Theory about current covering...

[fastwalker]

I'm not sure if this was posted? Dave over at PB#31, is a solid..stand up guy..so, having said that, I think it's worth a read..Thanks..dave (aka)$*CMKXTREME*$


Theory about current covering...

Sorry, it requires a lot of background reading, and it's a lot of work to review all of this just to come up with a possible theory surrounding current volume and m/m activity. Anyway, here goes:

Questions: How can so much volume be moving through CMKX without a proportionate effect on the pps? How can “covering” be taking place without any upward pressure on the pps?

Answer: First Review the following excerpts from NPCT’s lawsuit against the DTC

49. … the process of the Stock Borrow Program is as follows:

(a) On a daily basis, Members who wish to participate in the Stock Borrow Program inform NSCC of the number of shares of each security that are available to be borrowed in their general unpledged account at the Depository Trust. [This is the borrowing pool]

(b) Each morning, after the evening allocation cycle, the NSCC determines which short positions still remain open.

(c) If a short position remains open, the NSCC attempts to borrow securities from its Members to satisfy these open positions.

(d) The NSCC uses a formula to determine the order in which it will borrow securities from its Members and utilizes the full amount of shares available from one Member before borrowing from the next Member in sequence.

(e) When the shares are borrowed, the lending Member’s Depository Trust account is debited by the number of borrowed shares. The borrowed shares are then credited to the NSCC’s Depository Trust account and transferred to the buyer’s Depository Trust account. The buyer acquires all right, title and interest in the borrowed shares, including the right to vote, receive dividends and resell the shares, without encumbrance or any reservation of rights.

(f) The NSCC records the borrowing of the shares as a long position in a special CNS sub-account set up specifically for the lending Member’s stock borrow activity.

(g) The NSCC credits the lending Member’s regular CNS account with funds equivalent to the total current market value of the borrowed shares which the lending Member may invest to earn interest overnight.

(h) The NSCC also receives a fee from the Member who created the short position requiring the NSCC to borrow the shares through the Stock Borrow Program.


53. One of the effects of the Stock Borrow Program is to allow sellers to continue to fail to deliver because the NSCC can borrow shares from the Stock Borrow Program to cover the fail to deliver positions.

54. If the seller fails to deliver the sold shares on Settlement Day, a short position for that seller is created in the CNS System which is ultimately covered by the Stock Borrow Program…

55. …when a seller fails to deliver, the buyer notifies the NSCC that it intends to buy-in the seller’s fail to deliver position. However, instead of executing the buy-in by going into the market, the NSCC executes the buy-in by borrowing shares from lending Members of the Stock Borrow Program.

56. As a result, the Stock Borrow Program allows sellers to continue to fail to deliver because the Stock Borrow Program has effectively obviated the sellers’ obligation to deliver and the buyers’ right to buy-in through the market.

57. By borrowing shares through the Stock Borrow Program to cover fails to deliver, the Defendants have created tens of millions of unregistered illegal free trading shares of the issuer, artificially (1) increasing the supply of an issuer’s shares in the marketplace; (2) driving down the price of the stock of the issuer; (3) devaluing the shareholders’ holdings in an issuer’s stock; and (4) causing multiple owners who purchase shares in separate transactions to own the same shares.

{In the following example, it is best if you associate the “Lenders” with brokers and market makers [making their shares, held for street, avaible to the DTC for the Stock Borrow Program], AND associate the “Buyers” with brokers and market makers [purchasing shares on behalf of their street clients]. All Brokers and market makers are also “DTC/NSCC Participating Members”.}

58. For example, assume that on April 1, Issuer has 100,000 issued and outstanding shares. On April 1, Seller S sells 1,000 shares of Issuer’s stock to Buyer B. Seller S fails to deliver the 1,000 shares for settlement by April 4, which is Settlement Day. The NSCC then borrows 1,000 shares from Lender L through the Stock Borrow Program and delivers the 1,000 shares to Buyer B’s Depository Trust account on April 4. Buyer B’s Depository Trust account now reflects that Buyer B owns 1,000 shares. At the same time, since Lender L’s loan of 1000 shares to the NSCC is not reported or visible to the marketplace, Lender L’s NSCC account still reports that it owns the 1,000 shares that it lent to the NSCC. As a result, the marketplace now indicates that Issuer has 101,000 issued and outstanding shares, when in fact Issuer has NOT issued or authorized the additional 1,000 shares. These shares were artificially created by the NSCC when it borrowed 1,000 shares through the Stock Borrow Program and delivered them to Buyer B. Furthermore, two people now own the same 1,000 shares – Lender L and Buyer B.

more....

[fastwalker]

continued...

59. Since the 1,000 shares received by Buyer B in the paragraph 58 illustration is now held in Buyer B’s Depository Trust account, Buyer B can now lend the 1,000 shares to the NSCC through the Stock Borrow Program, thus, repeating the process and resulting in multiple shareholders owning the same shares. For example, assume that in a subsequent transaction on April 5, Seller S sells 750 shares of Issuer’s stock to Buyer C. Seller S fails to deliver the 750 shares on April 8, Settlement Day. Therefore, the NSCC borrows 750 shares from Buyer B through the Stock Borrow Program and delivers the shares to Buyer C’s Depository Trust account on April 8, which account now reflects that Buyer C owns 750 shares. In addition, since Buyer B’s loan of 750 shares to the NSCC is not reported or visible to the marketplace, Buyer B’s NSCC account still indicates that Buyer B owns the 750 shares which the NSCC borrowed for delivery to Buyer C. In sum, the marketplace now indicates that Issuer has 101,750 issued and outstanding shares, when in fact Issuer has NOT issued or authorized the additional 1,750 shares. These shares were artificially created by the NSCC when it borrowed 1,000 shares through the Stock Borrow Program for delivery to Buyer B and then borrowed 750 shares from Buyer B for delivery to Buyer C. Furthermore and most remarkably, three people now own the same 750 shares– Lender L, Buyer B and Buyer C.

60. This process of recycling borrowed shares amounts to stock-kiting in that the same borrowed shares can continuously be transferred from a buyer and loaned to the NSCC for delivery to the next buyer who then loans the same shares to the NSCC and so forth. Thus, the same shares can be recycled repeatedly through the Stock Borrow Program to satisfy multiple delivery requirements.

61. The Stock Borrow Program allows the borrowed shares to be recycled repeatedly, resulting in the number of borrowed shares exceeding the number of shares issued and authorized by the issuer. In addition, upon information and belief, the number of borrowed shares exceeds the total number of issuer’s shares actually on deposit at the Depository Trust. Thus, upon information and belief, the Depository Trust owns and holds a significantly fewer number of lendable shares than the NSCC has borrowed through the Stock Borrow Program.

177. Defendants have willfully and/or recklessly represented to Plaintiffs that the NSCC is borrowing shares from lending Members of the Stock Borrow Program to cover fail to deliver positions in the clearing and settlement process, when, in fact, the transfer of shares from lending Members to the NSCC to cover such fail to deliver positions is actually a “sale” of securities. This transaction is a sale because the NSCC delivers the borrowed shares to the buyer who acquires all right, title and interest in the shares, including the right to vote, receive dividends and resell the shares, without further encumbrance or any reservation of rights.

196. When shares are borrowed by the NSCC from a lending Member, the lending Member’s Depository Trust account reflects a debit of the number and value of the shares borrowed and a balance which is minus the borrowed shares. The borrowed shares are credited to a separate account that reflects all the shares loaned by the lending Member. However, because the Depository Trust records the borrowing by balancing the aforementioned two accounts, the lending Member’s total Depository Trust account is not reduced to exclude the number and value of the loaned shares. Therefore, when shares are borrowed, the lending Member’s Depository Trust account misleadingly reflects an amount and value of shares that are not actually held by the lending Member at the Depository Trust.

Theoretical Answer to the questions mentioned above:

The SEC is forcing a non-retail covering.

The covering is essentially a change in accounting for CMKX shares by anyone who is/was a lending member to the DTC for CMKX, who is/was reporting to have a long position of unpledged CMKX shares in their DTC trust account, and further was a lending member who was at the same time selling or brokering the sale of short shares of CMKX, and not settling those sales at the required T+3 (or ever).

The “covering” is taking place on all shares loaned out to the NSCC, by the DTC Member described above; specifically, those shares loaned out in order to cover a retail settlement failure within the DTC system, and retained on the DTC Member’s books as still being owned by the DTC Member. The SEC is requiring that these shares be re-accounted for as sales, rather than loans, and be removed from both the books of the DTC Member Lenders.

Because the share loans (which were done blind to the market) are now sales, these transactions must be accounted for in the market and through the tickers.

Simply put, say JEFF for example was responsible for both facilitating sales of CMKX which never settled, and was receiving back buy-in shares from their own purchases which went unsettled, all while reporting a long position of unpledged CMKX shares into the DTC trust – showing them as available to be borrowed.

The main effects of this covering:

1) It drastically reduces the number of naked short shares in CMKX. In the example (see 58 – 59 above), the short-seller sold 1,000 naked shares into the market (and failed on it’s settlement) but 2,000 shares ended up being legally owned (1,000 by the buyer and 1,000 by the DTC lender). With the accounting change, in this example, there is now only the short-sellers initial settlement failure which remains open, and the buyer becomes the sole owner of the 1,000 shares.

2) As DTC Member Lenders re-account their “loans to the DTC” as sales, it reduces, and likely completely eliminates, their “long positions” in CMKX, which would also significantly reduce, if not completely eliminate, the DTC’s “borrowing pool” for CMKX

When this “phase” of covering is complete, there should be one settlement failure for every fake share held in the retail market.

IMO



8-)source: PB#31

[fastwalker]

;D a COMMENT which floats....

Once all of the re-accounting of the loans (nss) as sales
from one mm to another mm or more than likely in cmkx case multiple mm's, the market for cmkx should have one settlement failure for every fake share (nss). After this process is complete and the books are in order, a cover buy up on the open market should take place.

In Jeff's case as stated below
this is willfully and/or recklessly borrowing shares with incorrect reporting.
How does the SEC force JEFF to cover?
JEFF was responsible for both facilitating sales of CMKX which never settled, and was receiving back buy-in shares from their own purchases which went unsettled, all while reporting a long position of unpledged CMKX shares into the DTC trust – showing them as available to be borrowed.

So in effect there is no RG bear trap only great CPA
sharpness and the ability of making sure the accountibility of the MM's are acurately taking place.

This was a great post no BS just a good understanding of how this screwy system works. How does the SEC force JEFF to cover?