October 3, 2018
"September 26,2018:Roundtable on Combating Retail Investor Fraud"
Cool story Jay.
One of your first observations as Chair: "Shock at the widespread fraud in the ICO and micro cap space"
So, what has changed since those comments that warrant a "Round Table" conclusion to Retail Investors that "All is clear" in the OTC/Microcap space?
With a straight face, you and your colleagues have been telling "Main Street" investors that the SEC is on the case and the "water is fine"
In the case of Bitcoin, the SEC punted on regulating as a security which opened wide the door to continued "widespread fraud". The SEC had settled precedent to regulate Bitcoin as a security where Howey was successfully applied: SEC v SG Ltd.
Despite the overwhelming evidence of ICO/Bitcoin money laundering when the SEC punted on regulating Bitcoin as a security, The SEC appears to have received its marching orders from Ms Peirce former employer Mercatus and Paul Atkins.
Despite empirical evidence that Bitcoin "is an index for money laundering" (Larry Fink)
The similarities to the OTC Equity market is glaring. In fact, the OTC equity (shell) market exists for 1 very simple reason:
Abusive naked shorting trading profits to facilitate money laundering. Jay, you especially are aware of this simple fact as your colleague at Sull Crom Jared Fishman is up to his eyeballs in the fraud.
The grossly corrupt SEC is in fact ACTIVELY facilitating this criminal activity. Just a few examples:
WHY did the SEC authorize the DTC to create a non guaranteed, shadow clearing mechanism: The Obligation Warehouse (OW)?
Why doesn't the SEC disclose fails data in the OW when they know exactly the level of fails? Giving the investing public aka Main Street the grossly false impression that there is no abusive naked shorting?
Let's talk specifics. Knight/KCG/Virtu is a known criminal enterprise that has been bailed out by the SEC repeatedly so that the activity can continue. Knight was insolvent in August 2012. Knight/KCG was insolvent in July 2017 when Virtu acquired it. Knight/KCG/VIRT (NITE) is insolvent in October 2018.ALL as a result of the abusive naked shorting effects on its balance sheet. HOW can this be? Because the grossly corrupt SEC has done absolutely nothing to enforce Rule 204 close out requirements (not suggestions) written in Reg Sho. In fact, the SEC does little to enforce Reg Sho in general. In June 2017, FINRA (not the SEC) brought a complaint against VIRT just 1 month before the VIRT/NITE merger closed.The complaint: VIRT "mis marked" 1.6 MILLION short sales as long. By definition: each example a Reg Sho violation. No locate. No Borrow. There was no mention of Reg Sho in the complaint. The Deterrent: pennies per violation.
In June 2017, again weeks prior to the VIRT/NITE merger closing, the grossly corrupt SEC allowed the VIRT CEO Cifu (aka Mr Transparency) to not "publish" KCG 2Q 2017 financials. Most definitely material information for Main Street investors in determining whether or not to invest in the combined company.
In allowing VIRT not to "publish" KCG 2Q 2017 financials, the grossly corrupt SEC facilitated Cifu/Coleman moving $4 billion+ in fails off the KCG balance sheet.
Now, Cromwell Coulson and Cifu are advocating for weaker Reg Sho (Rule 204 specifically) rules. Coulson seems to be echoing Cifu's claims that weaker Reg Sho rules will lead to "more liquidity". What empirical evidence does either Coulson or Cifu offer to support this claim? NONE. Coulson has the share volumes but does not disclose. Let me refute the baseless claims of Coulson and Cifu.
On the NITE/VIRT 2Q2018 earnings conference call, in a SEC reviewed slide presentation (slide 12 specifically) Cifu disclosed that NITE traded more than 11 billion shares per day of Coulson's OTC/pink sheet shells. There were 251 trading days in 2017. NITE/VIRT traded more than 2.7 TRILLION shares of OTC shells in 2017.These share volumes represent 90%+ of NITE/VIRT total equity market making share volumes. NITE is the top OTC shell trader. A close second is the multi billion dollar hedge fund run by 1 of the smartest guys in the room: Ken Griffin/CDEL.Combined, NITE and CDEL represent roughly 50% of the OTC equity share volumes. Mr's Coulson and Cifu:Where is the "liquidity" problem?
Further, NITE/VIRT top 25 traded OTC shells in July 2018 COMBINED price was .21075. AND, 1 of their top 25 OTC shells in the calculation did an SEC/FINRA approved 1:1000 reverse split on 7/18/18 and traded at .19 in July 2018
The rest of the top 25 and ALL of the NITE top traded OTC shells traded at trip zeroes in July 2018
So, Mr's Coulson and Cifu: How exactly do OTC shells trade to "trip zeroes" on billions of shares of volume? More buyers than sellers? Abusive naked shorting by NITE,CDEL and others is doing nothing to provide bona fide market making. Are NITE,CDEL sitting on the bid as "vital sources of liquidity" as these shells trade to trip zeroes on billions of shares? The NITE trading revenue certainly doesn't reflect bona fide market making. In fact, on the NITE/VIRT 2Q 2018 cc, Goldman Sachs analyst Alex Blostein was "shocked" by the leverage of these share volumes on the NITE/VIRT business model.
In addition, the glaring AML red flags associated with these OTC shells is profound. I can say with confidence that NITE/VIRT doesn't file any SAR's. How can I say that? When would they file a SAR: BEFORE or AFTER trading billions of shares? They never pull a market because they have open naked short positions. As registered BD's acting as market maker, NITE,CDEL can not outsource its compliance function to 3rd parties. NONE of this activity takes place without a willing BD/MM willing to convert certs to cash.
Also,WHY has the SEC outsourced the ENTIRE OTC equity market to the BD SRO FINRA? Including issuer corporate actions like reverse splits that perpetuate the fraud and money laundering?
Jay, you and your colleagues at the SEC are anything BUT "shocked" by the "widespread fraud taking place in the ICO and microcap space"
I have been telling the SEC about the criminal enterprise Knight/KCG/VIRT since 2011. In 2018, absolutely nothing has changed. The SEC is grossly negligent in executing its mandate to protect the investing public. You know Jay, those Main Street investors you're lying through your teeth at these Investor Roundtables.
If the SEC was truly interested in "preventing fraud in the microcap space" They should have shut down the OTC equity market and criminal enterprises like Knight/KCG/VIRT a LONG time ago.
Cheers
Christopher J Diiorio
[phone number redacted]