March 27, 2007
The Commission's decision to re-open Reg SHO for comment, is rather shocking, and appears to be nothing more than a thinly veiled attempt to provide the industry another bite at the apple to register comments that were previously entered as an afterthought to the requested comment period.
Does the SEC have anything to say about the US Chamber of Commerce formally requesting Senate hearings into naked short selling? Any comments to that?
How about the hundreds of letters pointing out the inequity inherent in allowing options speculators to hedge their put positions by naked short selling equity securities - an exemption to common sense delivery requirements that only benefits options speculators at the considerable and direct expense of equity security investors? Are those the comment letters you wish to have made part of the record? The ones asking for an explanation of how allowing one market's speculators to prey on another market's investors, by being allowed to fail delivery in equity markets for the sole purpose of having windfall free hedging for their derivative transactions - are those the ones you wish to memorialize? I have long been curious what part of Section 36's allowance of exemptions, to the extent as necessary for the protection of investors, and for the public good, are consistent with empowering derivatives market makers to create from thin air shares of stock, that only the issuer is empowered to issue, and ignoring that limitation, sell the phantom shares as though real, to investors who receive no warning that the goods they bought were fake )as in lacking any of the parcel of rights of the genuine article).
How does that protect me, as an equity investor? I understand how it protects the interests of the larger banks and brokers engaged in that wholly separate derivatives market, but how does it protect me, an equities security investor, and the company I bought, from unknown levels of dilution whenever the MMs feel like turning on the printing presses?
And how does grandfathering help me? How does that exemption, which DID NOT RECEIVE ANY COMMENT PERIOD AS REQUIRED BY THE COMMISSION's OWN RULES, protect me as an investor? I understand exactly how it protects the miscreants who use it to enable them to generate millions of non-existent shares, fattening their coffers with the money collected for a product never delivered - but how does it protect me?
For that matter, isn't it true that the SEC has no authority to create these sorts of exemptions, which clearly can be shown to harm investors? That its supposed right to do so rests in everyone ignoring that it CAN'T create exemptions that aren't necessary for investor protection - meaning my protection, not the protection of the profitable trading for some billion dollar options trading house?
When the SEC allows a broker to place a "securities entitlement" into an investor account, representing it as a placeholder for a legitimate equity security, and then that security doesn't show up due to all these exemptions - and yet the broker continues to represent the securities entitlement to the client as being equivalent to a "real" share - when it is in fact wholly absent any of the rights - how does that safeguard my protection? How am I protected?
Isn't it in fact the case that the 1933 Act, in its definitions, describes precisely what constitutes a security, and then further describes what constitutes an issuer authorized to issue that security, as well as the registration process? And isn't it a fact, that by allowing securities entitlements to be traded in the market, exactly like bona-fide securities, that the SEC is empowering brokers to become issuers, and allowing them to issue a new class of security - the security entitlement unsupported by any genuine share, but presumably representing an intention to deliver a share at some unknown future point - and that this class of security is unregistered, and non-exempt from registration, and thus the brokers are issuing and trafficking in unregistered securities? A major violation of securities rules, and the law?
How can the SEC allow brokers to create this new type of derivative - an IOU for a share at some unknown time in the future (it having already failed the T+3 requirement) - when that derivative matches 100% of the 1933 Act's description of a "security" - but a different one than advertised, rather one created by the broker, who then fits 100% of the criteria by the 1933 Act for an "issuer?"
When did it become legal and advisable in the SEC's opinion for brokers to engage in the sale and issuance of unregistered securities, as defined by the 1933 Act, and by what right does the SEC ignore that breach of its predecessor rules and laws?
So here are my comments.
The SEC is allowing Wall Street to create and trade unregistered securities, in violation of the 1933 Act (not the 1934 Act), and pretending that it's no big deal. It routinely ignores that absent prompt settlement and delivery of a one for one stock share to support the electronically generated securities entitlement, that securities entitlement becomes a security by every test the 1933 Act affords us - an unregistered, non-exempt one, the issuance of which is a legal violation.
The SEC unlawfully railroaded grandfathering down the throat of the American public, who likely didn't know that in order for it to be lawful, it would have required the comment period it failed to be subjected to.
The SEC has been aware of this duplicitous sleight of hand since the grandfathering started. There could be no comment, because the only possible comment is that it was a godsend windfall for anyone larcenously or abusively naked short selling in the markets. So it just skipped that important formality.
It also knows full well that it is NOT empowered by Section 36 to authorize exemptions to delivery, where they violate basic premises of investor protection. Allowing any participant to take a buyer's earnest money, and then refuse to deliver the shares paid for, FOR WHATEVER REASON other than extremely temporary clerical error, is the antithesis of investor protection, and cannot be an acceptable use of that exemption. And yet the SEC does it anyway, because nobody seems willing to force the SEC to obey the rules and laws that created it, and dictate its behavior. So instead it passes sweetheart loopholes designed to allow Wall Street's participants to run roughshod over investors, and delays anything that could reform those loopholes for as long as humanly possible.
So far we are now being treated to ANOTHER comment period, after the last one closed six months ago. Why? Because the industry claims that some of its members are so grossly abusing the exemptions that they represent the majority of the problem in some issues?
And why, precisely, is it a good idea to let them continue to engage in behavior which bears not the slightest resemblance to bona-fide market making, but rather flagrant abuse of that ill conceived and unlawful exemption?
Why is this worthy of more comment? They've been doing it to us for YEARS now. YEARS. Money paid, no stock delivered. Simple.
That this comment period exists hints at an artifice to try to get the comments the industry couldn't bring itself to submit on time originally, this time, on the official record. The industry, so accustomed to failing to deliver - late, if at all - did that with the comments, too. And thus it's kind of hard to pass whatever watered down farce the commission is contemplating absent the ill-conceived arguments of those pulling the purse strings, so it is time to give them all another shot at it.
Does anyone believe we are fooled by this?
Does the absence of a Congressionally-appointed special prosecutor mean that you will get away with it, yet again, as there is nobody watching the watchers? When the US Chamber of Commerce demands hearings, and instead gets this laughable comment period request, is beyond troubling.
That we are still discussing whether fraud is wrong, or inadvisable, or damaging, should trouble every remaining investor in our capital markets. Per Reg SHO, the answer to being successful in American markets is simple: Take the investor money, refuse to deliver what was bought, pocket the money, and then dare anyone to do anything about it.
It's worked rather well for the last 8 years. Many companies have been run out of business, countless investors damaged or destroyed, a crisis of confidence apparent in the exodus of IPOs and dollars from our markets, and Wall Street is racking up bigger bonuses and more astounding wealth than at any point in its history.
That has certainly served investors well.
Why not another 8? We could spend most of a decade commenting on it.