Bradley Abelow will be appearing before the State of NJ, under oath, on Thursday.
This is noteworthy because Mr. Abelow was on the Board of the DTCC from 2002.
The DTCC has come under increasing scrutiny and criticism for their role in the naked short selling crisis, specifically due to their infamous Stock Borrow Program, and the ex-clearing program. For the uninitiated, the Stock Borrow Program is a program authorized by the SEC to handle temporary delivery failures. It has been criticized due to its creation of a virtually unlimited number of electronic book entries, for which no underlying genuine shares exist (in absolute numbers, i.e. 200 million book entries could be created for a company with only 50 million authorized shares). Because the program allows the owner/participants of the DTCC to lend a share via the program, and the new buyer to immediately redeposit it back into the anonymous pool of shares, for lending again, it has been called a self-replenishing lending pool that has been grossly abused to create a de facto ghost float of phantom shares – facilitating naked short selling.
The ex-clearing system is a mechanism whereby brokers can handle their delivery of shares off-line, away from the prying eyes of the system, offering larcenous participants a silver platter upon which to fail to deliver, colluding with unregulated impunity. The DTCC takes the position that these ex-clearing transactions are none of its business, out of its hands, in spite of the fact that it is an SRO chartered with policing its members and enforcing securities laws. Kinda hard to do that if you are claiming that you are “powerless” to buy in failed deliveries, forbid your members from effecting buy-ins directly, and allow them to engage in contracts that can easily be used to circumvent securities laws mandating prompt settlement (that’s the only inference to be drawn from a system that creates exempted private arrangements for delivery, on the honor system, with no regulation).
Mr. Abelow is in a unique position to be able to comment on the DTCC’s clearing and settlement system, and more importantly, to share with the good folks of New Jersey how he dispatched his duties as a board member of the DTCC. Did he take steps to deal with over-voting – the creation of more votes than there are legitimate issued shares – a direct byproduct of creating share entitlements via the borrow program? Was the, “one share, one vote” issue something he battled to maintain the integrity of, or did it just sort of not come up?
Why does this matter? If you are going to allow a guy to hold public office, he will likely behave as he always has – history is a good barometer. If he didn’t do anything in the face of voting abuse at the DTCC (the euphemism is over-voting) then it is likely that it speaks to character. If he didn’t know anything about it, fine. But it is worth exploring, given that we fight wars and spill American blood to defend the right to vote.
As for the ex-clearing issue, it is also reasonable to ask whether Mr. Abelow discharged his obligation to the public, as the board member of an SRO. As the naked short situation has grown more visible, it is increasingly clear that loopholes in the settlement system have created a mechanism that can be abused by unscrupulous participant/owners. By divorcing clearing (the inking of the sales transaction and agreement as to the details of what is being bought) and settlement (the delivery of the goods) the DTCC is unique, in the sense that it has created a mechanism where everyone on the industry side of the table gets paid, before any product is delivered – if ever. Understanding that settlement failure is a direct result of this unique philosophy of compensation without performance, what, if any, steps did Mr. Abelow introduce to combat the obvious larceny that getting paid without delivering anything would introduce into the system?
My personal opinion is that the DTCC has several structural deficiencies that are artifacts of trying to jury-rig a clearing and settlement system wherein the imperatives of the industry are diametrically opposed with the interests of investors. By the DTCC’s placing enormous emphasis on speedy clearance, and leaving settlement as an annoyance to be dealt with after everyone has gotten paid their commissions, they have rewarded their owners/participants, at the expense of the public.
What role did Mr. Abelow play in examining these deficiencies, and was his perspective more geared to obfuscating problems, or solving them in an equitable manner? What, if any, steps were introduced on his watch to rein in unscrupulous participants, and institute controls to protect investors? Any? At all?
And while we are at it, how truthful is Mr. Abelow, just generally? If we ask questions that are simple and academic, will we get straight answers?
Here are some simple examples: Who owns the DTCC, and how does Cede & Co. factor into their organization? Hoovers lists Cede & Co. as the owner of the DTCC. Is that correct? And if so, who owns Cede & Co? The reason I ask is because Cede & Co. owns most of the stock in the US system, and yet their existence is somewhat mysterious and contradictory. So let’s ask Mr. Abelow that question, and see how he responds, as a test of his integrity and honesty. Let’s also ask him about how he performed during his time at the DTCC, and find out how he feels about the current scrutiny that the company is receiving as a result of its policies and procedures, and especially about the DTCC policy of maintaining all information about delivery failures as top secret. Perhaps Mr. Abelow can tell us exactly how large the FTD issue that many believe is a crisis actually is – specifically? I can think of a host of questions I would ask – how big is the ex-clearing issue? How many FTDs were in the system that required grandfathering by the SEC (i.e. how much delivery failure and potential fraud is the norm for the industry)? What is the total dollar contingent liability for the NSCC and DTCC from FTDs? If he doesn’t know, that is fine, but it would be interesting to hear the answers.
Mr. Abelow will go before the state on Thursday, at 9:30 AM, EST. The location will be Committee Room 4, 1st Floor, State House Annex, Trenton, NJ.
http://www.njleg.state.nj.us/Default.asp