Subject: File No. S7-08-08
From: Anthony Kalantzis

June 4, 2008


The modern history of counterfeiting of commercial securities began over 80 years ago. It started with the wholesale traditional counterfeiting of stock certificates to support the short selling activities of more than 500 pools comprised of the assets of the wealthiest individuals in this country at the time, over a 3 year period leading to the October,1929 Raid-related Crash.
The refinement of the earliest photo lithography made it possible to produce reasonably high quality counterfeit stock certificates duplicating the real ones.These certificatescould then be loaned to short sellers to create a required "borrow" to secure the margined short, especially useful when stocks were tightly held. The manual back offices of the brokerage firms never knew the difference, and they never saw what hit their companies until it was too late.
These unregistered counterfeit securities sold abovewere never registered by the true underlying company. They were never entered into the stock record book of the corporation, nor were any proceeds ever given to the underlying Company, nor were they ever accounted for in anyaudit process or financial reports of the Company. The frauds/criminals here knew they would force de-registration or bankruptcy of the targets, and subsequent loss of the books and records of the companies they broke. There was no Federal Record Keeping requirement back then.
In most cases, if not all, the people doing the counterfeiting were directly linked to the very same Pools (we call their modern analog Hedge Funds) referred to above, most of whom coordinated their efforts to act in concert at the direction of what might today be called in Chinese organized crime a "Snakehead". The largest short of the Crash was to become the first head of the SEC, Joe Kennedy Sr. He would accumulate a personal cash net worth of over $500 Million in 1933.
This counterfeiting practice was so widespread it was one of the earliest to acquire a name for its practitioners, PAPER HANGERS. The counterfeit securities also were named: They were called WATERED STOCK.
President Roosevelt chose Joe Sr. as the head of the SEC, only to face a firestorm of criticism.This was a tough period for FDR, asit was well known and believed that Kennedy and his key associates (Bernard Baruch was rumored to be the other key) had actually manipulated the 1929 Crash and subsequent bank failure in 1933 to their own profit.
FDR responded to the criticisms of his selection of Joe Sr. with the statement "I needed one of their own kind, who understood their criminal methods, to have any hope of controlling them." Controlling them was a pipe dream. They ran the same identical scam again in 1937, another Raid, with similar results.
Joe Sr. created an SEC that was little more than an enforcement and extortion racket he used to protect his friends, to attack his enemies and economic targets, and to further fill his pockets. The legendary investment banker and trader Charlie Allenwould later saythat Joe Sr. started the SEC to make sure no one else could ever have real money again.
Basic organizational theory dictates that the original culture of an institution can never be completely stamped out, and it further predicts that that culture will always re-surface, even if it is decades later. Remember this.
Laws were created to control the sale of unregistered securities, to prohibit the counterfeiting of commercial securities, and to federally criminalize as conspiracy any act done in concert to manipulate financial assets of the United States. I refer you all to Sections 5 and 6 of the Securities Act of 1933, to USC Title 18, Sections 513 and 514, and finally, to CJS Sections 22, 22A and 46, the latter being the supporting law behind the Sherman Anti-Trust Act, the Holding Company Act, the Investment Company Act of 1940, and more recently, the RICO statutes.
Sections 5 and 6 made such causes the basis for civil and limited criminal complaints for enforcement penalties, while Title 18 was used to attack the counterfeiting of commercial securities by making it a Class B Federal Felony, and finally, the CJS sections caused such conspiracy conduct between two or more parties to be judged as Insurrection and Sedition, a form of Treason.
During the 16 years I was on the street, I never worked in a firm that would begin to allow any form of unregistered security to be sold. Only two firms allowed the creation of synthetic securities from registered securities assemblages, specifically for Down and Outs, a form of synthetic put made up of a short of the stock, and the short of the call, a variant of the old Reverse Conversion arbitrage from options.
One firm would do it for client hedge funds, while the other firm told its clients it didn't do them, so their clients would not compete with their house trading accounts activities in this space. In 1979, I was offered job working on this very account at the second firm, an A list bulge bracket underwriter. I passed.
There were many professional short sellers throughout my time on the street, who tried to manipulate their target companies just as today. They operatedat first without many of the tools and opportunitiescreated by the ERISA Act of 1974, and the letter ruling of 1993 which dropped the word "Borrow" from the short seller's lexicon, and substituted word "Locate". This same letter ruling created exemptions from even this rule for three kinds of traders: Market Makers, Arbitrageurs, and Hedged Accounts (read funds).
During the Oil and Gas boom of the late 1970's and 1980's, one short seller in Texas in particular cut such a swath through the Oil Patch it was rumored someone finally put a high caliber bullet through the window of his Rolls Royce. This same dirt sandwich would call up a friend of mine who was a NASD Senior Supervisor and scream at him, saying "Yougot to stop this insider buying"This bozowas INSANE, a stone sociopath. This is but one small example of the mentality of this type.
As the market makers realized what they had been given, they levied an economic assault matching the coordinated attacks the equal of any in the history of modern warfare. They determined how to drag the clearing business in by giving them a piece of the action on their shorting, and invented numerous ways to use offshore brokers and jurisdictions to leverage their power.
This was doneso dramatically, that for a 7 to10year period, it would be said that 80% of NASD member firm profits came from shorting, particularly the development stage small public companies of the OTC Bulletin Board, nearly annihilated in six years. By the end of that period, they were attacking any company with an alpha, or "excess return". This included stocks onthe NASDAQ NMS, the AMEX (leading to its ultimate acquisition), and even the NYSE. Acting on concert in large syndicates (remember the word "Conspiracy" above?), NO company could stand up to them in any attempt to maintain orderly markets.
In 2002, one of the largest of these syndicates' (650 members including many large hedge funds) operator, one Amir Anthony Elgindy, was arrested in connection with investigation into his activities surrounding terrorism, subornation of FBI agents,and money laundering issues.He was later convicted of securities fraud and more, and was sentenced to 11 Years in Federal Prison, from where he continues to run his web site.
It is believed his syndicate killed well over 2000 target companies. His conduct was the direct link of shorting as a tactical approach to the strategic objective of money laundering for organized crime and other nasty global entities.
Experts at first talked much about naked short selling, not focusing on its real character, which was from the imputed contra account effect. Every time a share was naked shorted, a counterfeit long was created never registered by, known to, or accounted for by the underlying company. This should start to sound familiar. Some interesting twists in FASB also entered into their tactical equation.
If the short sellers could bankrupt a target company, they could avoid a revenue recognition event under GAAP. No revenue recognition event, no taxable event. Ergo, they pursued their targets with "unbridled aggression", always hoping for either an involuntary deregistration of the Company, or its actual bankruptcy.
In another twist of the SEC rules, if a company did either, the shorts never had to cover, not ever. Again, they had laundered money without tax consequence. I have explained this to every one I have worked with and talked to, and universally, it leaves them stunned.
The SEC came under so much pressure to clean up this disgrace, that finally, they issued a piece of window dressing rule making called Regulation SHO. After doing it, they realized the market could not clean up its past without wiping the operators out, so they initiated a "Grandfathering" proviso, saying that shorts existing prior to SHO would be exempted from immediate settlement, the latter which was highly cushioned.
Then came another wave of indignation from investors, and the SEC had to switch its position from there being no such thing, to it not having any effect on markets, to now, that it is really negative for the market, and adversely affects capital formation. They have said so many things about so many positions, that they have now said everything and taken every position so well that they can refer back to being right, and having acted prudently, no matter what happens.
In the late 1990's and early 2000s, market makers at broker-dealers had a 10 day fail rule, which mandated a charge to their net capital for any fail over 10 days. They would roll their positions within the system by kiting trades known by several names, including whip calls, and rolls. Reg SHO changed that effectively to 13 days. Re-enter rolls/whip calls, but now, not put through the clearing system, but rather done directly broker to broker in what is called Ex-Clearing.

Shorts and their related counterfeit longs would sit in Ex-clearing, invisible and unreported anywhere. Taking things a step further, the short players would take to intentionally miss-marking tickets to reflect short sales as actually "Long Sales" when they weren't, and no one was the wiser. Well, not exactly no one.
Everyone needs to realize that calling naked shorting anything other than counterfeiting, albeit by virtual electronic journal entries rather than a printing process, is simply WRONG. It is the intent of the perpetrators to delude the longs into thinking that they have bought real shares from a real seller, when in fact, the longs only know this when they themselves are dirty, such as when a manipulator wants the counterfeit proxies attached to the counterfeit longs to manipulate actions at a target company.
One well known company would call for a Proxy vote at their annual board meeting. They had a legally outstanding number of shares according to their stock record book of 60 Million shares. How many proxies showed up? 80 MILLION. I am shocked, SHOCKED, that such a thing could happen in America. Counterfeit proxies are the most serious corporate governance issue coming out of this scandal, a concern to every major corporate counsel in this country and overseas.
This is the longest piece I have ever posted. It re-covers many points in my previous writings. The SEC recently declared that the naked shorting selling of securities was NOT the sale of an unregistered security, in a completely illogical and self serving regulatory statement designed to feed key vested interests with their hands in the guts of the SEC.
Illegal naked short selling is MOST CERTAINLY not only the sale of an unregistered security it is by intent and practical impact the COUNTERFEITING OF COMMERCIAL SECURITIES BY SYNDICATES. What the SEC says as a bureaucracy is meaningless to true honesty. It is very interesting that in making this declaration, the SEC specifically did NOT exempt such players from insider trading rules, particularly where they had previous knowledge of a pending PIPE deal.
After a scathing set of Euromoney articles in April and June, 2005, the UK and EU went to a mandatory three (3) day settlement on all their exchanges, effectively stopping their shorting scandals mirroring those here. They gave no grace period. It was hard, but their markets are now much cleaner than here. It is no accident that London has now trumped New York as the leading IPO environment.
I could hang unending detail on this scurrilous story, but this enough for now. This needed to be said in one piece in one place, and here is an attempt at it.