THE CITY IS RUN BY CROOKS ...AND THE FSA DO SWEET FA

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P0lanski - 17 Nov'07 - 11:32 edit


http://thesanitycheck.com/

Welcome to The Sanity Check

If you are new to the Market Reform Movement and the underlying issues of market manipulation and naked short selling, click here.

Sign the Market Reform Petition Now!: View it here.

View the astounding Bloomberg special on the naked short selling crisis here.

Hear Senator Bennett's recent speech describing the problem to the Senate, here.

How big is the delivery failure problem? Try $67+ billion as of Q1, 2007, for just NYSE member firms - and that is at today's mark to market value, not the price at which the sales were made - likely 5-10X or more higher. See the totals for yourself in the Securities Industry Association's own summary of NYSE member firm financial performance, and contrast that to the DTCC/SEC's $6 billion fairy tale. Lines 69 and 103.

Breaking news of SEC insider trading and obstruction of justice scandal, in the new "SEC/GaryAguirre Cover-Up" section.

The Sanity Check website is intended to be an independent news source covering the Market Reform Movement. "Market reform", because much evidence suggests that our U.S. equities markets are out of control, and will either collapse under the weight of their own larceny, or be reformed, and operate in a fair and reasoned manner. The most pressing issue concerning many is the Naked Short Selling crisis affecting the stock market. This is a cancer - a malignancy that threatens popular faith in the integrity of the entire system. Lest you think this is all a flight of fancy, view footage of Senator Bennett discussing the issue with former SEC Commissioner Donaldson in a Senate Banking Committee hearing by clicking here - move the slider to 1 hour, 19 minutes and 35 seconds. What is sad is that this took place years ago, and not much has changed.

The practice of defrauding investors by taking their money and refusing to delver the product they paid for has many names. Some call it market manipulation, some call it naked short selling, others call it failing to deliver, still others refer to it as Stock Counterfeiting; many call it fraudulent stock trades.

Whatever your vernacular, it is the processing of a stock sale transaction in order to depress the price of the stock, with no subsequent delivery of the stock - the buyer doesn't get what he paid for. Non-delivery of stock is expressly forbidden by Section 9 of the Securities Exchange Act, and yet that is precisely what is occurring. The practice as described is illegal, and likely represents the single greatest threat to the US equity market, as well as the US financial system, and the engine of American prosperity that is the ability of smaller, early stage companies to access the capital markets, in order to develop and grow their businesses. Naked Short Selling is widespread, malevolent, and is at its essence, simple fraud - money is exchanged, but no product is ever delivered. There are those that claim it is good, or necessary, or justified, but our view is that defrauding investors is never good or justified, whatever the rhetoric. This site is meant to act as a resource for those exploring the subject - a good place to begin is in the Getting Started section.

Once you've nosed around a bit and familiarized yourself with the terms and the concepts that define the issues, please, get involved, and help reform the markets. Click here for a list of suggestions to start being part of the solution, rather than a victim. Your individual effort CAN make a difference.

For a neat resource that will show you all stocks on the Reg SHO list, along with cumulative totals, click here.

A number of blogs featuring key commentators are live at this site. Dave Patch, Bud Burrell, Mark Faulk, Bob O'Brien. Bob's column will now appear exclusively at this site, under the "Bob's Sanity Check" tab. The Faulking Truth and Investigatethesec.com will all maintain their own discrete sites, with this portal acting as a supplement to their fine work. NCANS will be incorporated into this site. Go to the links page for additional sites that feature NSS info and news.


http://www.deepcapturethemovie.com/

Financial Services
Naked Short Victim Strikes Back


Overstock.com filed a $3.5 billion lawsuit in California state court Friday accusing 10 of the largest U.S. securities firms of participating in a "massive, illegal stock market manipulation scheme" to distort its stock.

The Salt Lake City online retailer, whose Chief Executive Patrick Byrne has been crusading against stock market trading abuses not just in Overstock shares but as a broad, pervasive market problem, said the banks' actions caused "dramatic distortions" in how Overstock (nasdaq: OSTK - news - people ) shares were traded and lead to a dramatic decline in its price.

Overstock shares are down 77% in the past two years.

"These manipulative activities have caused tremendous damage to Overstock," Byrne said in a statement Friday. "I believe that this conduct is harming our company and our shareholders deeply."

Overstock's lawsuit says the amount of stock that was improperly shorted has exceeded the company's entire supply of outstanding shares. "It's about rigging the system," says Overstock's attorney, James Christian.

Overstock's suit names Morgan Stanley (nyse: MS - news - people ), Goldman Sachs (nyse: GS - news - people ), Bear Stearns (nyse: BSC - news - people ), Bank of America (nyse: BAC - news - people ), Bank of New York (nyse: BK - news - people ), Citigroup (nyse: C - news - people ), Credit Suisse (nyse: CS - news - people ), Deutsche Bank (nyse: DB - news - people ), Merrill Lynch (nyse: MER - news - people ), and UBS (nyse: UBS - news - people ) as defendants. None of the defendants had any immediate comment on the suit.

Byrne's self-described crusade against trading abuses over the last two years has brought a heap of criticism down on him, but regulators have acknowledged that there are loopholes that make the system ripe for abuse.

Going after the so-called prime brokers, the securities firms that provide stock lending and financing services to hedge funds, is another way to tackle the problem of naked short-selling, a manipulative trading tactic that can drive down share prices artificially and threaten the viability of small publicly traded companies.

Prime brokerage is one of the hottest businesses on Wall Street but little understood outside the world of finance. It essentially is the business of catering to hedge funds, acting as their trading counterparties, financing those trades, and loaning stock and other securities for funds to execute short-selling strategies.

According to Vodia Group, a New York firm that analyzes securities lending portfolios for traders at hedge funds and other asset managers, securities lending rakes in between $8 billion and $10 billion in annual revenues for Wall Street.

In regular short-selling, a trader borrows stock, sells it, and waits (or prays) for the price to drop before buying shares back to repay that loan and pocket the difference. There are rules for assuring that the shares have been properly borrowed, and everyone is supposed to abide them.

In naked short-selling, the trader sells the shares without properly borrowing the stock. When the stock isn't properly borrowed, the buyer at the other end of that short-sale doesn't get delivery of the shares within the mandated three-day window. The buyer also loses out on voting rights and tax-advantages until the short-seller closes out the position.

Now, fast working market makers are allowed to sell without borrowing to keep orderly markets. But naked short-selling as a strategy in and of itself is illegal. It is, however, highly tempting for both prime broker and hedge fund trader.

From the prime broker's perspective, fees can be made by lending out the same sought-after shares to multiple traders at the same time. So prime broker A has 100 shares of Company A and lends 100 shares to trader X, 100 shares to trader Y and 100 shares to trader Z. Obviously 200 of those loaned-out shares don't actually exist, and will result in a trade delivery failure.

From the trader's perspective, a naked short can be less costly, since they have to pay more to borrow hard-to-borrow shares that are usually the choice targets of short-sellers anyway.

Having all those excess shares in the market artificially reduces the price of a stock, Overstock contends in its lawsuit. Overstock has been a regular on a list of Nasdaq-listed stocks that have large and persistent failures-to-deliver since that list started being published in January 2005.

It's tough to say who is more at fault in naked short-selling, the hedge fund executing the short strategy without properly borrowing the shares, or the prime broker for either assisting or turning a blind eye to the practice.

In two suits filed last year in New York federal court, a small hedge fund and a small brokerage accused the same 10 banks named in Friday's Overstock suit of charging them for services they never received. In other words, the prime brokers supposedly took their fees for stock lending services, but never properly lent them shares for their legitimate shorting strategies, unbeknownst to them.

Last summer, 40 investors in the Kansas City real estate investment trust Novastar Financial (nyse: NFI - news - people ) filed suit in California court against the same prime brokers, saying they were responsible for artificially suppressing Novastar stock by skirting stock lending and clearing and settlement rules.

Byrne has spent the last two years pushing legislators, regulators, and anyone else who will listen to reform the system. The Securities and Exchange Commission is combing through comment letters on proposed amendments to short-selling rules that could close some loopholes, but efforts in state legislatures to clamp down on brokerages have largely failed.

Last year, sympathetic lawmakers in Overstock's home state of Utah shoveled a bill through the state legislature and got it signed into law after a special session in May. The new law would have forced brokerages to report trade delivery failures in shares of Utah companies to the state's securities director within 24-hours, or face paying a sort of fine to those issuers.

But the Securities Industry and Financial Markets Association, Wall Street's trade group in Washington, threatened a lawsuit in federal court and got the governor of Utah to capitulate on enforcing the law until June, supposedly to give the SEC time to reform the rules on a national level.

Several other bills in legislatures across the country have been stalled in the last few weeks by a similar threat of litigation by the industry group.