Stockgate - Naked Shorting Scandal

» Kirk - BIG story gaining traction

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I think the big story is naked shorting which is basically counterfeiting shares.

I have one stock that has been on the Reg SHO list for a long time with I think 33% unaccounted for shares short. I won't mention its name in case I am wrong and I don't want to get in trouble for pumping, etc....

But CNBC just had the CEO of overstock.com on vs. a swarmy hedge fund manager who would admit he was short the shares... but had no answer for why there were more shares short than delivered.

He ALSO said it was quite common for hedge fund managers to talk to reporters and there was no conspiracy behind hedge fund managers manipulating stocks through the press... Bellshhheeet is my reply.

I sent a note to Ron Insana, the CNBC reporter doing the interview, and wrote that a CEO can not talk to reporters and NOT disclose what was said unless he wants to visit jail due to Reg FD. These hedge fund players often control more stock than insiders in companies... so why should they not be subject to the same Reg FD rules? How they act, long or short, is material to a stock's price so it should be disclosed!

-- posted by Kirk

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» Kirk - Re: BIG story gaining traction

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In response to BIG story gaining traction posted by Kirk:

This story is gaining even more traction now that TheStreet.Com's Senior Writer is covering it.

Here is another good story.
Naked Before Byrne
By Kevin Kelleher
TheStreet.com Senior Writer
8/18/2005 9:42 AM EDT
URL: http://www.thestreet.com/tech/kevinkelle...

Naked shorts. There's something about those two words that begs for sensational coverage. But the scarcity of hard data on the illicit trading tactic so far has only polarized the debate on how serious a problem it has become.

Since TheStreet.com ran a story questioning whether a new law aimed at curbing naked short-selling was being enforced, the topic has become something of a media phenomenon. Not really because of TheStreet.com, but because of Overstock.com (OSTK:Nasdaq) CEO Patrick Byrne, who is like watching Lost -- always entertaining if sometimes a little hard to follow.

In what will surely go down as one of the least orthodox investor calls ever, Byrne set out to explain a lawsuit his company filed against Rocker Partners, a high-profile hedge fund.

Along the way, he described what he called a "Miscreants Ball," where hedge funds like Rocker waltzed with regulators, research firms and journalists at Barron's, The Wall Street Journal and, yes, TheStreet.com. Byrne also made shoutouts to fictional characters like Lord Sith as well as Wayne and Garth. If you're weary from chewing over dry SEC filings, this transcript is a real palate cleanser.

The issue got a further hearing Wednesday on CNBC when Byrne appeared opposite hedge fund manager Jeff Matthews, who was highly critical of Byrne but denied being part of any cabal against Overstock.

(Rocker Partners owns about an 8% stake in TheStreet.com (TSCM:Nasdaq) , and the site's star columnist, Jim Cramer, as well as two former writers, were named by Byrne as guests at the Miscreants Ball. Rocker Partners said today that it plans to countersue Overstock, alleging that Byrne's recent media appearances hurt the firm's reputation.)

Byrne's call pushed the topic of naked short-selling into heavy rotation at CNBC and gave it a wider airing. In so doing, it revived the question of how serious of a threat naked short-selling really is. Some, especially those working at hedge funds, say it's a straw man -- that most of the positions created by failed deliveries are related to options trading and not a concerted effort to drive stocks down.

That may be the case. But without better data on stocks that failed to deliver, the rest of us will never know for sure. Meanwhile, what little data are available suggest that naked shorting may indeed be out of control and that a much-ballyhooed trading rule known as Regulation SHO has so far done little to rein it in.

First, a little background. Shorting stocks, or selling shares you borrowed from another shareholder, isn't illegal. Abusive shorting, done to manipulate a stock price, is. And selling the stock of a badly managed company to a less-thoughtful investor is fair -- if brutal -- game in a market where stupidity is a sin. Over the past two decades, shorting has gone from a controversial strategy to an accepted practice that, nearly everyone agrees, weeds weak and fraudulent companies from the field.

More recently, the controversy has moved to naked short-selling. Naked shorting is in essence make-believe short-selling. In the same way kids play doctor without the medical equipment, naked shorters sell unborrowed stocks -- stocks that no one has borrowed and possibly never will. The SEC allows naked shorting in two cases: to maintain liquidity in hard-to-find shares and for anyone who shorted unborrowed shares before 2005. That second exemption has generated its own share of controversy.

As is often the case, stock newsletters were among the first to suspect a problem. [ Kirk's Editor Comment: We're good for something besides making money for our readers! ] The straw-man theory argues that critics of naked shorting are burned investors or corrupt executives who blame hedge funds the way failed businessmen blame the government for their own failures. But in recent months, newsletters like CrossCurrents and Biotech Monthly have sounded alarms on naked shorting.

"I'm quite confident that this is a much larger issue than anyone cares to consider," says CrossCurrents editor Alan Newman. It's hard to find bears any harder-core than Newman, who in February 2000 put a then-unthinkable 3000 target on Nasdaq and who today expects the Dow to sink to 8500. When the uber-bears are worried about the adverse impact of shorting, it's time to start worrying.

Newman explains naked short-selling in eye-opening clarity. Selling unborrowed shares means the buyer doesn't get delivery of the shares he bought. "There are now two actual owners of the same shares. The exact same shares now show up long in both accounts," Newman says. "Every 100 shares of a naked short is a duplication of real shares, just as if the shares had been photocopied and distributed."

So how extensive is the naked shorting? According to Larry Thompson, the First Deputy General Counsel at the Depository Trust and Clearing Corporation, a central clearinghouse for trade settlement, about 1.5% of the dollar volume of stocks traded each day fail to deliver. In a Q&A published this March on the DTCC site, "fails to deliver and receive amount to about $6 billion daily ... including both new fails and aged fails."

Overall, 1.5% of volume may not be much of an impact. But judging from the way some stocks spend weeks and months on the threshold list of shares that face persistent delivery failures, the naked shorting is concentrated in illiquid shares known to be hedge fund targets. The bulk are traded over the counter, but some are well known, such as Netflix (NFLX:Nasdaq) , Netease (NTES:Nasdaq) , Shanda Interactive (SNDA:Nasdaq) and Taser International (TASR:Nasdaq) .

Perhaps the most telling data came from a simple Freedom of Information Act filed by an individual investor who asked the SEC for aggregate data on failed deliveries on the NYSE and Nasdaq. Before Regulation SHO was passed in September 2004, an average of about 155 million shares a day failed to deliver on the two exchanges, excluding OTC and Pink Sheet stocks, the data showed.

After Regulation SHO was passed, the delivery failures rose, averaging 205 million shares a day in December and rising as high as 259 million on Dec. 22 alone. Since the law went into effect on Jan. 3, the delivery failures have declined, but are still only about 20% below their levels of last summer.

The SEC, wanting to avoid short-squeezes in dozens of stocks caused by the closing out of naked short positions, opted to "grandfather in" any failed deliveries before Jan. 3. But that opened the door to another problem: In the four months between the date Regulation SHO went into effect and the date it took effect, the grandfather provision gave anyone who was so inclined a generous period of time to build up naked short positions in any stock he liked.

Or, to use the counterfeit analogy, imagine outlawing the printing of funny money, but giving everyone four months to print up as much as they'd like. Only then would counterfeit dollars be illegal -- but only to print, not to use.

And it wasn't as if regulators weren't expecting this. The NASD, in a 2004 proposal to tighten rules on naked short-selling, wrote, "Naked short-selling ... can result in long-term failures to deliver, including aggregate failures to deliver that exceed the total float of a security. NASD believes that such extended failures to deliver can have a negative effect on the market."

"Among other things, by not having to deliver securities, naked short-sellers can take on larger short positions than would otherwise be permissible, which can facilitate manipulative activity," the proposal read. "Further, significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends."

So the hedge funds may be right in that many of the companies suffering from short-selling are badly run or on the path to insolvency anyway. And it may be that none of them are engaging in naked shorting in the era of Regulation SHO.

But if they are, it raises a serious question: Isn't there a better way to pursue their noble ends?

-- posted by Kirk

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» Kirk - SEC Looking at Hedge Funds in Stock Placements

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As an investor in the PIPE, regulators say, Shane had advance knowledge that the private placement would price Compudyne's shares at a significant discount to the going market price. And relying on that inside information, the regulators say, she made improper short bets against the company's stock. They also allege Shane used some of the discounted shares she obtained in the PIPE to close out her short positions.

[ Kirk's Editor Comment: The idea of private placement below the current asking price is supposed to be a way for a company to issue a boatload more shares and not tank the stock price. They try to find long term investors who won’t sell the shares for six months or more and who want to get the shares at a lower price than would be possible if they were to try and buy a large block on the open market. IF the underwriters find investors rather than shorters to buy the shares, then it is a good thing for the companies. The trouble is the hedge funds can buy these shares then go short an equal number of shares at the higher current market price. They can do this before the public is aware of all the details. Where it runs afoul of the law today is when they have to counterfeit shares to go short.

Personally, I think it should be illegal to short a stock when you hold private placement shares and/or warrants to buy shares at a lower price. This would get the hedge funds out of the business and make private placement of equity just for true investors, not manipulators. FWIW, I’ve seen some companies use “toxic financing” to raise money to keep paying themselves a salary knowing full well their shareholders would be screwed. The insiders figure they can issue themselves stock options at the lower price and clean up on those if they can turn the company around. The SEC really needs to clean this whole thing up. ]

SEC Looking at Hedge Funds in Stock Placements

By Matthew Goldstein
Senior Writer
10/6/2005 7:44 AM EDT
URL: http://www.thestreet.com/markets/matthew...

A long-running investigation into allegations of manipulative trading in the market for private stock placements by small companies is about to heat up.

The Securities and Exchange Commission is close to bringing enforcement actions against at least two hedge funds that have been active players in the $14 billion-a-year market for PIPEs, or private investments in public equity, people familiar with the inquiry say.

Within the past few months, the SEC formally notified one of the hedge funds that it is facing potential regulatory action by sending it a so-called Wells Notice. The other hedge fund has yet to receive a Wells Notice, but regulators are close to taking that next step, sources say.

The identities of the hedge funds could not be confirmed. But the looming regulatory actions would be the first taken by the SEC against any hedge fund in the nearly 2-year-old inquiry into PIPEs, financing transactions that are often used by cash-strapped companies.

The probe is focusing on allegations of stock manipulation by hedge funds, which tend to be the biggest investors in these shadowy stock sales, and allegations of wrongdoing by the Wall Street firms that round up buyers. PIPEs are popular with hedge funds because the buyers usually get to buy shares at a steep discount to the current market price.

Critics contend the ability of a hedge fund to purchase discounted stock makes the PIPEs market ripe for abuse by disreputable short-sellers, traders who place market bets that a stock will decline in price.

Some 18 months ago, the SEC, in conjunction with the NASD, began a broad inquiry into the PIPEs market. Regulators issued subpoenas and requests for documents to 20 brokerages that have arranged the majority of PIPE deals. The SEC issued subpoenas to about 10 hedge funds, several of which are big PIPE investors.

An attorney who represents several hedge funds contacted by regulators says the SEC is "looking at bringing a series of enforcement actions involving big PIPEs players." The attorney, who didn't want to be identified, says none of his hedge fund clients has received a Wells Notice from the SEC.

A regulatory source who also did not want to be identified says the "SEC is very interested in this area." The source said he "expects some more cases" in the near future.

One notable hedge fund that has drawn scrutiny from regulators over the past several months is HBK Investments, a big $7 billion Dallas-based hedge fund, sources say. The multistrategy fund is perennially one of the biggest investors in PIPEs. During the first six months of this year, HBK sank $53 million into six different transactions.

One particular PIPE deal involving HBK that regulators have looked into is a $3.4 million financing transaction for Plano, Texas outsourcing firm PFSweb (PFSW:Nasdaq) , say people familiar with the deal. HBK was the largest investor in the 2003 financing.

Jon Mosle, HBK's general counsel, declined to comment, noting the hedge fund has a policy of not talking to the press. PFSweb CFO Thomas Madden also declined to comment.

To date, most of what is publicly known about the investigation has revolved around a 4-year-old PIPE deal for Compudyne (CDCY:Nasdaq) , a small security services firm.

In May, the SEC and the NASD reached a $1.45 million settlement with former hedge fund manager Hilary Shane, charging her with fraud and insider trading. They charged Shane with illegally profiting from a series of short trades she made in Compudyne's stock.

As an investor in the PIPE, regulators say, Shane had advance knowledge that the private placement would price Compudyne's shares at a significant discount to the going market price. And relying on that inside information, the regulators say, she made improper short bets against the company's stock. They also allege Shane used some of the discounted shares she obtained in the PIPE to close out her short positions.

The investigation into the Compudyne transaction also led regulators to pursue a potential enforcement action against Friedman Billings Ramsey (FBR:NYSE) , the investment bank that lined up hedge funds to invest in the PIPE deal. For the past six months, regulators have been involved in settlement negotiations with Friedman Billings and three former executives, including Emanuel Friedman, the firm's co-founder and former co-CEO.

Friedman resigned as CEO in April, just one day before the SEC and NASD formally notified him that he could be charged with "aiding and abetting" insider trading in the Compudyne deal.

Friedman Billings, however, isn't the only Wall Street firm to get ensnared in the PIPEs investigation.

This summer, Knight Capital (NITE:Nasdaq) disclosed that its Deephaven asset management group could face potential regulatory action over its trading in a series of PIPE deals from June 1999 through March 2004. Refco (RFX:NYSE) , meanwhile, has set aside $5 million to cover the cost of settling allegations that some of its brokers acted improperly in arranging trades for an investor in a PIPE transaction.

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About time the SEC takes action. Too bad it is too late for many companies.

-- posted by Kirk

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» Normxxx - Whatever Happened to Integrity?

Refco Faces SEC Charges in Short-Selling Probe

By Matthew Goldstein | 17 May 2005

A wide-ranging investigation into stock manipulation in the private-placement market has tripped up Refco, a brokerage that last month filed plans for an initial public offering.

The New York firm disclosed late Monday that the Securities and Exchange Commission is considering filing civil charges against it over short sales in shares of Sedona, a tiny Pennsylvania software company.

The looming action against Refco stems from a 2003 SEC enforcement action against Rhino Advisors, a defunct investment firm that regulators charged with manipulating shares of Sedona following a $3 million private stock placement in 2001.

Regulators charged that Rhino illegally shorted the stock on behalf of one of its clients, Swiss-based Amro International, which had purchased a $3 million convertible note from Sedona in a deal negotiated by Rhino. Federal prosecutors in New York subsequently charged the principals of Rhino, Thomas Badian and Andreas Badian, with conspiracy to commit securities fraud.

The federal investigation of Rhino Advisors was one of the first enforcement actions involving PIPEs, short for private investment in public equity. The illegal shorting uncovered by the SEC in the Rhino case led regulators and prosecutors to launch a broad investigation into allegations of stock manipulation and insider trading by the placement agents and hedge funds in the $14-billion-a-year PIPEs market.

To date, the broad-based inquiry has led to the criminal conviction of a former SG Cowen managing director on insider trading charges and potential civil charges against investment firm Friedman Billings Ramsey (FBR:NYSE - news - research) and a former First New York Securities hedge fund manager.

Refco, which filed for a $575 million IPO last month, disclosed in the offering document that the SEC has been investigating its involvement with Sedona since June 2001. In October 2003, the brokerage received subpoenas from the U.S. attorney in New York. But the firm, which specializes in the futures and derivatives markets, said it "has been advised orally that it is not currently the subject of the U.S. attorney's investigation.''

The SEC investigation, according to the filing, is focusing on two former Refco brokers who handled an account and short sales for Amro International, an offshore hedge fund.

A short sale is a market bet that the price of a security will fall. A trader borrows shares, and if the stock does fall, he makes a profit by purchasing replacement shares at a lower price and using them to repay his lender.

In the Rhino Advisors action, the SEC charged that the investment advisory firm shorted shares of Sedona on behalf of Amro, even though the $3 million PIPE deal prevented such activity. Amro, which wasn't charged by the SEC, benefited from Rhino's action because it got a ready supply of stock to cover earlier short bets it had made.

[Normxxx Here:   Witness Dr. Patrick Byrne's revelation last week (of October 10) that his purchase of 25,000 shares of Overstock shares was not settled/delivered for more than 50 days from, of all folks, Morgan Stanley. Dr. Byrne is the CEO of OSTK. How can anyone believe anymore that transparency exists in the U.S. market? Opacity? For sure. ]

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The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

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» Kirk - The $10.5 Billion REFCO Smoking Gun?

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Was REFCO caught naked short and is now collapsing?

The listing for the assets and liabilities of REFCO was just made available, and guess what just happens to be hiding in the liabilities column?

A $10.5 billion liability, at TODAY's mark to market valuation, called "Securities sold, not yet purchased."

$10,590,379,000 - to be precise.

Securities that have been sold. But haven't been bought. And they haven't been borrowed, either - see item 3 below.

Welcome to the wonderful world of naked short selling.

The $10.5 Billion REFCO Smoking Gun?

By Bob O'Brien
Oct. 23, 2005

The listing for the assets and liabilities of REFCO was just made available, and guess what just happens to be hiding in the liabilities column?

A $10.5 billion liability, at TODAY's mark to market valuation, called "Securities sold, not yet purchased."

$10,590,379,000 - to be precise.

Securities that have been sold. But haven't been bought. And they haven't been borrowed, either - see item 3 below.

There are three possible explanations:

1) Mr. Thompson parsed the truth with such dexterity that the number he advanced was incorrect in the extreme.

2) The number Mr. Thompson advanced did not include ex-clearing FTD's. For a complete primer on the implications of this, as well as the terminology, Click Here.

3) Those are all legitimate short sales and government securities. Possible. Somehow though my gut says that isn't the entire case. Legitimate short sales would have shares borrowed prior to selling, and would have the borrowed shares shown as an asset, offsetting the sold shares - but there's only about $2.5 billion as a receivable for "securities borrowed." The rest is collateral in the form of receivables.

A friend of mine had an interesting take on the matter:

"Considering consolidated balance sheets, such as Goldman's; When it contains assets labeled "Securities borrowed", I understand such would be related to securities borrowed and sold short. And, the offsetting liability "Financial instruments sold but not yet purchased" would be the value of those same securities on the effective date of the balance sheet; ergo, the price to cover. The difference would therefore be a snapshot of the net value of the short position.

However, with Refco, we see a consolidated statement of assets and liabilities where there is no line item for "Securities borrowed". However there are two line items that may be related. There's "Receivables from securities borrowed", 2,631,989,000, and "Receivables from broker-dealers and clearing organizations", 10,770,348,000. It's my guess that the 2.6 billion is the amount related to selling borrowed shares short, and the 10.8 billion is the amount that is due to be received when shares are provided to cover naked sales. Therefore, the sum of the two numbers would be the net from selling short and selling naked; 2.6 billion plus 10.8 billion equals 13.4 billion. Note, however, that it's all 'receivables'. This brings us down to "Securities sold, not yet purchased", 10,590,379,000. This is probably the entire marked to market short position at Refco. Subtracting the liability from the 13.4 billion receivables indicates a net plus of 2.8 billion.

Not bad--up 21%.

But, wait! If all the sales were legitimate short selling with a borrow then there would not be 'receivables' of 13.4 billion. That 13.4 billion would be available cash that could be used to purchase shares to cover. But it isn't. It's 'receivables'. Therefore there's no cash and no chance of covering."

Looking at the 10Q, I note that much of the liability is broken out as being Treasuries and the like. That would be the 10Q that we have been advised isn't worth the paper it is printed on. So the amount of FTD's is unknown - all we know is that there is a big number articulated. We don't know what in the 10Q we can believe, as they are now known to be a fiction - the books have been cooked. As with Enron, it becomes a game of "which part of the story would you like to believe today?" Some unknown percentage of it is likely FTD's, given the company's history and the reluctance of Wall Street to buy the company when it was offered to them, per the NY Times. The question is what percentage.

But why speculate?

I think it's time that we find out, no? Why guess any longer - let's get it out on the table.

These guys were being sanctioned for being involved in a prior naked short selling scheme, and were known as the go to guys for questionable types desiring greater "flexibility" in their trading. They lied to their auditors, the SEC and the public about their financial condition. Their CEO has been cuffed. They've had a reputation as "loose" for a long time - consider this from tomorrow's NY Times:

"In 2003, Pershing, a unit of Credit Suisse First Boston that offered clearing services for equities, was sold to Bank of New York for $2.5 billion, an indication that greater value was being placed on such services. Lee had taken a preliminary look at Pershing. That year same year, Mr. Bennett approached investment bankers about selling Refco. The bankers canvassed Wall Street, trying unsuccessfully to find an industry buyer.

A senior Wall Street executive who attended a meeting where Refco was pitched said that the biggest concern was that it cleared transactions for many small customers in the United States and overseas whose practices might pose a risk to Wall Street firms (emphasis mine)."

I think there's reason to believe that REFCO is the smoking gun the industry has been dreading. Wall Street wouldn't touch REFCO with a ten foot pole a few years ago because of "risky practices" of some of their overseas and domestic customers, so the management laid off the risk on the investing public instead. Nice. And the SEC let them.

You heard about this here first. Many months ago. In March, when I was speculating about a catastrophically large level of fails in the system, being covered up by the brokers and the SEC. When I was writing about special purpose entities being used to hide the size of the problem.

And here we are.

The whole BK filing can be viewed here.

To read the rest of this article, go to:
http://bobosrevenge.blogspot.com/2005/10...

-- posted by Kirk

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» Normxxx - Re: The $10.5 Billion REFCO Smoking Gun?

In response to The $10.5 Billion REFCO Smoking Gun? posted by Kirk:

If what you suspect is true, this could totally bring down the market, if not the "whole ball of (financial) wax!"

... so the management laid off the risk on the investing public instead.

Not really, see my article about that on another thread; most of the first traders were Wall Street insiders and (unless they immediately 'flipped'), boy, are they pissed!

http://www.suite101.com/discussion.cfm/i...

-- posted by Normxxx

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» Kirk - SEC Short-Sale Probe Turns to Gryphon Fund

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SEC Short-Sale Probe Turns to Gryphon Fund
By Matthew Goldstein
Senior Writer
11/3/2005 7:17 AM EST
URL: http://www.thestreet.com/markets/matthew...

It's been a rough year on the regulatory front for the Dallas hedge fund Gryphon Partners.

In April, Jonathan Daws, a former Gryphon portfolio manager, pleaded guilty in federal court to a conspiracy charge arising from a scheme involving confidential information about government investigations of publicly traded companies.

Daws, who left Gryphon in 2002, participated in a plot hatched by notorious short-seller Anthony Elgindy that involved betting against companies being probed, then driving down the stock prices by leaking the news on the Internet. Elgindy and former FBI agent Jeffrey Royer, the scheme's masterminds, were convicted in January after a lengthy trial in New York.

Now, sources say, Gryphon is one of several hedge funds under scrutiny in another federal investigation, one that also involves allegations of misused nonpublic information.

The Securities and Exchange Commission is weighing whether to pursue an enforcement action against the $265 million fund, say people familiar with the matter. The case is part of a sweeping investigation into allegations of manipulative trading in the $14-billion-a-year market for PIPEs, an acronym for private investment in public equity.

SEC attorneys in Washington have made numerous requests to Gryphon for documents and information about PIPE deals the hedge fund invested in over the past several years. SEC attorneys also have had several face-to-face meetings with lawyers for Gryphon to discuss the investigation, sources say.

A spokesman for the SEC declined to comment on the situation. Ben Rosenberg, a partner with Dechert, who is representing Gryphon, says, "I do not anticipate an imminent enforcement action against Gryphon.'' He declined to comment further.

Since 1999, the first year Gryphon began investing in PIPEs, it has sunk a total of $190 million into these private stock deals, which usually involve small companies selling their shares at a discount to their market price. According to PlacementTracker, a private placement research firm, Gryphon this year ranks is the 19th most active PIPEs player in terms of the number of deals it's invested in.

PIPEs are popular with hedge funds because of the market discount. Critics, however, contend that the ability of a hedge fund to purchase discounted stock makes the PIPEs market ripe for abuse by unethical short-sellers.

There's no indication that the insider trading scheme involving Daws is related to the PIPEs inquiry. No charges were filed against Gryphon in the Elgindy investigation, although Daws, in pleading guilty, said "others at Gryphon made trades in the some of the relevant stocks, independent of me, and not at my direction.''

There are some similarities between the allegations underlying the Elgindy case and the PIPEs inquiry.

One of the charges regulators are looking into in the PIPEs probe is that some hedge funds routinely shorted stock once they learned a PIPE deal is in the works. Regulators contend that such premature short trades are illegal, since knowledge of the PIPE deal is confidential, nonpublic information.

In any event, Gryphon won't be the only hedge fund to find itself in the regulatory cross hairs because of its trading in PIPEs.

Some 18 months ago, the SEC sent an initial round of subpoenas to 10 hedge funds and 20 brokerages that either arranged PIPE deals or handled trades for hedge funds that a major PIPE investors. The investigation is being coordinated with parallel inquiries by the National Association of Securities Dealers and the Department of Justice.

In October, TheStreet.com reported that the SEC formally notified an unidentified hedge fund that it is facing potential regulatory action by sending it a so-called Wells notice. In addition, securities regulators are taking a close look at a number of PIPE deals that HBK Investments, a $7 billion Dallas hedge fund, has invested in.

This summer, Alexandra Investment Management, a $1.4 billion hedge fund complex, disclosed that it "has been providing information'' about its investments in PIPEs to both the SEC and federal prosecutors. Alexandra's disclosure, which was first reported by Bloomberg, was contained in a copy of its 2004 audited financial statement. An Alexandra spokeswoman says investors in the fund have known about the inquiries since June.

To date, the broad-based inquiry has led to the criminal conviction of a former SG Cowen managing director on insider trading charges and a $1.45 million civil settlement with a former First New York Securities hedge fund manager. Emanuel Friedman, former co-CEO of Friedman Billings Ramsey (FBR:NYSE) also faces potential civil charges, as does the investment firm he co-founded.

Other Wall Street firms that face potential regulatory action arising from the PIPEs investigation include Knight Trading (NITE:NYSE) and Refco (RFXCQ.PK:OTC) , the scandal-tarred commodity and derivatives brokerage.

-- posted by Kirk

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» Kirk - Manager Fined $125,000 to Resolve Charges in PIPE Deal

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I'd not be surprised if they only catch a few token illegal PIPE traders. I think this is much more common than they want you to believe.

Hedge Fund Manager, Former Broker John F. Mangan, Jr. Barred, Fined $125,000 to Resolve Charges in PIPE Shares Deal

http://www.prnewswire.com/cgi-bin/storie...

NASD Investigation into Other Individuals, Entities Continuing

WASHINGTON, Dec. 20 /PRNewswire/ -- NASD announced today that John F.
Mangan, Jr., a hedge fund manager formerly registered as a broker with
Friedman, Billings, Ramsey & Co. (FBR) of Arlington, VA, has been permanently
barred from associating with any NASD-registered firm and will pay a $125,000
fine to settle charges that he deceptively obtained shares in a PIPE
transaction, improperly sold the shares short, and shared in profits from the
shares without obtaining permission from FBR.

A PIPE ("Private Investment in a Public Equity") is a private offering in
which accredited investors agree to purchase restricted, unregistered
securities of public companies. Only after the SEC approves the PIPE shares'
registration are investors free to sell them on the open market. PIPE shares
can only be offered to "accredited" investors -- for example, investors with
assets of $1 million or more. NASD found that in September 2001, Maryland-
based Compudyne Corporation and its placement agent, FBR, offered accredited
investors -- on a confidential basis -- a PIPE deal proposing to sell
2,450,000 shares of common stock, which raised more than $29 million.

Not later than Sept. 28, 2001, Mangan learned through a firm-wide research
call that FBR had an investment banking relationship with Compudyne. Within a
few days, Mangan received copies of the Compudyne Private Placement Memo, a
Purchase Agreement and a sales script that FBR brokers were to use to market
the PIPE transaction to potential investors.

NASD found that Mangan wanted to invest in the PIPE through one of a group
of hedge funds he managed with a partner. Mangan contacted senior FBR
officials to inquire whether the hedge fund could invest in the PIPE. These
officials told Mangan in substance that a person associated with FBR should
not invest in the Compudyne PIPE and refused Mangan permission to buy shares
in the PIPE. Nevertheless, Mangan arranged for HLM Securities LLC ("HLM"), an
investment advisor owned by Mangan's partner, to buy 80,000 shares in the
PIPE. The restricted stock was sold at the below-market price of $12 per
share. In fact, FBR paid Mangan a commission of about $6,880 as the broker
responsible for HLM's purchase of the Compudyne PIPE.

Mangan and his partner agreed that Mangan would personally provide all the
funds necessary to buy the PIPE shares and that Mangan and his partner would
share equally in all profits from the PIPE. Mangan's partner was the only
signatory for HLM on the Purchase Agreement. Mangan failed to seek and obtain
written permission from FBR to purchase an interest in the Compudyne PIPE and
failed to disclose that he had arranged to acquire an interest in the
Compudyne PIPE through HLM, or that he had agreed to share profits from the
PIPE transaction with his partner.

On Oct. 9 and Oct. 12, 2001, Mangan caused HLM to place orders to sell
80,000 shares of Compudyne, and based on those orders, the executing broker
and prime broker treated the sales as "long" sales. In fact, HLM was naked
short selling the shares, and no affirmative determinations were made that HLM
could locate shares to borrow in order to make delivery by settlement date.
Mangan intended for HLM to profit by covering the naked short position in
Compudyne with shares acquired in the PIPE once they became registered.

On Oct. 31, 2001, after the PIPE shares were registered, HLM covered its
80,000-share short position using the 80,000 shares of Compudyne that HLM had
bought in the PIPE. As they had agreed, Mangan and his partner shared equally
in HLM's profits from the sale and purchase of Compudyne shares. Mangan
received a total profit of approximately $87,000.

In settling this matter with NASD, Mangan neither admitted nor denied the
charges, but consented to the entry of NASD's findings. NASD's investigation
into other individuals and entities involved in the Compudyne PIPE is
continuing. In May, Hilary Shane, a hedge fund manager formerly registered
with First New York Securities, was barred and ordered to pay more than $1.45
million in fines and restitution by NASD and the Securities and Exchange
Commission, to settle fraud and insider trading charges arising from her
purchase and sale of Compudyne PIPE shares.

Investors can obtain more information about, and the disciplinary record
of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck.
NASD makes BrokerCheck available at no charge to the public. In 2004, members
of the public used this service to conduct more than 3.8 million searches and
request almost 190,000 reports for existing brokers or firms. Investors can
link directly to BrokerCheck at http://www.nasdbrokercheck.com. Investors can
also access this service by calling 1-800-289-9999.

NASD is the leading private-sector provider of financial regulatory
services, dedicated to investor protection and market integrity through
effective and efficient regulation and complementary compliance and
technology-based services. NASD touches virtually every aspect of the
securities business -- from registering and educating all industry
participants, to examining securities firms, enforcing both NASD rules and the
federal securities laws, and administering the largest dispute resolution
forum for investors and member firms. For more information, please visit our
Web Site at http://www.nasd.com.

-- posted by Kirk

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» Kirk - Little Honor in Regulation SHO's 'Honor System'

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Stockgate Today: Little Honor in Regulation SHO's 'Honor System'

Thursday , December 22, 2005 11:16 ET

Dec 22, 2005 (financialwire.net via COMTEX) -- December 22, 2005 (Financial Wire) (By David Patch) Earlier this week General Electric's (NYSE: GE) affiliate station CNBC held a live interview with Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne to discuss the "Byrne Jihad" against naked shorting abuses. Once again the CEO was left to defend himself to anchors willing to accept the abuse.

CNBC analyst Joe Kernen initially applauded Overstock.com, calling it the envy of many companies due to its growth potential before attacking the efforts of Byrne to fight Wall Street corruption. Kernen challenged Byrne on his fight against short sellers by identifying that short sellers can go after any company they want in the entire country so why not "leave them alone" and focus on the business model. Kernen alludes that eventually the evil that short sellers bring to a company, legal and otherwise, can be exorcised through a solid business model. What happens in between is for the markets to bear and should not be the worry of the CEO.

Kernen's statements are hypocritical in an industry where CEOs are required to continually add to shareholder value. Allowing shareholder value to be manipulated by illegal acts should be the fiduciary responsibility of the CEO, yet Kernen wants the abuses ignored.

As Byrne laid out his evidence of failed trades, Kernen suddenly was left with nothing he could say to rebut the CEO. And when that happens, all CNBC can do is move on to another subject, which is exactly what they did.

According to Byrne, for the second time since August, he had gone into the open market and purchased stock in his own company. The result of his near $4 million in stock purchases since August is an indicator of what is wrong with this marketplace and what is wrong with the SEC's rendition of regulatory Swiss cheese.

For the second time, the seller of Overstock securities failed to meet obligations of delivery on shares sold to the tune of nearly $2 million, this on limited trades that were followed through and audited.

In e-mail exchanges between Byrne and his broker, provided to CNBC prior to the morning interview, his broker said that the trades had failed settlement because there were no shares available in the system to settle with. Some of the e-mail excerpts included;

Byrne's Broker: [Your shares] originally confirmed to have settled on Dec 5th and in the process of being converted from DTC shares to paper, have in actuality not settled and no shares have been received.

Byrne: Can you buy-in the fails?

Broker: Talking with my traders, they feel that we will run into the same problem [settlement failure], no one seems to have enough of the shares to deliver. Since Overstock is a hot stock, they [Wall Street] are finding it just about impossible to find shares to borrow or buy.

While CNBC had access to these transcripts and is aware of the firms involved, Joe Kernen asked Patrick why he didn't just walk away. What is the concern over $1.8 million worth of trades that were recently executed by Wall Street without the shares existing to sell? Who cares that you were notified that a trade settled only to have you conduct your own follow-up and prove that that notification was in fact false? Walk away, leave these guys alone was Kernen's opinion.

Why not ask the shorts and Wall Street to stop abusing companies, Joe?

Patrick Byrne, earlier in the interview said that he is not fighting about Overstock.com but instead is fighting to resolve a systemic economic collapse "of Enron-like proportions" if left unattended. Byrne further identified that the problem exists mainly due to an "intellectually corrupt SEC."

Byrne's allegations regarding the SEC were never challenged by CNBC and here is probably why:

Under the guidelines of Regulation SHO, all trades in a threshold-listed security must settle within a window of trade plus 13 days. If such trades do not settle within the that time, the seller must cease all future short sales without first executing a pre-borrow. The seller must also initiate an immediate closeout of the failed trades. The seller, under these guidelines, refers to the originating broker-dealer, prime broker, or executing broker, depending on the circumstance.

In the case of Market Makers, as was the case here, the Market Maker is required by law to give up the book on the security until the trade has actually met settlement. The SEC identifying in a Securities Industry Association (SIA) forum that a Market Maker cannot fulfill his obligations of bona-fide market making should he be required to pre-borrow prior to making a short sale thus must step aside.

Under both of these guidelines, the enforcement of higher market restrictions falls upon the honor system of the firms, according to a source at the NASD. Imagine that. An honor system among crooks and criminals?

In this case, the honor system failed. The firm responsible for the delivery of shares to Mr. Byrne missed the deadline yet remains dominant as a sell-side Market Maker in the box. The regulators have yet to pick up on this, and most likely by the time they do, the damage will have been done.

Review of Byrne's Form 4, filed with the SEC, the stock purchase of 50,000 shares was executed in a price range of $37.21 to $38.20. The selling Market Maker would only honor those trades with delivery [settlement] when their cover price fell below this pricing window. There has been insufficient activity and shares available below this price, which subsequently led to extended fails. The bona-fide market making of this firm became a trading strategy in the house account, and the house never loses.

With Tuesday's heavy early morning volume and the stock trading with lows at $33.54, the originating seller now has the opportunity to cover for profit. Acquiring shares at $34 to $35.00 a share will yield the firm a hefty $150-$200K profit.

And CNBC analyst Joe Kernen, expert to the industry, wants to know why companies can't leave the shorts alone.

The honor system of Wall Street is a joke. The firms responsible for defrauding the investing public out of hundreds of billions in investments is once again expected to police itself, with the goal evidently being not to get caught right away so their profits can outweigh their penalties when the police catch up with them. The Securities and Exchange Commission set it up this way.

If you ever wondered how Wall Street executives earn their pay, look to this as the perfect example. Patrick Byrne paid $1.8 million for stock that doesn't exist and by the time he receives it, the stock will have de-valued by near $200,000 or more. Byrne's loss will be diverted to the Wall Street firm's bottom-line profit. In this case, the profit came on a mere 50,000 shares traded. With tens of billions of shares trading daily in these markets, imagine the revenue stream created selling what does not exist.

Of record, in the 11 months since Regulation SHO has been in place, not a single enforcement action has come to play regarding illegal shorting or failure to give up the book due to extended fails in threshold securities. The SEC has qualified this a success. The investors see this as more of the same as market raiders continue to manipulate the markets for profit.

SEC Assistant Director of Market Regulation James Brigagliano stated in a recent NASAA Public Forum on Naked Shorting, "Bring us the evidence and we will rigorously enforce the laws." Sorry James, this is yet another example that the SEC is aware but has ignored.

Yes, there is dishonor in this honor system, and it starts at the front door to the SEC. How the SEC can ignore this blatant abuse is reprehensible, "intellectually corrupt," to steal a phrase.

(David Patch, editor of Stockgate Today, an electronic newsletter, and whose Web site is http://www.investigatethesec.com, has been a vocal critic of manipulative naked short sales, and over the past two years has been quoted extensively in several national publications. He has appeared on numerous financial news programs, including with Ron Insana on CNBC. Stockgate Today provides editorial commentary on events surrounding the naked short selling issues and is carried here as a public service and do not necessarily reflect the views of the editors at FinancialWire.).

http://www.siliconinvestor.com/readmsg.a...

-- posted by Kirk

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» Kirk - The Circle of Greed:

Printer-Friendly article from www.FaulkingTruth.com

[ Kirk's Editor Comment: This complaint is valid and much like complaining about high interest rates credit card people charge those who are dumb with debt. My solution has been rather simple. Invest some money in the companies that profit from all this while avoiding credit card debt and excessive trading. The damage naked shorting has done to some companies is terrible and I sure wish they’d enforce the rules and jail those who break them. See "Kirk's Newsletter" for more information about what I specifically recommend.]

Investing 101 - Jan 17, 2006
- The Circle of Greed:
The Only Bull in this Stock Market is a Cash Cow
by Mark Faulk

Hedge funds and brokerage firms. It's a match made in Wall Street Heaven. Brokerage firms make their money not by representing their clients, the average investor. They make their money by trading stock. It's that simple. And no one trades more stock that the hedge funds. Between the two of them, they have created some of the wealthiest individuals in America, lining their own pockets with outrageous salaries, unbelievable commissions, and massive bonuses that most Americans can only dream about. And they do it in a stock market where the average investor is still struggling to recoup even a fraction of the losses sustained in the market meltdown of 2000.

They do it by selling stock. It doesn't even matter whether that stock is real or imagined, just as long as the shares keep flowing. It doesn't matter whether the shares are delivered or not, just as long as the "customer" keeps paying the commissions for the shares that flow in a neverending stream from one hand to another. Counterfeit or real, as long as the brokerage firms collect their fees, they'll continue to buy and sell, sell and buy.

In a New York Times article last Thursday, they announced the yearly bonuses doled out by Wall Street by opening with the sentence, "Ferrari dealers, get ready. Wall Street bonuses are in and they are big." It wasn't an exaggeration. According the Times article, "Those bonuses were driven by record profits at many of Wall Street's major investment banks, including Goldman Sachs, Bear Stearns and Lehman Brothers."

Record profits on Wall Street. So what drove those profits? Did Wall Street deliver record returns to their clients to go along with those record profits? Isn't that the job of the brokerage firms, to make money for the millions upon millions of investors that they represent? So it stands to reason that investors across America shared in the banner year that lined the pockets of Wall Street, that gave literally thousands of Wall Street executives bonuses of well over a million dollars each.

Not so fast. According to the same article, "the bulk of Wall Street's profits continue to come from trading," and Alan Johnson, managing director of compensation consulting firm Johnson Associates, put it more bluntly, "The trading business, which drives Wall Street - it's not investment banking - continued to be extremely strong, even though interest rates went the wrong way."

So there you have it. The brokers get rich, not just rich but obscenely rich, by trading stock, and the hedge funds generate nearly half of all trades in the stock market, and an estimated 30% of total stock commissions. Real or counterfeit, every trade is money in the bank for both the brokers and the hedge funds. It's criminal, and it's a financial scandal so massive in scope that it's unimaginable that the major media still isn't reporting it, and in fact appear to have duct tape across their collective mouths when it comes to speaking out for the American investor.

Why is that? What earthly reason could there be for ignoring, no wait, make that aiding and abetting the perpetrators who are robbing America blind? As I was reading the Times article about Wall Street executives, bankers, and traders who had "already budgeted or spent their bonuses on multimillion-dollar estates, rare art, luxury cars and fractional shares in private jets," another Faulking Truth writer, Mike Bohling, sent me an unrelated article about media bias, called "Liberal Media Bias - Dismantling the Myth." At first glance, it had nothing to do with the stock market scandal, because, as I've said, this issue is not about liberal or conservative, it's an issue that crosses party lines and political demographics. But then, I read something in his article that triggered another of those "defining moments" that I speak about so often.

Why isn't the media covering this issue? As always, it always comes back to the Circle of Greed, to power, to control, not just the control of our ideology or our politics, but control of something far more important to those at "The Top" - control of the flow of money, specifically the flow of money from the Middle Class to the Ultra Wealthy.

Let's begin with my favorite media target.....Dateline, who spent thousands of hours and, I'm guessing, tons of money putting together an expose' on Stockgate, only to sit on it for a year and a half, and then, when they finally did air it, turned it into the biggest non-event in the history of uh....."investigative journalism." It was as if some unseen hand from above came down and slapped it into oblivion. At the time, much was made of the fact that NBC (and CNBC, MSNBC, Bravo, USA, and the sci-fi channel as well) are owned be General Electric, but that still didn't answer the question of why they seemed to have a vested interest in not just killing the Dateline story on NBC, but why they also seemed to almost take delight in hiring media hacks like Jim Cramer to promote their short selling agenda, and who blatantly attack advocates of stock market reform such as Overstock's Patrick Byrne and Dave Patch of www.investigatethesec.com.

In the case of NBC and CNBC, the "unseen hand from above" that guides the policies that perpetuate this massive fraud against America isn't the hand of God, or even the hand of GE. In this case, one doesn't have to look any further than NBC's Board of Directors to see who benefits from protecting the hedge funds and burying the evidence of massive stock counterfeiting. The list is a who's who of Wall Street and banking interests: J.P. Morgan & Co, Chase Manhattan, Citicorp, Morgan Guaranty Trust all have "representatives" sitting on NBC's Board of Directors. Oh, and there's one other entity who sits on the NBC Board of Directors, and helps to set the policy for both NBC and CNBC.....The New York Stock Exchange.

Enough said.

Let's just make this simple. I'll list every major media giant, and then mention a few companies who have "their people" sitting on the board of directors of those media giants. It won't take long to understand why the Corporate Media is allowing the rich to continue to rob the poor by the immoral and illegal manipulation of our financial systems.

Ready? here we go:

General Electric/NBC - Chase Manhattan, J.P. Morgan & Co, Citicorp, Morgan Guaranty Trust, State Street Bank and Trust, Banco Nacional de Mexico, and The New York Stock Exchange.

Viacom/CBS - Chase Manhattan, Credit Suisse First Boston Corp, Morgan Chase & Co., Bear Sterns Companies, Polaris Venture Capital, and.....(once again) the New York Stock Exchange.

AOL/Time Warner - Citigroup, Morgan Stanley Dean Witter, Forstmann Little & Co. (venture capital and buyout firm), Kleiner Perkins Caufield & Byers (venture capital firm), ZG Ventures, (venture capital and investment firm), and (who else?).....the New York Stock Exchange.

News Corp (Fox) - Rothchild Investments, Allen & Company (investment banking firm), and (say it with me this time).....the New York Stock Exchange.

Disney/ABC - City National Bank, LM Institutional Fund Advisors I, and Trefoil Investors (investment capital firm).

So how about the print media? Surely our major newspapers are interested in the truth, in exposing what many believe could turn out to be the largest financial scandal in our country's history. Again, it's been mostly the collective sound of crickets chirping when it comes to newspaper coverage of stock market fraud. After all, when Wall Street is handing out $38 million yearly bonuses to the CEO of Goldman Sachs, nearly $15 to Lehman Brothers CEO, and $11.5 million (for half a year's work) to the new CEO of Morgan Stanley, who wants to rock the hedge fund boat that generated those beautifully obscene paychecks?

Certainly not these board of director members (see if you recognize any of them):

New York Times Co. - Lehman Brothers, Chase Manhattan, State Street Research and Management (investment management firm), and Warburg, Pincus & Co. (investment banking).

Gannett (99 daily newspapers including USA Today and 21 television stations) - Goldman Sachs, Prudential Mutual Funds, Capital Investment of Hawaii, Carlisle Group (investment and financial software), Millennium Bank, and Pacific Century Financial Corp.

Knight-Ridder (32 daily newspaper, including the The Philadelphia Inquirer, The Miami Herald, and the San Jose Mercury News) - Goldman Sachs, Providian Financial, BankAmerica, State Street Bank and Trust, and Vanguard Group (investment management).

Dow Jones/Wall Street Journal - American Express, Bank of East Asia, Bankers Trust Company, and Lazard Freres (the French company that bills itself as "the world's preeminent advisory investment bank").

Washington Post - J.P. Morgan, Moody's (investment banking and finance), and Dun & Bradstreet.

The Tribune (Chicago & LA Times) - Wells Fargo, First Third Bancorp, and Washington Mutual (financial services).

So there you have it. The same media giants who we should be able to trust to give us fair and unbiased coverage of one of the most important issues facing our country today, controlled by the same banking and financial institutions who are lining their pockets with the spoils of a stock market spinning out of control.

And this is only a small part of The Circle of Greed. The web of corruption and collusion extends far beyond the cozy arrangements between the brokerage firms, investment banking industry, hedge funds, and the media shills who protect them. It involves our government officials and even our beloved Congress.

But that's a story for another day. Goodnight, America, and when you wake up tomorrow, don't forget to call your brokers and demand that they actually deliver your stock certificates to you, after all, they can afford it. They're all millionaires.

And that's the Faulking Truth.

Mark Faulk is the Editor of The Faulking Truth, and the author of the upcoming book entitled "The Naked Truth," due out in June, 2006.

---

For 2005, "Kirk's Newsletter Portfolio" was Up 13.2% vs. QQQQ up 1.2% vs. DJIA down 0.6% vs. S&P500 Up 4.8%

As of 12/31/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 197% while the S&P500 only up 12%!!! & NASDAQ only up 1%!!! (my portfolio beta is roughly equal to that of QQQQ.)

What should be quite clear is a “buy and forget” market strategy using the DOW, S&P500 or NASDAQ would have under performed holding money funds over the past seven years while my newsletter portfolio nearly tripled every dollar invested

Key to my success is I pay attention to Garp. GARP stands for “Growth At a Reasonable Price.”

Make sure you read my latest article: NanoViricides, Inc. [NNVC] (01/09/06) where it seems I’ve had the good fortune to highlight a stock just before it took off to more than double!

-- posted by Kirk

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