Post by fastwalker on Jan 7, 2005 10:51:36 GMT -5
Thanks Bart.....
SHO and Short Covering - I just received the following and was told it was OK to post. I hope you find this interesting and add some comments.
Gene,
The following is a note of further clarification I just received from Bud Burrell. You could post it to the same BB.
---------------------------------------------------------------------
A note of further clarification:
Every Clearing Firm and Market-Maker/Broker-Dealer depends on the security blanket provided to them by their Director and Officer Liability Insurance Policy.
No matter what the SEC says, the contingent liability referred to below connected to prior short positions creates potential claims against these policies when these entities are sued for suborning market manipulation.
So who has the leverage over the Clearing Firms, Broker-Dealers, and Market-Makers here? The Insurance Companies providing D&O coverage to them, and I can assure you they could care less what the SEC says about "grandfathered" positions.
I expect Insurance Companies to create "exceptions to coverage" on this matter. In the interim, I expect the industry to begin to force settlement of ALL outstanding short positions, irrespective of any SEC position on this matter.
----------------------------
I have told others this, but a clear focus has to be put on what and how a Compliance Officer must think about open illegal short
positions "Grandfathered" by the SEC.
Irrespective of what anyone may say to them, a Clearing Firm/B-D Compliance Officer must look at the contingent liabilities
associated with the existence of the previously existing and now "Grandfathered" short positions not being made subject to the
locate/borrow/shorting rules in the Securities Acts. The very existence of these positions exposes the clearing firms and
broker-dealers to law suits pertaining to these positions, and the SEC would have no standing in such actions.
The decision to apply the Regulation SHO Rules to just reporting companies doesn't fly. There is no exemption in the Securities Act
of 1933 that says prohibitions against Sale of Unregistered Securities only apply to reporting companies, and not to ex-clearing,
non-reporting, and "other OTC" stocks.
Illegal Naked Short Selling as an act creates a Counterfeit Long position that is a security under the Acts. Period. The investor
on the long side has no idea whether or not the stock sold to him is or is not "Counterfeit", if there is no delivery.
Counterfeiting of a Commercial Security remains a Class B Federal Felony.
It is not rocket science to understand that if such a
criminal case is made for Felony Counterfeiting, the related civil claims could implode a clearing firm or broker dealer, on the claims of just one heavily shorted company.
If I were the compliance officer of a major clearing firm, Prime Broker, or Broker-Dealer, I would not rely on an arbitrary and capricious ruling of an agency whose integrity and competency is in dramatic question. That would simply be imprudent.
Rather, I would direct my brokers, traders, clients and others to get compliant across the board, or I would have their heads. Any clients, brokers or traders lost as a result of this action would be ones I wouldn't want any way.
Coming from a derivatives background, I had a non-trivial interface with the implications of Rule 10b5, commonly referred to as the Prudent Man Rule. Any compliance officer looks to this rule first as his guiding principle. I have found no one who can show me
how allowing "Grandfathering" of illegal acts is "prudent" under 10b5, period. Any company CEO/CFO who becomes aware of the existence of the Sale of Unregistered Securities is bound by that Rule to disclose it in his MD&A as a material event.
See how the SEC has treated such companies: They have delisted, harassed and otherwise intimidated anyone attempting to make this
disclosure in their filing reports.
I can see no prudent foundation that would allow any Compliance Officer to rely on the conduct of such SEC and NASD officials. I
would ignore the ruling on grandfathering, and clean up my clearing books on illegal open short positions, PERIOD. Failure to do so
will result in the absolute certainty that the firm will be named as a defendant in more suits against both them and the DTCC by victim investors in class actions, and by victim companies in direct actions.
Author's opinion (not Bart)...
The SEC and the NASD have chosen to align themselves with professional short sellers. They have chosen one class of criminal over another. Man who gets in bed with dogs, gets up with fleas. These fleas are big and they bite.
SHO and Short Covering - I just received the following and was told it was OK to post. I hope you find this interesting and add some comments.
Gene,
The following is a note of further clarification I just received from Bud Burrell. You could post it to the same BB.
---------------------------------------------------------------------
A note of further clarification:
Every Clearing Firm and Market-Maker/Broker-Dealer depends on the security blanket provided to them by their Director and Officer Liability Insurance Policy.
No matter what the SEC says, the contingent liability referred to below connected to prior short positions creates potential claims against these policies when these entities are sued for suborning market manipulation.
So who has the leverage over the Clearing Firms, Broker-Dealers, and Market-Makers here? The Insurance Companies providing D&O coverage to them, and I can assure you they could care less what the SEC says about "grandfathered" positions.
I expect Insurance Companies to create "exceptions to coverage" on this matter. In the interim, I expect the industry to begin to force settlement of ALL outstanding short positions, irrespective of any SEC position on this matter.
----------------------------
I have told others this, but a clear focus has to be put on what and how a Compliance Officer must think about open illegal short
positions "Grandfathered" by the SEC.
Irrespective of what anyone may say to them, a Clearing Firm/B-D Compliance Officer must look at the contingent liabilities
associated with the existence of the previously existing and now "Grandfathered" short positions not being made subject to the
locate/borrow/shorting rules in the Securities Acts. The very existence of these positions exposes the clearing firms and
broker-dealers to law suits pertaining to these positions, and the SEC would have no standing in such actions.
The decision to apply the Regulation SHO Rules to just reporting companies doesn't fly. There is no exemption in the Securities Act
of 1933 that says prohibitions against Sale of Unregistered Securities only apply to reporting companies, and not to ex-clearing,
non-reporting, and "other OTC" stocks.
Illegal Naked Short Selling as an act creates a Counterfeit Long position that is a security under the Acts. Period. The investor
on the long side has no idea whether or not the stock sold to him is or is not "Counterfeit", if there is no delivery.
Counterfeiting of a Commercial Security remains a Class B Federal Felony.
It is not rocket science to understand that if such a
criminal case is made for Felony Counterfeiting, the related civil claims could implode a clearing firm or broker dealer, on the claims of just one heavily shorted company.
If I were the compliance officer of a major clearing firm, Prime Broker, or Broker-Dealer, I would not rely on an arbitrary and capricious ruling of an agency whose integrity and competency is in dramatic question. That would simply be imprudent.
Rather, I would direct my brokers, traders, clients and others to get compliant across the board, or I would have their heads. Any clients, brokers or traders lost as a result of this action would be ones I wouldn't want any way.
Coming from a derivatives background, I had a non-trivial interface with the implications of Rule 10b5, commonly referred to as the Prudent Man Rule. Any compliance officer looks to this rule first as his guiding principle. I have found no one who can show me
how allowing "Grandfathering" of illegal acts is "prudent" under 10b5, period. Any company CEO/CFO who becomes aware of the existence of the Sale of Unregistered Securities is bound by that Rule to disclose it in his MD&A as a material event.
See how the SEC has treated such companies: They have delisted, harassed and otherwise intimidated anyone attempting to make this
disclosure in their filing reports.
I can see no prudent foundation that would allow any Compliance Officer to rely on the conduct of such SEC and NASD officials. I
would ignore the ruling on grandfathering, and clean up my clearing books on illegal open short positions, PERIOD. Failure to do so
will result in the absolute certainty that the firm will be named as a defendant in more suits against both them and the DTCC by victim investors in class actions, and by victim companies in direct actions.
Author's opinion (not Bart)...
The SEC and the NASD have chosen to align themselves with professional short sellers. They have chosen one class of criminal over another. Man who gets in bed with dogs, gets up with fleas. These fleas are big and they bite.
