largely an efficiency issue. Fails and reclaims are
another matter. They create risks for participants and for the system as a whole.
Because fails are quite common in today’s system, it falls far short of straight-through processing. Currently about 5% of trades fail or are “dropped” at the end of the day — about 20,000 from CNS and 15,000 from non-CNS deliveries for a total of about 35,000 of the typical day’s 700,000. This doesn’t include “fails to deliver” that aren’t even introduced into the system, which would make the fail rate higher. Fails create significant risks for the deliverer and receiver. When a fail occurs, the deliverer is short of funds (although a firm can lend the securities it has and replenish them in normal market circumstances). Both the deliverer
and the receiver have portfolios that are not what they expected. Although a fail
does not create a credit, counterparty or principal risk, it does create a liquidity risk
for the deliverer. And institutional trades that fail create position risk for both deliverer and receiver.12

Most fails occur because positions are not available; that is, the deliverer does not
have free inventory. Stock lending can, of course, overcome this, as long as the lent stock is available quickly enough. When, as is usually the case, the lender receives sufficient cash collateral from the borrower, the credit risks associated with stock lending are small compared with the benefit of eliminating settlement fails.
Reclaims are somewhat different. Today, there are about 10,000 reclaims with a value of $7 billion to $10 billion on an average day, of which about $5 billion to $6 billion is for MMI deliveries and the balance is mostly for primary deliveries of securities loans and returns, and deliver orders. Nearly 90% of these originate through day-side delivery versus payment transactions.13 However, while the dollar values of reclaims are not that large typically, about $300 billion of securities are reclaimable — institutional trades and participant inputs that are not RAD-eligible. Of the total value of settlements at DTCC — about $750 billion on a
typical day — about 40% could be reclaimed, and about 1% actually are.
Reclaims eliminate the risk to a receiver of taking delivery of a security that it does
not want. However, this is a risk the receiver could eliminate beforehand by authorizing the trade, actively or passively. And, in the course of a reclaim, risks are
created for the deliverer and the system as a whole.

For a deliverer, the risks created by the possibility of a reclaim are similar to the
risks created by a fail — liquidity and position risks. However, they occur after a
13

Straight-Through Processing: A New Model for Settlement
12 There is no position risk for CNS participants when a trade fails because NSCC extends to them all of the legal rights and privileges they would have had with completion, even when their account at DTC is not credited.
13 The total number of reclaims is about twice this, with the remaining 10,000 or so being due to payment orders – the movement of cash without any corresponding delivery of securities across DTCC’s books. These reclaims are unimportant for
inventory management – there is no inventory movement associated with them – but they are very important potentially for risk management, because many of them are associated with making margin payments.
14 trade has been settled. Therefore, they add to the overall risks of settlement; on any given settlement day there is the risk that any of the trades due to settle that day may fail, as well as the risk that any of the reclaim-eligible trades made the previous day may be reclaimed.

If a participant failed and a trade it delivered the preceding day were subsequently
reclaimed, DTCC might have to buy the securities back from the receiver —
because DTCC does guarantee the receiver’s right to reclaim — and then sell
them into the market. DTCC would face market risk, which it would offset with any
available collateral from the failed participant.

Nevertheless, there is residual market risk for the system as a whole. And,
once again, because the risk of reclaim refers to trades settled yesterday, this is
additional to any risk DTCC might face from settlements due today.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By davidn on 8/8/2008 3:26 PM
Of the 700,000 or so deliveries that settle at DTCC’s subsidiaries daily, about 250,000 are institutional and pass through the ANE system; of these, about 50,000 are exempted. Of street side (broker-to-broker) transactions, typically about 180,000 deliveries a day are channeled into CNS, ofwhich about 35,000 are exempted.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By bobo on 8/8/2008 3:25 PM

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By waterfallsparkles on 8/9/2008 9:56 AM

Interesting. Another Company SCA a Bond Insurer is heavly Shorted with Naked Shorts. They are changing their name and exchanging stock certificate to the new company name.

One poster on the message boards posed a question as to what will happen to all of the share holders that are holding shares that had been naked shorted. Would they require a buy in? I thought it was an interesting question.

Could a Company changing their name get rid of all of the Naked Shorts? Interesting concept.

Also, what I find interesting is that the NY Insurance Commission is now investigating Short Sales in the Bond Insurers and Insurance Companies. Plus, deceptive, false statements about the financial soundness of Insurance Companies is against the Law, just like the Banks. I think that thoes shorting the Bond Insurers knew the SEC would not press the Naked Shorting rules but do not think that they ever considered the powers of the Insurance Commissioner.

Check the news on MBI. MBI said that they were cooperating with the Insurance Commission and were considering a Law Suit themselves against one of the most vocal short sellers on their stock (David Ackman).

I thought you would enjoy this as now others are considering Law Suits against short sellers. Plus, who would have thought the Insurance Commissioner start an investigation to help sure up the Insurance Companies and rein in Naked Short Selling. You may want to forward some information to him.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By cutty on 8/5/2008 11:02 AM
From the shareholders to the DTCC; "And maybe you want our shirts too?" Normally I am mostly against lawsuits, but in this case, SUE THE DTCC INTO THE GROUND!

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By Sean on 8/5/2008 11:03 AM
Bobo, this has been the best self incrimiating deed done by the DTCC in the most recent past. If this does'nt send off smoke signals of danger to all nothing will. This one will break the camels back. WATCH!!! Thank you for an insightfull and enlightening article.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By tommytoyz on 8/5/2008 11:04 AM

This is the beginning of the end. The yelling, kicking and screaming on who is to carry the cost for the money that Wall Street siphoned off from equity investors has begin in earnest.

Then we have the FTDs in bonds and US Treasuries...............this will not end well and will have to be negotiated, as the trust that investors and issuers have put in Wall Street has been totally abused - in a criminal manner.

The official tip-off was COX's statement recently that a run on investment banks could result in collapse, because the investment banks only held fractional reserves of customer investments - in violation of 15c3-1 and 15c3-3 and possibly 15c3-2 which is expressly and redundantly prohibited for exactly these reasons.

It also makes the adoption of the rule that NIPC has proposed look like a common sense solution to avoid what is happening now.

Look for the coming NIPC comment letter.
Tom

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By rtway on 8/5/2008 11:12 AM

Thanks Bobo for bringing this to our attention. I have a feeling this story is going to be repeated many times over in different forms but the dilution of value will be the catalyst. These idiots thought this was never going to come to roost, obviously there planning and foresight sucked and now they are hoping the average Joe won't catch it. Unfortunately for them, Joe has been educated by the good Dr. and the bunny. Don't stand in front of the fan, the time has come.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By bobo on 8/5/2008 11:16 AM

The only possibility that could twist this to the negative is if Grifco was selling unregistered securities out the back door, which isn't even hinted at or alleged in the PR. So upon it's face, this appears to be exactly what the analysis portrays it to be - the DTCC trying to bully some companies into picking up the check for a bunch of short sellers who really don't want to ever have to deliver what they sold, nor comply with the law.

What do they call it when you aid and assist lawbreakers, and attempt to use fraud and collusive effort to do so? I was under the impression that if you did it recidivistically, it was RICO. Are the owners of the DTCC immune from the law? Apparently so. Must be nice.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By Dr. D on 8/5/2008 11:22 AM

What's particularly disturbing in regards to the NSCC acting as the "Central Counter Party" to all trades is that once the FTD occurs they, the NSCC, is now owed the missing shares. As the creditor they would obviously have the right to buy-in any FTDs. They choose not to and plead to be "powerless" to. Thus the abusive DTCC participants end up owing themselves (this black box known as the NSCC) this debt. CCPs are necessary in any clearance and settlement system but the CCP can't plead to be a "powerless" creditor in its rule as the surrogate creditor.

Re: Euromoney Naked Shorting Article

By Willie Loman on 8/5/2008 3:14 PM

http://www.euromoney.com/Article/1990841/BackIssue/65741/Naked-shorting-Funds-up-in-arms-about-short-selling-ban.html

Naked shorting: Funds up in arms about short-selling ban

When the US SEC announced in July that it would impose a 30-day ban on illegal naked shorting in 19 stocks, some hedge funds were up in arms.

They had a right to be confused. The proliferation of illegal naked short selling, whereby stocks sold short are deliberately not bought in and delivered within three days, to allow the seller to take advantage of further drops in price, had largely been played down by the SEC.

Punishment for failing to deliver within the timeframe has been posting collateral – not a big enough incentive to prevent the practice. The ban implies therefore that the SEC has either misunderstood the damage that illegal naked shorting can inflict and has been inflicting, and suggests that it admits that the practice is rife in the industry. One trader says he is familiar with a large hedge fund manager that has been shorting large financial companies in the past few months with no intention of locating the actual stocks within the three-day period. His argument is that his firm has sufficient clout with the broker for the broker to turn a blind eye.

The ban has received criticism from hedge fund industry representatives, fearing it might lead to longer-term regulation restricting short selling as a whole. The Managed Funds Association and Coalition of Private Investment Companies wrote a letter of complaint to the SEC. MFA president and chief executive Richard Baker says his firm believes "the difficulties are the result of poor fundamental conditions and not a mysterious conspiracy, or the inadequacy of current rules related to short selling".

Jim Chanos, chairman of the CPIC, argues that restrictions on short sales undermine the integrity of prices because they remove liquidity and healthy sceptism from the marketplace

Shorting stock without physical possession of the stock certainly keeps the market liquid but hedge funds’ arguments that three days are not sufficient to locate stock and deliver it is only proof that the SEC’s failure-to-deliver regulations have been ignored for years.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By mhatmccane on 8/5/2008 11:55 AM
And where is the SEC, the DOJ ? Are any States AGs getting involved? This just may be the tipping point. Is this what PB was referring to in his letter to Wall Street?

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By rocker on 8/5/2008 3:13 PM

Here is what is interesting.

Grifco decided to go back one year back in time for the record date.
In other words they used a record date that had already passed, instead of one in the future.

(I guess) On that date in time they had 40million shares issued and outstanding.

Subsequently the share count did grow.
As of July 24, 2007 there were 115,564,430 shares outstanding.
But as of MAY 1 2006 Grifco claims that there were 40million shares.
I see absolutely no reason why they would lie about the sharecount.

On May 25, 2007 Grifco decided to distribute a dividend- but the record date to be used would be May 1, 2006.

http://www.pinksheets.com/otciq/ajax/showFinancialReportById.pdf?id=11198

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By Blackbart on 8/5/2008 3:14 PM

The companies are POS that deserve to get destroyed and the shareholders are only getting what they deserve for investing in these outfits. The money the shortsellers got while not delivering shares is their rightful booty and compensation for putting miserable companies like this out of business. They and the DTCC are just culling the herd for us ignorant investors. What would we do without them to protect us?

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By bobo on 8/5/2008 3:18 PM

rocker: So the share count was an accurate one, as far as anyone knows, on the date selected by the company to stop the clock on their share count, and to distribute the dividend. The shareholders of record at that date were about 30 million more than what the company had issued and authorized - at least. That would be akin to counterfeiting about 1X or so the company's outstanding shares, yes?

If that is any example of the sort of thing the DTCC has been enabling, you can see why I say that the rot is not an interstitial nook in the system, it is the system.

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By tommytoyz on 8/5/2008 4:23 PM

Dr D:
The NSCC works differently. When the NSCC assigns FTRs, that is - "fails to receive" that broker can request a buy-in. Then after T+5 (if I remember correctly), the NSCC will assign to the FTR holding broker, an FTD causing broker(s), from which to obtain either the shares or damages. This way, the NSCC washes itself from the counter party position.

That makes the DTCC behavior very suspicious in this case. They've never done that before and are now dealing directly with the issuer and almost directly with the investors. Why? They could just have said that they distributed all shares they received and anyone that did not get any should complain to their brokers. But that's not what they did.

It's points to the possibility that the DTC misrepresented the number of securities they had on deposit. This would make them and not the brokers the guilty parties. Could be..........In that case, the DTC securities positions in all issues should be audited by an independent entity.
Tom

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

By davidn on 8/5/2008 5:34 PM

Of course they are liable. Except for x-clearing, the DTCC is literally the one that fails to deliver. They advertise that they GUARANTEE settlement and they say they can buy in right in their annual report. They don't do it because they profit from not doing it. Don't listen to Stu Goldstein, the consultant they hired to lie for them.

DTCC = parent
DTC = subsdiary that does the record keeping for shares held in trust by Cede & Co.
Cede & Co. = the actual registered owner of the shares
NSCC = subsidiary that manages the continuous net settlement system
Participant = brokerage, clearing brokerage or foreign depository. Most brokerages don't have accounts with the DTCC and clear through third party clearing brokerages. It is common for a clearing brokerage to have a large number of separate participant accounts. They can shuttle between.

This is a bit tricky to understand, but each participant is either a net buyer or net seller for any security they trade that day. (All the buys and sells are added to get a positive or negative trade.) If they are a net seller, they sell to the NSCC (which is a DTCC sub.) If they are a net buyer, they buy from the NSCC. The NSCC is ALWAYS the counterparty to the trade.

There is no matching seller or buyer in the world because of the netting. The buyer or seller on the other side is ALWAYS the NSCC.

If the NSCC doesn't have enough stock in sellers accounts and the stock loan program at the DTC, they just fail to deliver it to the buying participant. The clearing house that is the buyer doesn't care as they get to keep the money until they get the shares.

If a participant in the world fails to deliver to the NSCC, then it is said the NSCC fails to receive the shares. The NSCC doesn't mind as it means they get to keep the money.

In both cases, they don't really care as it isn't their asset and "who is ever going to know". The books are very opaque.

From their annual report, it shows the DTCC owes the participants $5.7 billion worth of stock. They are also sitting on $7.5 billion cash they owe to brokerages that haven't delivered stock to them.

http://www.dtcc.com/downloads/annuals/2007/2007_report.pdf

"NSCC completed delivery of $1,693,456,000
in securities through the SBP ($1,105,727,000 at December 31,
2006), leaving $5,761,192,000 in open delivery obligations due to participants."

So after netting 98% of the trades and after netting at the clearing participant level, they still fail to deliver $5.7 billion worth of stock. Unless I am missing something, the real problem would have to be at least 50 times this because this is the after 98% netting amount.
pg. 62 We've got to be talking $100's of billions of dollars worth of fails at the level of the customer. This is an awful lot of extra supply to dilute share values.

"If a participant fails to fulfill its settlement obligations to NSCC
and/or FICC and these subsidiaries cease to act on behalf of the
participant, that participant’s guaranteed security receive and deliver
obligations would be liquidated and that defaulting participant’s
margin and mark-to-market deposits, including participant fund
deposits, would be applied to satisfy any outstanding obligation
and/or loss."

Re: Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting	By bobo on 8/5/2008 5:39 PM
Davidn: I've long held that the problem is likely at least 50 times larger than what they say, for the same CNS netting m