Post by bunnyb on May 3, 2010 9:47:05 GMT -5
Where did the money go?
October, 6, 2009
This project seeks to display the need for more information to be disclosed to investors by stock
sellers. The problem of delivery failures causing a loss of value in the stock market and the
amount of information a small investor has about these processes is the basis of my report. The
need to involve more investors in the call for more information is clearly indicated by this report.
The stock sellers have a large industry devoted to keeping this information from the investors. If small investors have any hope of having access to the information being suppressed by the securities industry as ‘trading strategies’ then they must actively seek to change the way the system now works. Through web sites and the SEC’s own comment section it is clear the issue is becoming more prominent. What this report is meant to do is to cause others to take an interest in finding out more about these issues for themselves.
Thank you for the opportunity.
Transmittal Memo……………………………………………………………………...pg1
Table of Contents………………………………………………………………………pg2
Summary……………………………………………………………………………… pg 3
Introduction……………………………………………………………………………pg 6
Findings………………………………………………………………………………..pg 7
Conclusion……………………………………………………………………………...pg10
Appendix……………………………………………………………………………….pg11
Works Cited…………………………………………………………………………….pg11
Copy of Survey…………………………………………………………………………pg12
Summary
The purpose of this report is to determine the extent to which the average investor has been informed of the conditions under which their investment has been made.
The DTCC is a corporation that holds stock in trust for share owners in the name of CEDE and company. This corporation lends the stock it holds for short selling for a fee. “The DTCC processes 1.2 quadrillion [million trillion] in trades every year. The agency has stated that 1% of these trades have failed to deliver per day.” The agency processes about 2 trillion in trades daily including bonds and does not quantify whether the failure to deliver rate of 1% refers to total trades or total equities. The DTCC keeps the dollar value of these fails secret, however, the failure to deliver is known to be a problem not only related to stocks.”(O’Brian 1).
The SEC ‘grandfathered’ all delivery failures prior to 2005. Effectively, allowing all who sold stock short and never bought the real stock in, to cover their positions without buying the stock...They never had to deliver what was sold by the brokers. No stock was actually bought with the money .The trades were then grandfathered in, which means the brokers never have to buy the stock they were given the money to buy; they just got to keep the money! Many investors think they have stock in their retirement and other accounts, but in reality the accounts do not hold shares in the companies the investor requested ,but instead hold markers or security entitlements which are nothing more than counterfeit shares. The process of naked short selling has been implicated in the stock market losses associated with Lemans and Bear Stearns rapid stock decline.
The DTCC’s “stock borrow program” lends shares to be delivered to buyers. It allows one share of stock to be lent out multiple times for short selling, increasing the amount of stock available for short selling. Who really owns the DTCC? The article: Who Owns America, states that in 1971 on June 24th Senator Metcalf asked “Who owns America” and went on to state that CEDE and company are really a code name for the stock clearing corporation a wholly owned subsidiary of the NYSE (Wendling 1). This is where the money generated by the borrowing fees goes.
Increasing the amount of supply has a negative effect on demand and price. This process favors the large investor over the small investor. In many cases the small investor has no disclosure to them of the practices that are causing their investments to lose value. This report is to find a way to increase the information available to the stock owner, and the company that has issued the stock. The information that is the most vital to these participants in the system is the amount of stock sold to stock owners, and the amount of stock issued by the company. When the amount of stock sold exceeds the amount of stock issued by the company, the owners of the stock and the owners of the company should have a right to know. In a story by Lucy Komiser in Jan 2009 the issue of failure to deliver bonds is also discussed .The article states that in the fall of 2008 two trillion in treasury bonds were allowed to be sold but not delivered for six weeks (Komier 1).
Disclosure of this information has a direct effect on the value of the investment held by these participants. Through the use of this survey and through quotes and links to information available, this report will show the need for an increase in the information available to companies who issue stock, from the sellers of the stock. This report will show the need for information requirements and disclosure from stock sellers being needed for small investors, who need to know the value of the stock they are buying, may be detrimentally affected these processes.
The secondary purpose of this project is to try to understand how much of the losses incurred by the recent economic downturn can be in some way connected to the process of naked short selling. The report is intended as a way to use the results of the information on the survey to show the lack of information the average investor has concerning these processes .The report will show, through the other sources of information, that the processes involved were implicated in the loss in value of stocks in specific companies.
The need for investors to have access to this information before they buy a stock is clear. The amount of stock available to be traded has a direct impact on its value. Selling a product without disclosing the fact that: one, a process used by the brokerages selling the product was devaluing the stock purchased and two, that the place the brokerages had put the stock “in trust” was making money using the shares to drive down the price of the stock just purchased from them seems to be a practice that could be termed fraud. It is doubtful that this disclosure is being given to investors before stock purchases.
Introduction
This research project is something that everyone has an interest in: money. The losses recently experienced in the stock markets value have been credited to the subprime lending problem or some other reason. The report will show that there are other reasons that may have contributed to these losses that are not being discussed. The survey that was conducted was designed to give an indication of how much information the average investor has about processes that are affecting the stock market. Through this survey and the information presented here this report should show a need for more communication of these processes to all investors.
Findings
Do investors need and want more information?
The answer to number fourteen indicates only thirty percent of respondents were interested in accessing information used to compile the survey. Seventy percent do not know what it means to hold stock in certificate form, from question three. From question two we see seventy percent of those who answered hold stock. Eighty percent responded that the DTCC should be responsible for letting a shareowner know when the share they own is ‘lent out’ for short selling, something which does not happen now. If only thirty percent want more information on the sources of the survey, yet eighty percent want more information than is now available then the need for a better understanding and more information is clear.
Number five in the survey related to the lending out of more stock than was issued by the company, most investors were against this process, which occurs regularly in the stock market today.
The replies to question eleven that most investors want all trades reversed that do not settle by the third day, goes against current policies regarding the failure to deliver issue. According to Bloomberg the Hazle, a trade group for stock transfer agents “Reviewed 341 shareholder votes in corporate contests in 2005 it found evidence of over voting -the submission of too many ballots-in all 341 cases.”( Drummond1 )
The people who run many of the sites visited in research for this report have been trying for several years to increase information available to investors. The brokers and large investment houses have lobbyists and make large contributions to political parties to help keep this information private. The DTCC, where the stock borrow program originates, has no public posting on its management or practices. This makes it difficult to look for conflict of interest in this establishment. The subject of naked short selling has been implicated in the steep loss in share value experienced by Lemans and Bear Stearns last fall. The October issue of Rolling Stone magazine has a story covering the information concerning the share decline in value, paired with large failure to deliver positions in the stock at the same time as it was losing value. The questions the article raises are valid. The follow up on the True Slant by Mr.Taibbi, showing a part of the process leading to this problem is very educational (Taibbi 1).
Why have no brokerages or individual investors been named as guilty of what was a blatant manipulation of these stocks? By increasing the information available to share owners and by demanding a right to know about these processes before paying money for a stock investors could have a better understanding of the risks they are exposed to when investing. Some companies have had the stock of the company blocked from trading by the DTCC. ”Over the last four years Energy Source Inc. has made every effort for the resumption of trading of its stock by complying with all requests made to it by all pertinent agencies. It has done this at great expense and effort but as it has complied; it has found its efforts to be unfairly obstructed. Even with the findings of various government agencies showing Energy Source to be innocent of any wrong doing one private organization continues to block the rights of the company, the Depository and Trust Clearing Corporation [DTCC]. The DTCC its officials and lawyers lead the company to understand that on the completion of all the normal regulatory requirements it would clear its stock for normal trading. This position was reached by mid 2007 after an exhaustive and costly process”. The DTCC even though all requirements had been met still refused to allow stock in the company to resume trading of its shares unless: “The company supplied sufficient shares to the DTCC to cover the counterfeit shares it had allowed to enter the market through its gross negligence as well as supporting a tide of naked short selling by its client owners and brokers.” (Megas 1). This example could be repeated over and over again. Without an involvement of the investors who are being harmed by this system the system will not change.
Conclusion /Recommendation
This reports recommendation would be to use the resources and the links this report provides to find out if the economic value of investments has been impacted by these practices and what can be done about it. If enough people become informed as to these practices the system will have to change. Small investors will demand it. Without direct intervention of the small investor, the reform necessary will not happen.
The C.E.O. of Overstock has a web site devoted to this fight; his name is Patrick Byrne. They are involved in exposing the setting, the crime and the cover-up. This report highly recommends using the resources found there. They have a great fight on their hands and a well matched bunch of contenders on both sides. It is a furious battle to watch and a better show than is on television most nights. The thing that makes it the most important is the fact it is real. It is real money being stolen, as well as the future rights of investors and stock issuing companies. So check out the information clicks a few links to watch a vicious fight and tell others. It could be one of the most valuable uses of time found.
If after reading these sites and researching your own investments you find these practices have negatively impacted you financially I would recommend that you, decide to hold your own property yourself, in the form of stock certificates, to keep your own property from being used to drive down your investments value and ,as a buyer who has been defrauded, seek to take legal action against the sellers of the property that you purchased .For nondisclosure at point of sale, of information the sellers had, about conditions the seller engaged in that would have detrimental effects on your stock purchase. File a lawsuit against the sellers for fraud. We have ample evidence that the market regulators will not protect small investors.
It is time to protect ourselves through our courts and legal system. It is our right as citizens to seek redress of fraud against our property as written in the constitution it is our right and it is up to us to protect that right and our property. It is clear that if we do not no one else will.
Appendix
Works Cited
Bob, Drummond. "Bloomberg." 27 febuary 2009. bloomberg. 6 october 2009 <http://www.bloomberg.com>.
Kaufman, Ted. “Kaufman and Isakson Statement on Tomorrow’s SEC Roundtable on Short Selling.” Ted Kaufman United States Senator for Delaware 29 September 2009. 6 October 2009 <http://www.kaufman.senate.gov/>.
Komiser, Lucy. “Finance US: Treasury Nominee Failed to Halt Bond Scam.” IPS News 19 January 2009. 6 October 2009 <http://ipsnews.net/>.
Megas, Thomas. “Energy Source Inc. Announces New Action for Investors.” Globe News Wire 6 October 2009. 6 October 2009 <http://markethingych.com>.
O’Brian, Bob. “The Sanity Check FAQ.” The Sanity Check 6 October 2009. <http://www.thesanitycheck.com/FAQ/>.
Taibbi, Matt. “Caught on Tape: A Naked Swindle.” True Slant 5 October 2009. 6 October 2009 <http://www.trueslant.com>.
Wendling, Richard. “Who Owns America?” Bear Facts Specialist Report Informational Website 27 January 2008. 6 October 2009 bearfactsspecialistreport.com/.
Zendrian, Alexandra. “Is Naked Short Selling Really a Problem?” Forbes 1 October 2009. 6 October 2009 <http://www.forbes.com>.
Survey
The purpose of this survey is to determine the level of communication between the sellers of stock, the investor buying the stock and the companies issuing the stock sold.
The selling of more shares of a company than were issued by the company affects the share price which can fall at rapid levels harming the company and the investors’ interests
Unless a stock is held in certificate form, the stock can be “lent” out to short sellers.
When the stock is “lent out” in share numbers exceeding the share number issued by the company this is called naked short selling.
The Depository and Trust Corporation [the DTCC] holding stock and “lending” it [under the name of CEDE] makes money on every share they “lend”.
This practice has been implicated in the fall of many large financial firms last fall including Lehmans.
This survey is designed to find out how well the process of stock lending has been communicated to you the stock owner and to determine how well the owners of companies are informed in the trading of more of their stock than the company has issued
The goal of this survey is to find a way to improve investor and company ability to communicate with the sellers of stock.
1. Do you own stock or have any money in a retirement or other fund tied to the stock market?
0Yes 0no
2. Have you experienced a loss of value in this investment in the last 5 years?
0Yes 0no
3. Do you know what it means to hold a stock in certificate form?
0Yes 0no
4. Do you feel the DTCC should be responsible for informing the actual share owner when shares the DTCC is holding in trust for them are “lent out”?
0Yes 0no
5. Should the DTCC have the right to “lend out” more shares of a company’s stock than were issued by the company?
0Yes 0no
6. Do you feel that selling more of a stock than was issued by a company is wrong?
0Yes 0no
7. Do you think that when a company is delisted and the shares can no longer be traded that the total number of shares sold should be only what the company issued and that any trades that cannot be covered with real shares should be canceled and the money returned to the investor?
0Yes 0no
8. In a case of delisting should the short seller of shares be allowed to not buy in real shares to cover those they borrowed when shorting the stock, never completing the trade, and just be allowed to keep the investors money?
0Yes 0no
9. Should a company have the right to know when more shares of their company are trading than were issued by the company?
0Yes 0no
10. Would you as a shareholder want to know when more stock than was issued by the company is trading before you buy a stock?
0Yes 0no
11. Should all stock trades that do not get “covered” by real shares by the third day after a trade is made be voided and the money returned to the investor?
[What ordinary trading rules require]
0Yes 0no
12. Should hedge fund or stock pool market makers have an exemption from the three day trading rule?
0Yes 0no
13. Should the Security and exchange commission enforce existing laws requiring the delivery of real shares by all sellers of stock in the three day settlement period?
0Yes 0no
The end of this survey is to ask if you would be interested in a reference and contact list related to the subjects in the survey.
0Yes 0 no
If so please take this bottom sheet.
The links referred to here are sites I used in researching this subject.
www.sec.gov/
www.deepcapture.com/
www.thesanitycheck.com/
taibbi.rssoundingboard.
www.dtcc.com/products/cs/index.php