Tuesday, May 24, 2005

It's official, SEC is committed to screwing investors...

Not sure I thought I'd ever see this day, but watching some of the latest shenanigans at the SEC, particularly with the SEC's Division of Market Regulation, headed by Ann Nazareth, leaves little doubt that protecting the investor is a rather low priority.

The primary issue apparently concerns Strategic Naked Short Selling. This is where a company (think Soros Hedge Fund here), sells a stock it doesn't own. Normally, in short-selling, the stock will have to eventually be purchased by the seller and supplied to the buyer. This aids in liquidity of the market. Easy enough. The control on the damage short selling could cause is the requirement to supply the actual stock at a later date and the "up-tick" rule (more later).

But the difference here is in the word "strategic" - that in some of the smaller cap stocks, the buyer never goes out and buys the stock. He just keeps shorting and shorting - forcing the companies price lower and lower. This in turn, makes it impossible for them to raise capital and eventually forces them into bankruptcy. Happily, for the seller,he is then clear of any responsibility to ever supply the stock to the unfortunate buyers. His profits from the sale of the stock is his to keep.

While not common on the NYSE or AMEX, the complaint's have come frequently, and with increasing frustration from the OTC market - where a lot of companies historically have started. The claim from many of these small cap companies is that the SEC and DTC (Depository Trust Company) not only overlook, but even contribute to this ruining of American companies by their tacit agreement or direct aid by not requiring delivery of the shares - in effect creating phantom shares not issued by the company. The DTC will credit a buyer's account with shares that were not actually procured in the market, they just tell the broker to reflect them in the account (simplified, but accurate.)

Now of course, Ms. Nazareth - who has been nominated for a Commission seat, and who ultimately is charged with overseeing these type of infractions, has denied that Strategic Naked Shorting exists. She's indicated it's just whiney shareholders who can't handle their liquor or something. Here's where it gets interesting.

The SEC recently, on the small cap companies, eliminated the "down-tick" rule. This has been an important safeguard to keep the price of the stock from being driven down by continuous short shelling. Simply, a short can't be executed unless the price just increased, if even only by a small amount. Now, the shorts can be continuiously executed and systematically force the price down. That's just wrong.

Next, the SEC has granted the DTC (and it's sister the NSCC) limited liability for "direct losses caused by the NSCC's gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action."
Protect Me!

Read that again. That's right.... The DTC/NSCC can't be sued for actual damages, by investors, if they willfully screwed the same investors over. The agency charged with protecting investors, has ruled that companies willfully violating U.S. Securities Law to the detriment of U.S. shareholders, are protected by statue. IF Nazareth is correct, and this type of intentional fraud - Strategic Short Selling - doesn't go on, then why does the DTC/NSCC need such protection??

But it gets even better. Guess who is one of the main "owners" of the DTC?? Would you believe our own Federal Reserve? Now, understand this - the Vice-Chairman of the Federal Reserve System is Rodger Ferguson. Guess who's married to Ferguson? It's simply beautiful. Let me give you a hint. Who's responsible for regulating the DTC? Bingo.

Ms. Ann Nazareth is also Mrs. Rodger Ferguson. Isn't somewhat akin to the fox watching the henhouse? Can a spouse legally have regulatory authority/oversight for the other spouse?? What a great country. Do you wonder what would happen to President Bush's Private Accounts and investing in general, if this kind of intentional fraud, perpetuated by the Regulators themselves, is revealed? I think the time's drawing near for such discovery. Several lawsuits have been filed, a Federal court has finally ordered the DTC to turn over it's actual records to a company (Eagletech: EATC) where two different shareholders each claim to own certificates for the Outstanding shares (should be impossible without some fraud occurring.) Why wouldn't the DTC release the company's records anyway?

There needs to be answers. Until then, can you name me one woman who doesn't need a position on the Commission??