.....New items
have been added to Quicktrader. Please review the
QuickTrader links above for new research tools and reports,
for example the Knobias Clip Report can be delivered to your
mailbox each morning or you can see the latest report by
visiting QuickTrader.
Again a
significant amount of stocks made good moves yesterday
review WebLine Archives.
The WebLine
server has been reinstalled and is now up and will be
following a regular schedule. Please attempt gto visit
WebLine regularly and post any research and strategies you
feel may be helpful to the Group. Remember that much of the
success in your investment endeavours will be due to the
research shared among your fellow researchers and
strategists.
Some Stocks To Watch
Today
ABNJ BOCH CPWR DAI DITC ESV EXAR FTO MRX ELQV GCYT GEYO
IAQGU PXPS ROHT UDRY UDRYW TMPTF OROSF PWCAF SSFCP HMDO IHME
BCGOF CGORF ERPNF GVMUF LGBWF MTXCF BCP NVDF PTOK MYST LOCM
SLP TOA HAYZ CREAF DEEP TMRK ACLS JRC NUVO JADE VVUS KWGI
PRZ BUKX PURE MXFD FNLY WWAT AGIX SWCC SSTR CRGN SGEN PHBR
SIRV DDSS JAVA EMMS ALU NT
Transaction
Reminder Checklist ...Check
These Before You Trade
1.
Never buy a stock without immediately placing a Stop Loss
Order, preferably a Limit Stop Loss Order.
2. Always use the 'Two Order Process Rule' when buying a
stock, place one order to buy and then a stop loss order of
5%. Trail the stop loss order if the price moves up.
3. If you buy a stock in which you cannot place a stop loss
order use the 'Three Point Sale Rule'.
Point
1. Never hold it longer than three (3) days if it does not
go up in price. Trail the process if the price moves up.
Point
2. Sell
on a 7% to 10% drop ...No Questions asked
Point
3. Sell with the 'Betty
Rule' 4.
As the price moves up don't sell without an event ...e.g
Hannaian Spike, 10% Drop,
etc.
5. Don't sell on a slow Roll up, until a definite
downturn
6. Watch closely right after a sale, & buy right back on
a sell mistake
7. Buy only after researching fundamentals for long term, or
using strictly structured momentum strategies for short
term
8. Watch, learn, & utilize the Support & Resistance
levels in the stock 9.
Check WebLine for advice, insight, & research just
before a trade 10.
Check for news before placing any
order 11.
Check Charts, Time & Sales, and Level II depth when
placing orders
12. Check the message boards before placing any order
Basic Trading
Philosophy - Keeping it Simple
1. Stick with
your established trading discipline
2. Operate as a business which puts the laws of
averages in your favor
3. Always use the Betty Rule (10% Sell Loss Rule)
...i.e. You cannot recover losses
4. Work on a basis 50/50 ratio assumption, good
versus bad trades (only 50% of your trades will be
successful)...even though you may be able to
achieve as high as 70/30 ratio
5. Even on 50/50 ratio you will be far ahead even
if you only make just 20% on the up trades ...As
long as you limit your losses with the Betty Rule
to 10%
6. Always remember the major part of the Strategy
is a Day to Day Trading Operation where you operate
as a business and thereby use the law of averages
to your benefit
7. Finally be part of a system that researches,
reports and publishes the researched Information on
a timely basis.
Always
Remember HIPS Basic Philosophy...Aggressive
Investing in Small & Emerging Growth Companies, Rich in
Intellectual Properties ...Buying on Fundamentals &
Selling on Behavior
Rules
for the Best Investors
1. Find the best percentage based returns for use of your
money, talents, & efforts at any particular point in
time.
2. Use a systematic, business approach to investing.
3. Use a support system designed specifically for the work
you have to do. Important
Notice The
strategy for the current Market is to be reasdy to take
profits with 3-5% gains and buy back in when necessary.
Hannaian
Trading & Investment Research
Updates
Hannaian
WebLine Notes NASDAQ
PORTAL Adds 144A Liquidity and
Pricing
....August 10, 2007
The world of private
placements has historically been a dark place with the
landscape littered with performance crazed firms and
capital-searching companies being a main ingredient in their
diet. Companies looking for money and time frequently
enlisted the help of these brokers and institutional
investors to finance their operations and execute business
plans to allow them to become self sustaining.
On the other hand,
investors have also become prey to companies with little
hope for the future, whether known or not, that received
funding eventually paid out to management for little or no
return for the fund or institutions. The reasoning has
caused an influx of 144A deals over the past few years where
companies would receive the financing and the assurance that
share prices of registered shares wouldn’t be affected.
The lack of a secondary market became an obstacle for many
institutional investors to accept these types of illiquid
securities. In its simplest term, companies need money and
institutional investors need liquidity, less risk, and
return... Enter NASDAQ Stock Market Inc. (NDAQ).
The equity exchange
recently announced that the SEC has approved their new
centralized system for 144A securities. The fully automated
platform, which is an outgrowth of NASDAQ’s 17 year old
system, is the first electronic system for accessing and
displaying 144A issue trading and quotation. It will
effectively create a secondary market for qualified
institutional buyers (QIBs) and qualified brokers to
facilitate and execute trading in these unregistered
securities.
The system will bring
transparency and liquidity to what has been at times very
dark. It will allow institutions to also value their
portfolios in real time. “In the past, 144’s
owners would have to set up meetings with other QIB’s
to liquidate all or parts of their positions. They would
also have to contact other QIB’s and brokers to gauge
the value of their shares for mark to market calculations.
This new system allows for that to happen
electronically,” noted NASDAQ Executive Vice President
John Jacobs.
But NASDAQ isn’t the
only firm that saw the need for a new system. Merrill Lynch,
Lehman Brothers, Morgan Stanley, and Citigroup are
developing an electronic trading platform for this type of
unregistered shares. Goldman Sachs also recently developed
their own system, GSTrUE, which was catered to Oaktree
Capital and subsequently used for Apollo Management to trade
their unregistered shares.
But NASDAQ doesn’t
feel that the other systems will be in competition with the
PORTAL. “Our platform is neutral,” noted Jacobs.
“We expect all firms to participate in the PORTAL;
hence it’s a different model. We don’t see them as
competition but rather as a complimentary product.”
A perceived problem of the
expanded liquidity and trading expected in PORTAL was the
fact that after a private company reaches 500 investors,
they are forced to becoming a fully public, reporting entity
under the Securities Exchange Act of 1934. The fear of being
forced to become public was a reason for companies
considering this type of funding to be wary and choose other
alternatives. “Not so,” says Jacobs. “This
has become an unwarranted fear. No one has been able to
point to a single 144A company that has been forced to
register because they triggered the 500 shareholder test in
the 17 year history of 144A.”
To reassure the companies
participating, PORTAL will also institute shareholder
tracking. “The Bank of New York in collaboration with
the DTC will institute a shareholder tracking system to be
implemented into the PORTAL for shares that need
tracking,” said Jacobs. “But of the many deals
we’ve done through July, none have asked for
shareholder tracking.”
To become a QIB,
institutions must manage at least $100 million in assets. To
become a qualified broker, $10 million in non affiliate
securities must be managed. To reach 500 investors and be
forced to become public, a 144A would have to become divided
between enough QIBs and brokers to make up the difference
between company founders and management and the 500
threshold. It’s just not a very likely scenario.
In any event, with the
advent of this electronic private placement market,
companies considering a traditional IPO should have an
attractive new option to gain simpler and less expensive
access to the capital they need. “We feel this could be
a new step for companies in their trek to become public. We
envision companies beginning their life cycles as private,
PORTAL, and then public on NASDAQ,” noted Jacobs.
The becoming public part
could also be another reason for the development of the
PORTAL system. NASDAQ will have an upper hand of sorts to
list companies that are reaching the stage where they want
or need to become public. It’s also another revenue
stream for the equity index in the form of subscription fees
paid for the right to trade in the PORTAL and also
application fees to list the 144A’s, though there will
not be any per share fee for trades.
“We may have a
subscription fee, and small application fees. We don’t
want to hinder the number of deals at all,” says
Jacobs. With the number of deals done by NASDAQ growing and
the percentage of total deals in equity growing from 5%
historically to 15% this year, the aspect of adding a
composite or subindex could allow for retail to gain entry
into this market down the road. But until that time,
providing the liquidity and transparency in an otherwise
dark market is enough of a service for the time being.
“The market needed it and that’s why we built it.
PIt’s going to be a good thing for all involved,”
finished Jacobs. With the history of private placements,
many are sure to agree.
Companies undertaking spinoffs are among the
least-followed potentially lucrative investments available.
Often it's the company being spun off that appears to be an
ugly duckling, but is actually the attractive investment
opportunity. Other times it's the parent doing the spinning
that has the appeal, and sometimes both companies can be
more attractive after such an action.
Spinoffs come to the market as tax-free distributions to
existing shareholders of a parent company or as an IPO by
the parent company. There are also situations where a parent
will IPO one of its businesses and then later spin off the
remainder to shareholders. This is what Hidden Gems
selection Walter Industries (NYSE: WLT)
did with Mueller Water (NYSE:
MWA).
These four criteria can hint at an attractive
spinoff:
Unattractive factor. Something
unattractive is a plus. Too small, too obscure, or too
different from the parent -- something that makes
investors want to sell. Sometimes it's because investors
are only interested in owning the parent; other times, it
is because institutional investors have strategies that
don't allow for holding companies below a certain size or
outside of their area of focus. The end result of their
disinterest is to sell, which can temporarily depress the
price of even a very good business. For this reason, you
want to closely track a spinoff in the first few weeks
after it begins trading. But when it really gets
interesting is when the spinoff has one of the following
traits as well.
Growth. Some spinoffs are simply
freeing a growth business to shine. The beauty of these
spinoffs is often that they are free of the parent's
capital allocation decisions. Once spun off, the growth
business is free to retain the cash flow it generates and
plow it back into the growth opportunities it sees. This
was part of the strategy behind Sara Lee
spinning off Coach (NYSE:
COH)
a number of years ago.
Leverage. Parent companies often use
their spun-off children as a way to unload debt. It's
somewhat counterintuitive, but a spinoff that is saddled
with debt can be a very good investment, because that
leverage amplifies the impact of sales growth and margin
improvement, promoting debt repayments and lowering
future interest expenses. Debt also unquestionably makes
the spinoff a riskier investment, because if sales or
margins fall, the interest payments get tougher to
cover. Hanesbrands (NYSE:
HBI),
another company sprung from Sara Lee, fits this mold with
$2.5 billion in debt and a sliver of equity.
Incentives. To catch this one, you
have to be paying attention to the prospectus and filings
of a spinoff. Many times, management has plenty of
incentives in place to make sure the stock price of a
spinoff performs. This can be an ownership stake,
options, restricted stock, or stock appreciation rights.
Just because incentives are in place doesn't mean a
spinoff will be successful, but it increases the odds
that management will be keen to decrease costs and take
other actions that increase shareholder value.
Some upcoming spinoffs to keep an eye on There are a number of companies in the process of
being spun off. Perhaps the best known is the remainder
of Kraft being spun off from Altria
(NYSE: MO).
A couple of other notable ones include
Automatic Data Processing (NYSE:
ADP)
spinning off its brokerage operations and Morgan
Stanley (NYSE: MS)
spinning off its Discover credit card business.
Cadbury-Schweppes has also announced it will split
itself in two. If you track the news closely, you'll find
that there are even more spinoffs in the works. A quick
search through my news alerts yields more spinoffs happening
than I have time to focus on.
Foolish final thoughts As a final word, I'd recommend not forgetting about
the parent companies. Many times the parent company in a
spinoff also benefits from being to focus on just its
core operations and is able to more efficiently allocate
capital.
If you're excited about spinoffs and want to start
digging into them and other special situations, I highly
recommend getting a copy of You Can Be A Stock Market
Genius by Joel Greenblatt. It's not a great title for a
book, but within its pages is a treasure trove of
valuable case studies and insights on spinoffs and other
special situations. After that, be prepared to pay close
attention to the news and be ready to dig through filings
with the SEC, because to get to the best spinoff
opportunities, you have to have a grasp on the details of
the transaction. If more than one of the traits outlined
above really stands out, you could have a winning investment
idea on your hands.
If you've been investing for some time, odds are that
you've heard about arbitrage. Many large financial
institutions use arbitrage to make easy money, often at the
expense of less sophisticated investors. Small investors,
it's implied, can't hope to make money through
arbitrage-based strategies.
While it's true that some such strategies require a
significant amount of capital, there are other ways to use
arbitrage, even if your available resources limit you to
relatively small transactions.
How arbitrage works In general, arbitrage opportunities can exist
whenever there are at least two different markets in which a
particular good is offered for trade. Unless the prices in
each market remain exactly the same at all times, alert
investors can exploit any discrepancy in price.
For example, shares of Royal Dutch Shell(NYSE: RDS-B)
are traded on the London Stock Exchange, and via American
Depositary Receipts (ADRs) on the New York Stock Exchange.
Theoretically, the prices of ADRs trading on the NYSE and
Shell shares trading on the LSE should be identical -- at
least during the hours each day during which both markets
are open for trade.
Historically, the lack of instant communication and
reliable shipping made arbitrage opportunities common. In
modern times, advances in communication and shipping have
reduced the number of pure arbitrage opportunities, which
involve little or no risk. These days, index arbitrage
opportunities on stock exchanges may involve microscopic
differences in price that last a matter of seconds. Futures
markets in different areas of the world may have slight
disparities in the prices of certain goods, but as long as
the disparities are small enough that the transaction costs
of taking advantage of them would wipe out any potential
profit, there's no point in attempting an arbitrage
strategy.
However, for investors willing to assume a higher amount
of risk, certain arbitrage opportunities frequently arise
from proposed mergers between publicly traded companies.
Merger arbitrage Corporate merger arbitrage opportunities fall into
two basic categories: cash buyouts and stock buyouts. In
cash buyouts, an acquirer offers to pay stockholders of the
proposed target company a certain amount of money for their
shares. In stock buyouts, the acquiring company instead
offers to trade shares of its stock for those of the target
company.
With cash buyouts, the arbitrage strategy is extremely
simple. Usually, after a company makes a cash offer to buy
the stock of another company, the target company's stock
rises sharply, but lingers at a level slightly below the
offer made.
For example, take the recent
buyout offer for Yankee Candle. Before
the offer, Yankee shares were trading in the high $20s. The
prospective buyer offered $34.75 per share; immediately
after the announcement, the stock rose to between $33 and
$34.
The difference between the buyout price and the trading
price can be explained by two factors. First, there is a lag
between the time a buyout is announced and the time
investors receive the actual cash payment; in Yankee's case,
it was projected for early 2007. Second, there is always at
least a small risk that the merger will not go through, in
which case the stock may descend to its pre-announcement
levels. If the merger goes through, however, arbitrage
investors get to pocket the difference. It may be a small
profit, but it could far exceed the returns you would get
from other investments on an annualized basis.
Stock buyouts are a bit more complicated. For instance,
in October 2006, the Chicago Mercantile
Exchange(NYSE: CME)proposed
a merger with the Chicago Board of
Trade(NYSE: BOT).
For every 10 shares of CBOT investors hold, the terms of the
merger would give them slightly more than three shares of
CME. CBOT's share price rose sharply on the announcement;
the day before this article was first published, CBOT shares
closed at roughly $151, while CME shares traded for
$512.
To use merger arbitrage for a potential profit, you would
have bought 10 shares of CBOT and sold short three shares of
CME. The short sale would have given you a total of $1,536
in proceeds, while buying CBOT shares would only have cost
you $1,510. If the merger went through, you'd then receive
three CME shares, which you could use to cover your earlier
short sale.
It's important to understand the considerable risks of
merger arbitrage. Before a merger can take place, it must
clear several hurdles. Regulatory agencies may have to
approve mergers involving companies in certain industries.
If the proposed merger raises antitrust concerns, the
Department of Justice may review the terms of the merger and
its effect on its market segment, to determine whether its
consequences may contradict antitrust laws.
For cash mergers, the acquiring company must secure
enough financing to pay target shareholders. Overall market
conditions can also change, making what originally would
have been a profitable combination no longer viable. Last
spring, investors in salon operator Regis(NYSE:
RGS)
discovered that the hard way, when potential acquirer
Alberto-Culver(NYSE:
ACV)backed
out of merger talks. Although companies usually work
hard to overcome these obstacles, it only takes one failed
merger to wipe out the profits of several successful
deals.
The lure of easy money draws investors to seek profits
from arbitrage opportunities. As long as you understand the
risks involved, a close examination of proposed mergers can
help you discover ways to make good short-term returns on
your investment.
An
Introduction To Naked Short Selling - Failing To Deliver
(FTD) *
Naked Short
Selling / Failing to Deliver
Naked short selling occurs when a seller sells a share of
stock, and then fails to deliver it.
In a legitimate short sale, the seller first borrows a share
of stock, and THEN sells it, hoping to buy it at a lower
price before he returns it to the lender, his profit being
the difference between the sale price, and his later buy
price. It is a bet on a price decline, and legal as
described. Sell high, buy low.
A naked short sale is a manipulative trading technique. It
takes advantage of a structural deficiency in the system
that allows a transaction to occur, and all moneys to be
paid, before delivery occurs.
So a transaction goes by on the tape - a sale - and it is
processed, and has an effect on the price of the stock, but
the delivery portion of the transaction is left for days
later. Meanwhile, the depressive effect of thousands of
these sales extracts it toll on the price - the naked sales
are still sales, and are treated as legitimate by the
system.
At some point after the checks have been cashed and the
commissions distributed and the fees paid, the share never
shows up.
Illegal In Most Instances
Naked short selling is illegal as described - it can be
legal in certain limited circumstances: for a market maker
that needs to provide shares in a fast moving market for a
thinly traded security, but in that instance it will buy the
share back a few cents below where it sold it - Sell at
$4.20, buy at $4,00 - which is part of legitimate market
making. Or an options market maker will do so to hedge its
sale of put options. These are legal, limited-time frame
exceptions. All other instances are illegal.
The industry term for a naked short sale is a Fail to
Deliver (FTD), because the seller fails to deliver.
The FTD is handled by the clearing and settlement system
(the DTCC, a for-profit company wholly owned by Wall Street
- the brokers) in two ways:
1) The stock borrow program at the NSCC (a subsidiary of the
DTCC) enables that entity to borrow shares from an anonymous
pool, and effect delivery to the buyer. The NSCC then
creates a debit in the seller's account, and holds the cash
from the sale (minus commissions, of course) as collateral.
It charges a fee to do that, and the program was designed to
accommodate "temporary" delivery failures - but has been
abused over the years, as "temporary" has no fixed
definition, and some unscrupulous hedge funds think
"temporary" means years.
2) The non-CNS (Continuous Net Settlement) system, or
ex-clearing (ex- meaning outside of) system, which allows
the NSCC to handle the cash for the brokers and pay
everyone, but leaves the delivery portion of the transaction
outside of the system, between the two brokers, on the honor
system. The brokers ALL have a ledger in their back offices
where they keep track of the IOU's from each other, and this
has resulted over time in a ghost, or phantom, float of
electronic book entries in the system, with no stock
existent to support the transactions - just IOU's.
The DTCC reports that the FTD problem amounts to $6 billion
a day, marked to market. It is unclear whether that includes
the ex-clearing transactions or not - the language used is
ambiguous, and allows for different interpretations. Many
have asked for clarification, and none has been offered -
the DTCC doesn't like to talk about this, to anyone,
including the regulators.
Critics of the DTCC charge that the Stock Borrow Program
creates more book entries/FTD's/IOU's than there are shares
of stock issued, which the DTCC has denied in carefully
parsed language that actually doesn't deny the direct
accusation. These critics maintain that the lending pool is
replenished as shares are borrowed, delivered to the buyer's
broker, then put right back into the pool by the new broker
to be lent out again, thereby giving birth to IOU after IOU.
The DTCC carefully argues that it never lends more shares
than there are in customer accounts. This is technically
true, as Lender A's account has no share in it once it is
lent to Buyer B, but when Buyer B re-deposits the lent share
into his DTCC account, available for loan, it then gets lent
to Buyer C, leaving a nice little trail of IOU's as it worms
its way through the system. The DTCC never addresses this,
and instead answers questions that weren't asked, in the
best tradition of politicians and bureaucrats
everywhere.
The DTCC has said that only 20% of the transactions are
handled via the Stock Borrow Program. That leaves the
question of how the remaining 80% are handled. The answer is
via the ex-clearing system.
How can the SEC allow this chronic failure to deliver to
occur, creating a de facto phantom float of book
entries/IOU's with no shares to support them? Aren't those
in actuality counterfeit shares, falsely represented to the
buyers as real? If they are treated by the system as
equivalent to genuine shares for the purpose of creating a
transaction, I would argue they are.
The system tells the buyer that all is well, and doesn't
differentiate between a legitimately delivered share and an
IOU. Thus, the buyer sees that he bought 1000 shares of ABC
on his brokerage statement or on his screen - but there is
no way of knowing how many are real shares and how many are
IOU's without obtaining paper certificates, which cannot be
counterfeited with the ease of an electronic book
entry/tick/IOU. The brokers will tell you that of course
there's shares there, or alternatively, that it is a
non-issue, as the ticks can be sold at any time, getting the
buyer's cash out of the trade. These explanations
deliberately ignore that there is no attendant share to back
up the IOU.
A share is a specific thing, a parcel of rights, from the
issuing company. Among these rights are the right to vote,
and the right to legal redress (you can sue them as an owner
of the company), and the right to any dividends, cash or
stock.
An electronic book entry without a share to back it up has
none of these rights.
The lack of differentiation between real shares and IOU's
has resulted in a market where we are trading claims on
shares, rather than genuine shares, and oftentimes there are
many more claims than there are shares. That is not the way
the market is supposed to work.
Systemic Problem of Critical Scope - Rule 17A Sought
to Prevent This
Congress mandated in Rule 17A of the 1934 Securities
Exchange Act that our markets have prompt, accurate
clearance and delivery. It reads, "The prompt and accurate
clearance and settlement of securities transactions,
including the transfer of record ownership and the
safeguarding of securities and funds related thereto, are
necessary for the protection of investors and persons
facilitating transactions by and acting on behalf of
investors.”
That seems pretty clear. BOTH clearing (booking the sale and
paying for it) and settling (delivery) need to happen
promptly, and further, the transfer of record ownership
needs to occur. The rule makers understood the temptation to
come up with a way to game this, so were clear on the
necessary predicates. Clear AND Settle, including transfer
of ownership.
FTD's violate that mandate. No record ownership is
transferred on a stock share via an IOU. Further, none is
transferred via a Stock Borrow Program "loaned" share -
because if it were, then the lender would lose his
ownership, which would be a sale, not a loan - so either the
"loan" is a disguised sale in which record ownership IS
transferred, in which case the NSCC appears to be
deliberately disguising a sale by erroneously calling it a
loan, or no record ownership is being transferred, in which
case it violates 17A. Those are the only two choices.
Neither is pretty, nor legal.
So how does the SEC allow this to go on?
They typically cite Addendum C of the NSCC's rules, which
allows for the stock borrow program to loan stock to cover
TEMPORARY settlement failures - the kind resulting from lost
certificates. The "temporary" caveat has been ignored, and
it has instead become a long-term device to create an
unlimited number of electronic book entries.
They also take the position that the ex-clearing
transactions are the province of contract law, as the
agreements to deliver are a contractual agreement, and the
SEC doesn't mediate contractual disputes. A nice way to step
out of the role of regulator of the markets, and create
instant deniability. The NSCC takes the same position,
leaving things up to the brokers, on the honor system.
So the back offices create an unknown number of IOU's,
predictably resulting in depressed prices for the afflicted
securities, and the regulators say it isn't any of their
business.
Systemic Risk
Because of this unbridled FTD manufacturing, a tremendous
contingent liability for the industry has been created over
time, as the large float of FTD's represents stock that
needs to be bought back at some point in the future, but for
which there is no guarantee that stock is readily available.
In some instances there are reports of companies where FTD's
represent multiples of the issued genuine shares.
The collateral used to secure the FTD at the NSCC is cash,
but it is marked to market against the price of the stock at
the end of the day, and any overage is available to the
seller. This means that if the FTD was created at $20 per
share, and the stock has been run down to $5 per share, the
seller gets to withdraw the $15 dollar difference. This
creates a dangerous situation where the system is hopelessly
under-collateralized for the true risk - the shares will
cost far more than their current depressed price to cover,
as the depressed price is often a function of massive
selling of FTD's. This is the contingent liability risk. It
is likely considerable, and is ignored by the system.
This risk creates a situation where the brokerage community
has a vested interest in seeing the prices of victim
companies stay down once they are down, as their best
customers (hedge funds) have taken out the
over-collateralization dollars over the years from the
FTD's, and used them to collateralize other securities -
many times, more FTD's.
The most obvious way to keep the price depressed and enable
everyone to continue to make money is to issue more FTD's
whenever the price of a victim security starts to rise. This
creates a self-fulfilling prophecy of chronic price
manipulation via the issuance of FTD's.
It is likely that there is a severe leverage crisis with the
hedge funds that use FTD's, as they have used borrowed funds
to collateralize the initial FTD, and then used the
over-collateralization to create yet more FTD's. If one of
these funds was to unwind it could vaporize the assets of
the fund involved virtually overnight, and create yet more
systemic problems for other hedge funds as their positions
rise in value, triggering more de-leveraging.
It is the classic derivative risk de-leveraging scenario
wherein one or two larger funds can cause a meltdown, a la
Long Term Capital Management (LTCM) in 1998, where one
highly leveraged hedge fund with $2.2 billion in assets
caused the entire US credit markets to shut down. LTCM was
not naked short selling - they are mentioned to illustrate
how one leveraged fund can endanger an entire market.
The SEC is likely aware of this risk, as it heretofore
inexplicably violated SEC Rule 17A, and grandfathered in all
FTD's prior to 2005, even though long term FTD's were
illegal for many years prior to that date, and even though
it is in violation of their Congressional mandate. Further,
and perhaps more disturbing, the grandfathering rules
grandfathers current FTD's below the threshold once a stock
hits the Reg SHO Threshold list - market manipulators still
get one free bite of the apple even on new SHO entrants -
all the fails up until the company lands on the list are
inexplicably grandfathered as well, even if they happened
today. Wild? It's fact.
SEC Forgives Past Larceny With No Penalty -
Why?
Why would the SEC grandfather all prior fails, as well as
current fails below the threshold, and knowingly violate
their Congressional mandate? It is akin to allowing bank
robbers keep the proceeds of all prior bank robberies. There
are two logical explanations available to us:
1) The SEC knows about the
systemic risk FTD's cause, it is terrified of the
implications, and it wanted to, at the stroke of a pen,
eliminate that risk from the system, even if it violated the
law and was at the expense of shareholders who had been
financially decimated by the practice.
A choice was made to allow the brokers and hedge funds to
keep the proceeds of their ill-gotten gains, and not require
them to ever buy in the shares they had printed whole
cloth.
The SEC admits it, in their own bureaucrat-ese. From the
February, 2005 Euromoney article on the controversy:
The SEC's Brigagliano says the commission made a choice.
"We were concerned about generating volatility where there
were large pre-existing open positions, and we wanted to
start afresh with new regulation, not re-write
history."
Substitute the words "not enforce existing, decade-old laws"
for "not re-write history" and you have the plain English
version. The SEC violated 17A, knowingly, because they were
worried about causing "volatility" - SEC-speak for short
squeezes, where stocks with millions of FTD's go through the
roof as they are bought in - essentially a return of capital
to those damaged by the FTD's, as their cash is returned to
them, in return for selling their genuine shares. That would
be the fair way equitable markets would work - those who had
made untold billions using FTD's would have to pay most or
all of it back in short squeezes, as legitimate supply and
demand are returned to an unbalanced market (because of the
current artificial supply of FTD's).
The SEC was apparently so
concerned about that "volatility", that their solution was
to give the violators a free pass, and allow the damaged
shareholders and companies to remain damaged in perpetuity,
never settling nor having record ownership transferred. This
decision underscores the likelihood that the SEC understands
the systemic risk years of FTD creation have created, and
will go to great lengths to avoid triggering an event that
would cause the violators to have to settle the trades.
A more cynical interpretation is that the SEC didn't want to
cause undue financial hardship for the more politically and
financially important violators (the violators would likely
be both, as they had years of selling non-existent shares
with which to build and solidify their financial importance
- and to spread the wealth by supporting their elected
officials with contributions), choosing instead to lock in
the industry's illegally generated profits, rather than have
the violators pay it back - the SEC favored the hedge funds
and brokers that had violated the law, over the shareholders
and companies that had been brutalized by the
practice.
2) The far more ominous
logical explanation is that the SEC grandfathered not out of
concern for the system, but rather to limit its own
liability under the law - that after
years of permitting felony short selling/securities fraud
manipulation, the SEC ultimately came to realize that it had
committed collateral crimes, and could be held accountable -
as accessories to the felonies. This explanation posits that
in passing Regulation SHO, the SEC wasn’t just
grandfathering the previous illegal short selling to protect
the short sellers, but rather it was, much more importantly,
protecting the SEC itself. And it focused the ire of the
victims on the rule violators who financially benefitted,
rather than upon the regulator that had permitted the
felonious activity for years.
The
legal argument would go like this (simplified): The felony
committed and suborned in this situation is USC 18, Title
514, the commission of counterfeiting of a commercial
security, a Class B Federal Felony. By permitting this
felony to be an endemic part of the modern market system,
and by knowingly failing to enforce rules designed to
prevent counterfeiting of a commercial security, the SEC
aided and abetted those who have done so, subjecting it to
risk of civil and criminal redress. The permission of a
large float of FTD's to be part of the markets is a de facto
permission of counterfeiting (wherein the bogus IOU/Markers
are represented as and have the effect of legitimate stock
shares, on the auction price of the security as well as on
the long term size of the float), and thus creates an
accessory risk for the Commission. Arguments have been
advanced that, as in the Elgindy case, naked short selling
was used for money laundering for Middle Eastern arms
dealers, thus constituting treason during a time of war
(according to the Patriot Act), a Class A Felony - that the
Commission was ignorant of the outcome of its permitting the
counterfeiting does not absolve it of the legal jeopardy
arising from that outcome, any more than the driver of a
getaway car in a bank robbery is absolved of the murder of a
teller during the robbery - even though he was ignorant of
the ultimate crime committed. That is not how the law works.
Note that I take no
position as to the likelihood of this second explanation
being correct. It is a credible explanation advanced by
several experts familiar with the legal ramifications of
allowing FTD's to remain in the system in perpetuity, and
failing to enforce rules designed to stop larcenous action,
nothing more.
FWIW, it is far more
likely that the SEC folks understand that upon retirement
they will receive $700 per hour jobs with top lawfirms
representing Wall Street, and that knowing this they are
much more likely to favor Wall Street's interests. Most
agencies of the Government have the conceit that comes from
unbridled power, and it is hard to imagine Federal employees
actually afraid of liability for anything. Thus, the second
explanation is a hard one to swallow.
But whatever the
motivation, charitable or cynical, you arrive at the same
effective point: Years of lawless predation were pardoned
(in violation of 17A's Congressional mandate), the profits
kept by the criminals, with no penalty or sanctions imposed
- leaving investors and the victimized companies out of
luck, and money.
So what about now?
Since the new FTD rule was passed (Regulation SHO, for
SHOrt) and went into effect January, 2005, more companies
have gone onto the Threshold list (a list of companies whose
FTD's exceed a "threshold" of 10,000 shares AND 1/2% of
their total issued shares), and more FTD's have been
created. The industry can't help itself (and truthfully why
would they?) - it is just too lucrative to ignore the
un-enforced rules, and continue to manufacture IOU's. The
systemic risk continues to build, and the regulators that
hoped the industry would heal itself are left unwilling or
unable to act - the imperative to create fair markets is
clearly subordinate to pandering to the financial well being
of the violators.
The DTCC and the SEC take the position that information
about this crisis is proprietary and secret, and that our
elected officials and companies and we shareholders have no
need or right to know the true parameters of the problem.
The workings of the machine are opaque, and transparency is
derided as an unnecessary invasion of the industry's
privacy.
Again, the charitable
explanation for this stance is because they want to avoid a
potentially damaging meltdown (albeit of their own
creation). The cynical explanation is that investors would
riot in the streets or abandon the market if they understood
what was being done to them, and would hold the SEC
accountable for their role in it. Regardless of the
explanation that one feels best explains the SEC and the
DTCC's actions, what is unarguable is that the size, scope,
and ongoing treatment of the crisis is top secret.
This is very much like the way the regulators handled the
S&L crisis, allowing a large systemic problem to develop
into a catastrophic systemic problem that wound up costing
hundreds of billions of dollars, and every man, woman and
child in the US about $2K in taxes. We are still paying for
it today.
In that episode, the
S&L's accounted for about a third of all the business
Wall Street did in the 80's, and every big house stuffed the
most larcenous of the S&L's with untold billions of junk
bonds and options and precarious loans, knowing and
understanding that the American taxpayer would ultimately
have to pay the freight via secured deposits. Wall Street
was assisted in this wholesale looting of the financial
system by every major accounting firm in existence, and the
most prominent attorneys in the country. Fraud of a mind
boggling scale was perpetrated and perpetuated by that
industry, and one of the primary beneficiaries was Wall
Street, who that time also got to keep the money, laying off
the blame on the S&L's. This time around we have hedge
funds comprising over 50% of Wall Street's action, and we as
a nation seem to have learned nothing from our prior
fleecing. One can't understand that catastrophe and not draw
striking parallels to this situation.
In fact, the entire FTD crisis is very similar to the
S&L crisis, in the sense that staggering amounts of
money are in play, private interests are operating in an
unregulated environment (hedge funds and ex-clearing),
leverage is being employed to compound the risk, Wall Street
wunderkind are making preposterous profits, phenomenally
wealthy players are receiving preferential treatment even as
they knowingly violate the law, Greenspan is saying that no
restrictive regulation is required, the industry is
protesting that there is no problem, and the entire affair
is taking place shrouded in secrecy.
That didn't end well.
The above is simplified, and is conceptual, as in reality
there is no single share followed through the system - there
are debits and credits to participant accounts at the NSCC,
which are netted against total long positions, further
obfuscating the mechanisms. But the fundamentals are
accurate, if lacking in a certain specificity that could
fill volumes. Hopefully it is enough for the reader to grasp
the issue and the scope thereof.
* From "Symphony of
Greed - Financial Terrorism and Super-Crime on Wall Street",
by Bob O'Brien, in progress. Interested literary agents or
publishers are encouraged to contact Bob at
NCANS.mgr@gmail.com
Last week, when
I
wrote about naked
short sellers and Regulation SHO, I suggested none too
subtly that the new rules seem to deal pretty lightly with
any bad guys operating outside the law. If the Securities
and Exchange Commission is acknowledging a problem, as it
seems to be, then Reg SHO seems like a pretty weak tool for
controlling it.
But that was last week's
subject. Having gotten to that point, I was left wondering
how extensive the problem really is. As I said then, I'm
deeply skeptical of some conspiracy theories that suggest
that short selling is not only rampant, but also a part of a
coordinated scheme involving brokers, media, and regulators
trying to bring down targeted companies. In fact, let me say
at the outset that after spending many hours looking at this
issue, I remain unconvinced of the larger conspiracy
theories and agnostic on how extensive naked short selling
is or how exactly it happens. There is no shortage of
theories -- some of which I'll discuss here -- but little in
the way of concrete answers. So the first and most obvious
question is, how much of this is going on?
Rare or everywhere? Unfortunately, nobody seems to know. The Depository
Trust & Clearing Corporation (DTCC), a holding company
that clears and guarantees almost all trades in the U.S.,
very recently posted an interesting
Q&A on naked
short selling, an article well worth reading if you're at
all interested in the subject. "While naked short selling
occurs," says DTCC First Deputy General Counsel Larry
Thompson in the document, "the extent to which it
occurs is in dispute." Ain't that the truth.
Nevertheless, the DTCC has
a good reason to say something public about the issue. The
subject of naked short selling has gained some momentum with
the introduction of Reg SHO early this year and a rising
tide of complaint from companies like Overstock.com(Nasdaq:
OSTK) and
others. But in addition to this general attention, 12
separate lawsuits have accused the DTCC itself of
engineering naked short-selling schemes. Nine of these,
according to Thompson, have been dismissed or withdrawn,
while three are still pending.
The basic accusation is
that the DTCC itself counterfeits shares through its stock
borrow program. This program has been around for more than
20 years and helps guarantee transactions when one party
fails to produce promised shares. While the DTCC itself
doesn't own shares, a network of participating
broker-dealers lists shares available for borrowing with the
program, and these are called on to complete failed
transactions.
Lawsuits have claimed that
the DTCC loans out shares it never collects from
participants. These, in turn, presumably show up as new
"fails to settle" transactions, but from the point of view
of the market, they appear to be new shares floating around
-- in electronic form, that is, without stock certificates
to back them up. These can then be relisted, the theory
goes, as available for borrowing, and the process repeats
itself, allowing the folks manipulating the system to
essentially manufacture any number of phantom
shares.
Thompson calls these
accusations "either an intentional misrepresentation of the
SEC-approved system, or a profoundly ignorant
characterization of this component of the process of
clearing and settling transactions." I want to stress that
I'm not supporting these accusations -- I mention them
because they describe one popular theory of how naked short
sellers operate.
Something's going on
here But if we rule this out, how does one explain the
suspicious volumes and consistent, ongoing settlement
failures experienced by companies like
BioLaseTechnology(Nasdaq:
BLTI),
Netflix, or
Rule Breakers pick
Taser(Nasdaq:
TASR)
on the Threshold Security lists? Thompson, while
acknowledging that naked shorting does happen, suggests that
many settlement failures are innocent. "An investor can get
a physical certificate to his broker too late for
settlement," he suggests. "An investor might not have signed
the certificate, or signed in the wrong place. There may
have been human error, in that the wrong stock (or CUSIP)
was sold, so the delivery can't be made. Last year, 1.7
million physical certificates were lost," he continues, "and
sometimes that isn't discovered until after an investor puts
in an order to sell the security. There are literally dozens
of reasons for a 'fail to deliver,' and most of them are
legal. Reg SHO also allows market makers to legally 'naked
short' shares in the course of their market making
responsibilities, and those obviously result in
fails."
But can unsigned
or lost certificates really explain why some companies have
lingered on the list for weeks, meaning that more than
10,000 shares per day or over 0.5% of the company's entire
float is subject to failed settlement on a daily basis? If
that's the root cause, it would certainly seem to point to
some pretty shoddy settlement practices among
broker-dealers. If that's really all there is to this, then
maybe Reg SHO will serve its greatest purpose in
embarrassing some brokers into improving their settlement
procedures.
Who's making
the market? Yet, as I noted last week, it is the
market-making exemption that still seems to me like a source
of potential trouble. Market makers don't have to locate
shares before executing short sales in most circumstances.
Their role is to keep an inventory of readily available
stock, to smooth volatility, and to manage their own risk,
and this sometimes requires them to short shares. A prime
example of why this is sometimes a valuable function and
even protects investors can occasionally be seen with
companies emerging from bankruptcy.
When
US Airways (OTC BB:
UAIRQ.OB) was planning to re-emerge from bankruptcy in 2003,
for instance, its old common stock, trading on the OTC BB,
rallied -- apparently because some investors mistakenly
thought the news was somehow good for shareholders in the
old common stock. But the plan called for the issuance of
new stock, and the old shares were to become worthless.
Market makers, by shorting the old common shares, could
burst a speculative mini-bubble in the making and stop more
ill-informed investors from losing their shirts. (Of course,
one wonders why stocks are allowed to trade at all in these
situations, but that's another matter). In any case, this is
an extreme example of one function legitimate market makers
serve by shorting stock and why they are given an exemption
to the rules.
The potential
problem is that unscrupulous folks could potentially
register as market makers to take advantage of the
exemptions. (Do you
want to be a market maker? Go here
for an application! It's not a rubber-stamp process, but
it's not as hard as you might think.) Right now, "bona fide"
market making is judged by the individual transaction rather
than by the individual market maker, so no market maker gets
a blanket exemption, but any market maker -- even the ones
posting $0.001 bid/$10,000 ask spreads -- get a pass in the
right circumstances. It's a situation that seems to hold
potential for mischief.
Overseas
intrigue? And here is a final source of potential trouble
I'll suggest. Say the broker placing the order to short a
stock is in an offshore location where naked short selling
is legal. This would seem to open up the same opportunities
purportedly exploited to naked short the stock of companies
that have issued floorless convertible debt.
A floorless convertible
bond (a vehicle of what is sometimes called the "convertible
death spiral") is a debt instrument issued by desperate or
dishonest companies to raise cash; the bondholder can
convert the debt into stock at variable, below-market
prices.
It's not a deal a
responsible company should enter into. When a company does a
floorless convertible, its stock, not surprisingly, drops.
The new bondholders have every reason to short the stock
unmercifully, and as the price drops further, they get more
shares upon conversion because the conversion rate changes.
Thus, the original shareholders lose virtually all their
stake in the company. Meanwhile, the bondholders simply
short all the shares they can, take their profit, and then
hope the stock price continues to drop until they get more
than enough shares upon conversion to cover the original
short.
As long as the bondholders
are using legitimately borrowed shares and not engaging in
unscrupulous tactics to manipulate share price lower, this
is a legal strategy -- although it is hard to see why such
floorless converts, devastating for existing shareholders,
are in fact legal. But if the bondholders are in an offshore
location where they can legally naked short, they might
theoretically short more shares than they can get their
hands on. After all, the shares they have coming back to
them are multiplying as the price drops, so why
not?
At the root of the
conspiracy theory? There are folks out there who believe this is the main
source of naked short selling in the market. Certainly, in
this scenario the bondholder has an incentive to naked short
the stock, and one could expect to see massive issuance of
new shares as the debt is converted to stock at a
rock-bottom price. Failed settlement and suspicious volume
in one neat package, right?
Maybe. But since most of
the companies on the Threshold Security List haven't issued
toxic convertibles, of what relevance is this? Only this: If
an offshore concern can naked short the shares of a company
to which they've issued a convertible loan, why can't a
foreign broker naked short a company for which there is
simply high demand for borrowed shares?
When I look at the
Threshold Security List, even ignoring the penny stocks, I
see companies that a lot of investors want to short (OK,
that's pretty much true by definition). The very appearance
of these companies means that not everyone is getting to
borrow the shares they want -- you won't see
Microsoft(Nasdaq:
MSFT) or
General Electric(NYSE:
GE) on the
list. Couldn't an enterprising broker in some foreign
location be executing naked short sales to satisfy some of
this demand? Wouldn't this cause persistent settlement
failure?
I have no way of proving
this -- it is just surmise. But notice that this scenario
does not suggest that the naked shorts are
successfully pushing down the price of the threshold stocks
to any significant degree. It only suggests that the
real demand for shares to short is being satisfied by
extra-legal means -- brokers who have set up shop to
transact shares of a popular short target. Investors who see
value and want to take a long position in these same stocks
should naturally balance out the shorts, absent some highly
organized conspiracy to spook the market. Thus, I don't
think investors in threshold companies should necessarily
believe that their stock is artificially depressed to any
substantial degree.
More unanswered
questions This may only go part of the way toward explaining
unusual volume, however. Last week, I mentioned Global
Links (OTC BB: GLKCE.OB), a penny stock that has a
listed float of a little over 1 million shares but traded
many times that volume in a single day despite there being
one shareholder who claimed to own the entire float. I
mentioned that particular company because it came up by name
at the March 9 Senate Banking Committee hearing, and the
story makes a good illustration of the kinds of absurdities
showing up on the Threshold Security List.
But in fairness, I should
point out that in this particular case, there are other
factors that might explain the volume. Among other things,
the company has a huge overhang of preferred shares
convertible to common stock. It's impossible to tell from
the SEC filings alone exactly what's going on here, and
while it's an interesting story, a smoking gun it ain't.
This is part of what makes penny stocks really bad
investment ideas for nearly everyone.
But while Global Links is
a strange and perhaps poor example of suspicious trading
volume, there are other examples out there. Overstock CEO
Patrick Byrne has noted seeing four or five times his
company's float trade hands in a day. The same thing has
happened to other threshold companies. What explains
this?
I'm afraid I still don't
know. Is it day traders on steroids, frantically trading
back and forth? Perhaps. Could it be a few hedge funds
painting the tape, hoping to make it look like the sky is
falling? Maybe. Could it be huge numbers of phantom shares
out there, making the reported float inaccurate? I guess
it's possible.
Unfortunately, Reg SHO
appears to raise more questions than it answers. As the DTCC
is quick to point out, its job is simply to report the
failed settlements. It is up to the SEC to actually do
something about it.
By the way, I'll look at
some more of the specifics of naked shorting and what they
mean to investors in the next issue of the Rule
Breakers
newsletter.
Karl
Thiel is a
member of the Rule Breakers newsletter team. Click
here for a
free trial.
He does not own stock in any companies mentioned in this
article. The Motley Fool has a disclosure
policy.
Eat My Shorts!
A Naked Shorting Primer for CEOs.
Cale Smith, Senior Associate
Hawk Associates, Inc.
The drama surrounding
naked shorting has all the elements of a John Grisham
novel. Sly, blue blood institutions conspire with shadowy
hedge fund cowboys to unmercifully assault a well-meaning
but outgunned CEO in his quest for shareholder value.
Offshore accounts and corrupt foreign officials veil the
crimes for decades, until finally being thrust into the
open through the hyper-caffeinated efforts of hundreds of
message board denizens throughout cyberspace.
As with most Grisham
novels, however, liberties may have to be taken with the
original story to romanticize an otherwise bland topic.
After all, it’s hard to make CUSIP numbers and stock
certificates sound sexy, but that’s really the heart
of the naked shorting controversy.
Due largely to concerns
raised by microcap CEOs and their shareholders, naked
shorting is a hot topic on message boards. Opinions range
widely on how common it is. Those claiming it pervades
the markets and foreshadows a systemic meltdown are met
with equally fervent arguments calling it an over-hyped,
isolated problem that is becoming the grassy knoll
conspiracy theory of Wall Street.
Everyone agrees,
however, that risks of naked shorting are heightened in
the microcap world. The sheer number of small public
companies, combined with high volatility and an almost
inevitable need for financing, make detecting this
hard-to-prove crime that much more difficult for the
microcap CEO. Although the odds seem small that a
particular company will be victimized, there is no
authoritative data indicating how many microcaps are
being naked shorted.
Keeping those odds in
perspective, then, this primer is for microcap CEOs
curious about the naked shorting fuss. On the off chance
that a company attracts naked shorts, CEOs should
recognize that there is despairingly little that can be
done to stop it from occurring. Due to the nature of the
crime, legal expertise may not help.
Although there seem to
be few bulletproof ways to stop naked shorts, there are a
handful of things a proactive CEO can do to reduce the
odds of being blindsided by this notorious lot. This
primer includes a rough sketch of how naked shorting
works and a brief familiarization with the main players.
A worst-case scenario of what it means to be targeted by
naked shorts is presented, as are suggestions for wary
CEOs. The final section contains a list of links with
more about the intriguing world of naked shorting.
WHAT
IS NAKED SHORTING, AND WHY SHOULD A CEO CARE?
In its simplest terms,
naked shorting involves selling shares of stock that
don’t exist. It’s performed routinely by
market-makers to keep an orderly market, but it is
illegal when done to manipulate a company’s stock
price. Only when someone intends to drive down the stock
price is naked shorting breaking the law. Throughout the
rest of this overview, any reference to naked shorting
will refer to the illegal variety.
It’s also worth
noting the important distinction between shorting and
naked shorting. The former is perfectly legal and occurs
extensively as either a way for an investor to mitigate
risk or as a bet that a company’s share price will
decrease (i.e. the short-seller or “short”
believes the company is overvalued). Despite the wary
glances often cast upon them, shorts are an essential
part of a robust market and are often the first to
discover financial fraud, as in the case of
Enron.
A short will sell
borrowed shares as a bet against a company because he
believes the price will eventually drop. These borrowed
shares come from his broker, which loans the short a
certain number of shares (not dollars). As soon as the
short receives the borrowed shares in his account, he
sells them immediately for cash, which goes to his
brokerage account. The short still has that pesky loan to
pay back, though, and does so by waiting for the price of
the stock to drop. Then he buys some cheaper shares using
money from the same pool of cash he received after the
original sale, gives the broker his shares back, and
keeps whatever cash is left in his account.
Naked shorts, in
contrast, are much more manipulative – they sell
short shares that don’t exist and then attempt to
actively lower the company’s share price through
constant short-selling pressure. By using pretend shares,
of which there is an unlimited supply, naked shorts can
effectively control the share price through this constant
pressure, eventually driving the price of a
company’s shares into the basement.
Where do these fake
shares come from? Naked shorts can create them out of
thin air, depending on your point of view, due to either
(a) glaring inefficiencies in the back-office world of
certificate transfers, or (b) institutionalized fraud on
a massive scale. Either way, the effects can be
disastrous for companies who are victimized.
WHO
IS INVOLVED?
Naked shorting is
typically done by hedge funds with arm’s length
support from several other parties. The extent of active
assistance provided to the fund by these related groups
is unclear but hotly debated. One player is the
Depository Trust & Clearing Corp. (DTCC), which
tracks the stock certificates of traded shares between
brokerages. When a fund sells short a share of stock, the
fund’s brokerage (another prominent player) has a
settlement period of three days to deliver those shares
to the buyer’s broker. If the transfer doesn’t
occur, the DTCC notifies the fund’s broker that it
has “FTD’d” (Failed to Deliver). The DTCC
is required by the SEC to enforce delivery of missing
shares. While waiting to account for shares, the DTCC may
charge the brokerage to borrow similar shares from its
own inventory.
The obvious conflict of
interest here is that DTCC is policing its own customers
- the brokerages. In response to complaints, the SEC
required all exchanges to comply with Regulation SHO in
January of 2005. Reg SHO establishes several requirements
aimed at broker-dealers, but it does not specifically
address the manipulative aspects of naked shorting, which
fall under existing securities law.
Regulation SHO
specifically requires the major exchanges to provide a
daily list of Threshold Securities, defined as those that
(1) have an aggregate fail to deliver position of over
10,000 shares (2) equal to 0.5% of the issuer’s
total shares outstanding for (3) greater than five days.
Reg SHO also requires a broker-dealer to close out any
“open fail” position once it has been included
on an exchange’s Threshold Security list for 13
consecutive days. The ironic effect of this policy, as
noted by its detractors, is that it effectively requires
shorts to cover (buy back shares) after they’ve had
two weeks to drive the price down - meaning they profit
from the trade. Needless to say, the effectiveness of
such a regulation is often called into question among the
cyberspace crowd.
Links to the Threshold
Security list for each primary exchange are included at
the conclusion of this article. It’s important to
remember that seeing a company included on the Threshold
Securities list does not mean that company is being naked
shorted nor that its share price is artificially
depressed. It means shares in that company are failing to
deliver on time for what may be legitimate reasons,
including simple human error. Even shares bought long
could FTD and show up on the Threshold list. A daily
presence on the Threshold list for more than 13 days at a
time, however, might signal the need for deeper
digging.
HOW
DOES NAKED SHORTING ACTUALLY WORK?
Based on the accounts
of CEOs who believe they have been the target of naked
shorts, here is how the worst-case scenario might play
out using an ill-intentioned hedge fund (“Fund
Malicious”) as an example.
Fund Malicious first
identifies a target in the microcap world for naked
shorting, most likely an obscure company in the
development stage or having otherwise questionable
fundamentals. The hedge fund gets that firm listed on a
foreign exchange in, say, Berlin, via a request funneled
through a complicit broker or official in that country.
Malicious then sells short shares it doesn’t have
(naked shorts them), waits three days for the DTCC to
call and ask for the shares, and then replies either,
“I borrowed them on the Berlin exchange, and
they’ll take some time to get here,” or
“I’m a market-maker for that company’s
shares in Berlin and naked shorting rules don’t
apply there.” The DTCC then loans the fund shares
from its inventory and charges the broker a fee until the
stock loan is repaid. Malicious, in the meantime,
continues to drive the price of the target’s shares
down as long and as aggressively as possible. In the
event the fund does cover to pay off the stock loan, it
doesn’t take much effort to begin the naked shorting
cycle again.
Other theories exist as
to how the hedge fund might skirt additional rules. To
prevent “piling on,” exchange rules mandate
that a stock cannot be shorted on a downtick or decrease
in stock price. In other words, Malicious must wait for
the stock price to increase briefly before shorting the
company. Rather than wait passively for an uptick,
though, Fund Malicious can create an uptick in the stock
itself by purchasing a few shares through a small
offshore account. The hedge fund is then free to short
(or naked short) the company with both barrels at
home.
Malicious may get
additional leverage out of the original naked short by
choosing to target an ugly, obscure microcap company. By
driving the price down, the fund hopes to scare existing
shareholders into selling their shares, too, out of fear
that something is going on that they don’t know
about (i.e. the fund can “paint the tape”).
This, of course, drives the price even lower while
further obscuring the role of Fund Malicious.
There is plenty of room
for additional mischief in the above scenario. According
to the most vocal critics of naked shorting, funds like
Malicious have relationships with reporters and/or
message board regulars who are compensated to distribute
negative news about the company in order to exaggerate
the selling. There is also plenty of irony possible, in
that a CEO can be her shareholders’ worst enemy by
merely uttering the words “naked shorting.”
Investors may panic, the stock might dive further and
legitimate short-sellers could begin to circle.
KEEPING
THINGS IN PERSPECTIVE
Given the mysterious
nature of hedge funds and the convoluted nature of this
crime, it’s easy to get carried away with paranoid
scenarios regarding naked shorting. The skeptics,
however, have some unanswered questions of their own. For
instance:
• What’s in it for the brokerages? Are they
supposed to take all the risk just to get a few more
commissions or under-the-table money? Since when have
they been that desperate?
• Has anyone ever
been found guilty of naked shorting?
• Where is the
proof? Are there other pieces of evidence that would
suggest a crime is being committed?
• Why aren’t
more companies making noise about it? Where are the
whistleblowers?
• Wouldn’t
the unintentional buyers of naked-shorted shares voice
their concerns when they did not receive proxy
votes?
• Why is there no
outrage from legitimate funds and brokerages?
• How much
regulatory burden should the SEC and other publicly
traded companies have to bear to resolve the questionable
problems of a few companies?
Both camps raise
legitimate issues that simply cannot be addressed
definitively yet. Reg SHO is not the deterrent the
problem seems to demand. There have been numerous calls
on the SEC to increase the scope of data provided in the
daily Threshold Securities lists, which may help better
gauge the seriousness of this problem. Until those issues
are resolved, the SEC continues to consider the
surveillance and enforcement of trading activity as the
primary responsibility of the markets and exchanges. The
DTCC considers its role to be reporting the FTDs.
Brokerages are doing all they can to win commissions from
hedge funds. Detection is difficult, accusations are
nearly impossible to prove, and nobody has figured out a
foolproof way to stop this crime.
So what’s all that
mean for the microcap CEO? When it comes to naked
shorting, you are your own best watchdog.
WHAT
TO DO IF YOU THINK YOU MAY BE TARGETED
Above
all else, be discrete with your public
accusations.
A well-intentioned CEO
can fulfill his own prophecy by going public with
accusations of naked shorting. Investors may flee the
stock, further lowering the share price. Meanwhile, other
funds may hover, waiting for an uptick to begin shorting
your company themselves.
Watch
your trading volume.
If you’re seeing
four or five times your company’s float trade hands
in an otherwise ordinary day, and you have no large share
overhangs, pay attention. Start documenting those
patterns.
Keep
your focus on operations.
Your stock price is not
declining exclusively due to naked shorting. Weakness in
the business, industry, model, communications or
management team exists well before naked shorting begins
and allows it to continue. In most cases, the best
deterrent for shorts of any kind is consistent execution
and credible communications with your
shareholders.
Always
surprise on the upside.
By maintaining absolute
secrecy before good news, you give yourself the best
chance to catch the shorts off guard and maybe even
squeeze them. Be conscious of unintended signals you may
send when in public appearances, conference calls and
analyst meetings before a particularly good quarter or
other surprising good news. Keep your cards close to your
chest and save those glowing press releases for the
middle of the trading day.
Maintain
a steady stream of news.
By communicating with
your investors as often as possible, you remove some of
the mystery surrounding a company that a naked shorter
typically targets. In the absence of any company news, a
continuously dropping stock price is the only
communication your investors are hearing. Sales of stock
by legitimate owners are sure to follow.
Put
floors on your convertibles.
A floorless convertible
bond (also known as a “convertible death
spiral”) is an open invitation for its owners to
short the stock as aggressively as possible. A constant
decline in share price means the convertible owners will
get more shares because the initial rate of conversion
will change. While the original shareholders may very
well lose their entire stake in the company, the
convertible owners can continue to short the stock until
they can effectively cover the original short with new
shares created by a new rate. Should those convertibles
be held offshore where naked shorting is not illegal, the
potential for price depression becomes even greater.
Ensuring you have a floor on those converts will prevent
the worst case scenario.
Monitor
small international exchanges.
If your firm
unexpectedly turns up on the Berlin-Bremen stock exchange
and you, the CEO, did not request a listing there, that
might be a sign of a problem. Request the removal of your
company from that exchange immediately, and keep asking
until it’s done.
Realize
your choice of financing vehicle may attract naked
shorting interest.
In addition to
floorless convertibles, PIPEs may also attract undue
attention from potential funders. Since shares in a PIPE
are sold for below market price, the provider could short
the stock down to that level with no risk of capital loss
on his part. When issuing warrants with the deal,
you’re also effectively pushing the price lower
through increased dilution of existing shareholders.
While it’s true that sometimes beggars can’t be
choosers when it comes to raising funds, go into those
negotiations with your eyes wide open.
Check
the Threshold Security lists.
Links to the lists at
each exchange are below. Keep in mind that inclusion on
that list does not mean naked shorting or any other
improper activity is occurring, just that some shares
meet the three requirements mentioned above. An extended
presence on the Threshold list, however, in combination
with other signals may be an important sign.
Don’t
read the message boards.
You’ll drive
yourself nuts, waste a ton of time and eventually
convince yourself you’re a victim of someone’s
ill wishes, naked shorts or otherwise. If you’re
that compelled to monitor the boards, ask your IR team to
send you weekly summaries of any cogent posts.
Know
your IR company.
Consider your choice of
an investor relations firm as your first line of defense.
Does the company have expertise in dealing with naked
shorting? Does the price of your stock mysteriously rise
or fall between the time you send your draft press
releases and when they hit the wires? Do they have
long-term clients willing to vouch for their integrity?
And do they have processes in place to handle sensitive
information?
Know
your transfer agent.
Given that the process
of naked shorting begins at the brokerage level,
there’s not much your company’s transfer agent
can do with regards to those shares. The responsibility
for tracking them lies with the brokerage. It is
theoretically possible, however, for a corrupt transfer
agent to conceal the true float and otherwise manipulate
the shares themselves.
Both your transfer
agent and IR firm should be able to advise you on the
effectiveness of combating naked shorts by changing CUSIP
numbers, reverse mergers, and/or reverse splits. Although
the long-term effectiveness of these strategies is
questionable, it may be useful as part of a larger
strategy to deter naked shorting. After changing your
company’s CUSIP number, for instance, all existing
stock certificates must be exchanged for new ones. All
issued and outstanding certificates from old shares will
no longer represent an interest in the company until
exchanged. This may be more trouble than it’s worth,
however. Once the new shares are in circulation,
there’s nothing to stop a new round of naked
shorting by determined parties. Such tactics may
represent a small part of an overall strategy to reduce
naked shorting interest in your company.
Questions?
Please feel free to contact Cale Smith at Hawk Associates
at either csmith@hawkassociates.com
or (305) 451-1888 with any questions or comments.
In recent months, there has been a fair amount of media
coverage of naked short selling, Regulation SHO and even
DTCC’s role in that via the Stock Borrow program
operated by DTCC subsidiary National Securities Clearing
Corporation (NSCC). Because there has been much confusion
about these issues, and much misinformation, @dtcc
sat down with DTCC First Deputy General Counsel Larry
Thompson to discuss these issues.
@dtcc:
Let’s start with the question, what is naked short
selling and why has it suddenly become an issue?
Thompson:Short selling is a trading strategy where a
broker/dealer or investor believes that a stock is
overvalued and is likely to decline. It is an integral part
of the way our capital market system works. Basically, it
involves borrowing stock that you don’t own and
selling it on the open market. You then buy it back at a
later date, hopefully at a lower price, and as a result,
making a profit.
Naked short
selling is selling stock you don’t own, but
not borrowing it and making no attempt to do so. While naked
short selling occurs, the extent to which it occurs is in
dispute.
@dtcc:
DTCC and some of its subsidiaries have been sued over naked
shorting. What has been the result of those
cases?
Thompson:
We’ve had 12 cases to date filed against DTCC or one
of our subsidiaries over the naked shorting issue. Nine of
the cases have been dismissed by the judge without a trial,
or withdrawn by the plaintiff. The other three are pending,
and we have moved to dismiss all those cases as well. While
the lawyers in these cases have presented their theory of
how they think the system works, the fact is that their
theories are not an accurate reflection of how the capital
market system actually works.
@dtcc:
One of the allegations made in some of the lawsuits is that
the Stock Borrow program counterfeits shares, creating many
more shares than actually exist. True?
Thompson:
Absolutely false. Under the Stock Borrow program, NSCC only
borrows shares from a lending member if the member actually
has the shares on deposit in its account at the DTC and
voluntarily offers them to NSCC. If the member doesn’t
have the shares, it can’t lend them.
Once a loan is made, the
lent shares are deducted from the lender’s DTC account
and credited to the DTC account of the member to whom the
shares are delivered. Only one NSCC member can have the
shares credited to its DTC account at any one
time.
The assertion that the
same shares are lent over and over again with each new
recipient acquiring ownership of the same shares is either
an intentional misrepresentation of the SEC-approved system,
or a profoundly ignorant characterization of this component
of the process of clearing and settling
transactions.
@dtcc:
Another allegation is that the Stock Borrow program has
become “a reliable source of income” for NSCC?
Some articles have said we make almost $1 billion from
it.
Thompson: This
statement is purposely misleading. One billion dollars
represents our total revenue from all our operations of all
subsidiaries. The fact is that there are NO separate fees
for transactions processed through the Stock Borrow program.
There is just the normal fee for delivery of the shares,
which is 30 cents per delivery. If you assume we make an
average of 22,000 deliveries through Stock Borrow a day,
there would be about $6,600 extra a day in revenue over 253
trading days, or about $1.67 million a year in additional
revenue, out of $1 billion.
All of our members know
that DTCC and all its subsidiaries operate on a “not
for profit” basis. What that means is that we aim to
price our services so that our revenues cover our
expenses.
@dtcc:
Just how big is the fail to delivers, and how much of those
fails does the Stock Borrow program address?
Thompson:
Currently, fails to deliver are running about 24,000
transactions daily, and that includes both new and aged
fails, out of an average of 23 million new transactions
processed daily by NSCC, or about one-tenth of one percent.
In dollar terms, fails to deliver and receive amount to
about $6 billion daily, again including both new fails and
aged fails, out of just under $400 billion in trades
processed daily by NSCC, or about 1.5% of the dollar volume.
The Stock Borrow program is able to resolve about $1.1
billion of the “fails to receive,” or about 20%
of the total fail obligation.
The Stock Borrow program
was created in 1981 with the approval of the SEC to help
reduce potential problems caused by fails, by enabling NSCC
to make deliveries of shares to brokers who bought them when
there is a “fail to deliver” by the delivering
broker. However, it doesn’t in any way relieve the
broker who fails to deliver from that obligation. Even if a “fail
to receive” is handled by Stock Borrow, the “fail
to deliver” continues to exist, and is counted as part
of the total “fails to deliver.” If the total
fails to deliver for that issue exceeds 10,000 shares, it
gets reported to the markets and the SEC.
@dtcc: If
the volume in the Stock Borrow program is so small, why are
these companies suggesting it is a major issue?
Thompson: Frankly,
we believe that the allegations are attempting to purposely
mislead those who are not familiar with this program. A
number of small OTCBB and so-called “pink sheet”
companies have contended that this practice is driving down
the price of their shares and driving them out of
business.
According to their own 10K
and 10Q reports financial auditor’s disclosure
statements, many of these firms have admitted that “factors
raise substantial doubt about the company’s ability to
continue as a going concern.” They have had little or
no revenue, according to their financial reports, and
substantial losses, for periods of seven or eight years. One
of these companies has been cited for failing to file
financial statements since 2001. Another has been cited by
the SEC for press releases that misled investors on
expanding business contracts that didn’t exist. They
will do anything they can do that takes people’s
attention off that kind of record, especially if they can
convince a law firm to take the case on a contingency basis,
which is what has happened.
@dtcc:
Who are the law firms bringing these suits?
Thompson: The main
law firms engaged in these lawsuits, and they have been
behind virtually all of them, were principally involved with
the tobacco class action lawsuit. They like to bring suits
in multiple jurisdictions in an attempt to find any
jurisdiction where they might be successful in winning large
judgments.
@dtcc:
What causes a fail to deliver in a trade? Is it all naked
short selling?
Thompson: There can
be any number of reasons for a “fail to deliver,”
many of them the result of investor actions. An investor can
get a physical certificate to his broker too late for
settlement. An investor might not have signed the
certificate, or signed in the wrong place. There may have
been human error, in that the wrong stock (or CUSIP) was
sold, so the delivery can’t be made. Last year, 1.7
million physical certificates were lost, and sometimes that
isn’t discovered until after an investor puts in an
order to sell the security. There are literally dozens of
reasons for a “fail to deliver,” and most of
them are legal. Reg SHO also allows market makers to legally
“naked short” shares in the course of their market making
responsibilities, and those obviously result in fails. We
can’t do anything about them but what we are doing:
that is, report all fails of more than 10,000 shares in any
issue to the marketplaces and the SEC for their
action.
@dtcc:
What happens then?
Thompson: The
markets check to see if the amount of fails to deliver is
more than 1/2 of 1% of the total outstanding shares in that
security. If it is, then it goes on a “Threshold List.”
If it is then on the Threshold List for 13 consecutive
settlement days, restrictions on short selling then apply.
The “close-out” requirement forces a participant
of a registered clearing agency to close out any “fail
to deliver” position in a threshold security that has
remained for 13 consecutive settlement days by purchasing
securities of like kind and quantity. If the participant
does not take action to close out the open fail to deliver
position, the participant is prohibited from making further
short sales in that security without first borrowing or
arranging to borrow the security. Even market makers are not
exempt from this requirement.
@dtcc: So
Reg SHO doesn’t force them to close out the position,
but if they don’t, they are prohibited from making any
additional short sales without borrowing the shares
first?
Thompson: That’s
right.
@dtcc:
Does DTCC have a regulatory role in naked short selling?
What authority does it have to force companies to settle a
fail?
Thompson: Naked
short selling, or short selling, is a trading activity. We
don’t have any power or legal authority to regulate or
stop short selling, naked or otherwise. We also have no
power to force member firms to close out or resolve fails to
deliver. That power is reserved for the SEC and the markets,
be it the NYSE, Nasdaq, Amex, or any of the other markets.
The fact is, we don’t even see whether a sale is short
or not. That’s something only the markets see. NSCC
just gets “buys” and “sells,” and it’s
our job to try and clear and settle those trades.
@dtcc:
Why won’t you reveal the number of fails to deliver in
each position to the issuer of the security?
Thompson: There are
a couple of reasons. First, we provide that information to
regulators and the SROs so they can investigate fails and
determine whether there are violations of law going on.
Releasing that information might jeopardize those
investigations, and we feel they are the appropriate
organizations to get that information since they can act on
it. Second, NSCC rules prohibit release of trading data, or
any reports based on the trading data, to anyone other than
participant firms, regulators, or self-regulatory bodies
such as the NYSE or Nasdaq. We do that for the obvious
reason that the trading data we receive could be used to
manipulate the market, as well as reveal trading patterns of
individual firms.
@dtcc:
How does DTCC respond to claims that shares from cash
accounts and/or retirement accounts and/or institutional
accounts are being put into the lending pool of the Stock
Borrow program?
Thompson: It is our
broker and bank members who control their DTC accounts. They
can and do segregate shares that they are not permitted to
lend out. Neither NSCC nor DTC monitor or regulate that
activity. It is done by the SROs and the SEC. However, there
is no requirement that brokers or banks participate in the
Stock Borrow program, and neither DTC nor NSCC can take
shares from an account unless those shares are voluntarily
offered by the broker or bank member.
@dtcc: Do
you think there is illegal naked shorting going
on?
Thompson: Certainly
there have been cases in the past where it has, and those
cases have been prosecuted by the SEC and other appropriate
enforcement agencies. I suppose there will be cases where
someone else will try to break the law in the future. But I
also don’t believe that there is the huge, systemic,
illegal naked shorting that some have charged is going on.
To say that there are trillions of dollars involved in this
is ridiculous. The fact is that fails, as a percentage of
total trading, hasn’t changed in the last 10 years.
@
Naked Shorting --
Why not just ignore the law?
LINKS
So who and what is
responsible for creating all the naked shorts? Market makers
abusing their short-selling exemption? Brokers in foreign
markets where naked shorting is legal? Hedge fund managers
manipulating the market? Has this been facilitated over the
last couple of decades, by the shift to the vast majority of
shares being held in street name? The creation of, flaws in,
or abuses of, the DTCC's stock-borrow program?
In case you weren't aware
of it, the SEC is in the process of phasing out paper
certificates, totally. In a 2004 Concept
Release: Securities Transactions
Settlement, the
SEC called for comment on methods to improve the safety and
operational efficiency of the U.S. clearance and settlement
system and to help the U.S. securities industry achieve
straight-through processing. You can read the resulting
comments
here.
The SEC's paper blithely
assumes they are trying to shorten the settlement time for a
trade from 3 days to 1 or even less. It does not address the
fact that the present system sometimes fails totally and any
new system should be designed to eliminate the flaws in the
old one.
Read more via the links,
below.
For recent developments
and discussion, go to the
CEO Council website
and click on "Council Initiatives", then read the
section on "Predatory Trading".
Buyins.net
-- compiles the data on the Threshold Lists and expands upon
them. Finds out at what prices these stocks have been
shorted, what amounts have been shorted and with enough
investigation, who is illegally shorting the
stocks.
To get more information
that that included in Reg. SHO, Pink Sheets petitioned the
SEC to cause the amendment of NASD Rule 3360 and require
NASD broker dealers to maintain a record of total "short"
positions in all customer and proprietary firm accounts in
all publicly traded equity securities as well as report this
information to the NASD for public dissemination of the
short positions by security. (At the present time OTCBB and
Pink Sheet companies are not included in this type of
reporting.) Here is the letter
from R. Cromwell Coulson,
Chairman of The Pink Sheets, asking you to support the
petition. Subsequently the SEC did, indeed, propose
such a rule change.
Investrend's
FinancialWire Search Page
where you can type in "naked" to get the many articles Gayle
Essary has written on the subject. And here's a quick link
to the
reason you won't see these
articles at Yahoo
Finanance, MarketWatch, or Investor's Business Daily. (Note:
to access FinancialWire archives you'll have to do a free
sign-up.)
Below are
extremely truncated excerpts from a very
interesting conversation posted on a discussion board. An
investor decided to experiment by trying to buy a shorted
stock from 2 different sources. Here's what happened.
Read
the whole exchange
for many more details.
Dennis Smith Posted: "I
thought it might be interesting to prove a short position
first hand by purchasing shares in (GLKC) a company that
reportedly already had over 100% of it's shares sold (and
"legally" documented).... Just after settlement date (three
days later), I requested certificates from both brokers. The
cert ordered through Ameritrade appeared in three
weeks....
Getting the Wells Fargo
cert however has become predictably (and almost amusingly)
problematic....":
From Wells
Fargo: ...We are researching your request and will
contact you directly as soon as we have completed our
investigation....
From Dennis
Smith: ...It's been five days. What kind of
"investigation" are you doing?
From Wells
Fargo: ... We were awaiting full delivery of the
shares from the transfer agent. Unfortunately, due to
some unusual circumstances, this took longer than we
expected.
From Dennis
Smith: What exactly are the "unusual
circumstances"?
From Wells
Fargo: ...The broker/dealer from whom your shares
were purchased is short 5,000,000 shares versus the
street. A broker/dealer is allowed to sell shares which
they do not own, which they will buy at a later date and
deliver.
From Dennis
Smith: Exactly how later is "later"? Is not a
5,000,000 short position cause for alarm? Who is the
subject "broker/dealer" from whom you acquired my
"shares" and what is that dealer telling you about his
apparent failure to deliver? As I understand it, a
shareholder is entitled to physical certificates in every
event, assuming the buy was legitimate.
From Wells
Fargo: ...The other broker/dealer who is short shares
of your security is E*Trade. Though this type of activity
makes it difficult to issue physical certificates, it is
legal and within regulations. There is no definite date
by which E*Trade would have to purchase the shares....
According to our trading desk, E*Trade was the only
broker/dealer offering shares of GLKC yesterday. This has
been the case since you originally requested your
certificate.
From Dennis
Smith: You stated there is no definite date by which
E-Trade has to purchase the "short" shares that they sold
you and that in turn you sold me. How can this be
"legal"? What is to prevent them from continuing to sell
what they don't own while subsequently refusing to buy
the shares back if there are no time
constraints?...
My bottom line is this.
I demand the physical GLKC certificate(s) representing
the shares I purchased.
From Wells
Fargo: ...We have received your request for physical
certificates. As soon as we are able to order a physical
certificate for you, we will do so.
Help make the
SEC Expose Unsolicited Spammers and Stock
Promoters
The problem:
There is hardly a
household in America that has not been inundated with spam
emails making fantastic claims about easy profits to be made
by any purchaser of some obscure stock. In most cases, these
securities promoters and those who finance them hope to turn
a quick profit when unsuspecting investors buy stocks based
on unsupported or spurious claims - leading the stock's
market value to plummet as soon as these promotional
activities cease.
Given that the OTC markets
play an essential role in the capital formation of smaller
companies and provide a portal for overseas issuers seeking
to access the American capital markets, Pink Sheets is
committed to working with regulators to create a more
orderly and legitimate marketplace for all participants.
Pink Sheets’ proposed
solution:
Pink Sheets has proposed
that the SEC adopt a new rule that provides for full
disclosure of the identity, compensation and relationships
of all participants (i.e., issuers, sponsors, third party
promoters, etc.) directly or indirectly engaged in the
promotion of stocks in the over-the-counter (OTC) market and
that targets the explosion of misleading spam email and fax
promotions on OTC stocks and provides for increased
transparency and effective disclosure to protect investors
from "pump and dump" promotion schemes. The full rule change
request is available for you to read at:
http://sec.gov/rules/petitions/petn4-519.pdf
"We believe that putting
these straightforward requirements in place will enable
investors to easily identify fraudulent stock promotions and
unveil the miscreants who engineer them. Any company that
does not have current information available has no business
promoting its securities, since investors cannot make
reasonable investment decisions in an information vacuum. By
cutting off the ability of promoters, sponsors and
affiliated parties to dump these stocks into the market, the
rule will render fraudulent promotions unprofitable and set
the stage for legitimate small company issuers to deliver
information to the marketplace," said Cromwell Coulson,
President and CEO of Pink Sheets, LLC.
What you can do to
help:
We need your help as
investors and as the recipients of unsolicited promotional
spam to urge the SEC to consider this rule proposal. You can
help by sending your comments directly to the SEC, either
via email to: rule-comments@sec.gov, or, if it's more
convenient, you can mail your comments to:
Ms. Nancy Morris
Secretary, Securities Exchange Commission
100 F Street NE
Washington, D.C. 20549
Your Email or letter
should refer to SEC File No. 4-519. Request for Rulemaking
to expose and prevent unlawful and deceptive activities by
securities promoters and their sponsors.
The
Pink Sheets vs. The OTCBB
SANTA MARIA, CA (OTCBB
NEWS NETWORK), June 21, 2002—The OTCBB total volume has
dried up in recent days. Only weeks ago it was approaching a
billion shares on good days. It is currently down to around
300 million shares daily. In fact, the other OTC
“exchange” called the Pink Sheets now has volume
that rivals that of the OTCBB. What is going on? Is it just
the summer doldrums, the same market woes that drive the
bigger exchanges? Perhaps. Certainly that contributes to it.
But it could be something else. Could the OTCBB be starting
to shut itself down because of the new upcoming BBX
exchange? Experts believe that roughly 2000 companies will
not be able to qualify for the BBX listing standards. What
will happen to the 2000 companies? They will fall to that
other OTC venue called the Pink Sheets. Here is a primer on
the Pink Sheets, as we realize there are lots of investors
who know nothing about it.
Like the OTCBB the Pink
Sheets is technically not an exchange, but rather an
electronic bulletin board system for market makers to quote
stock prices. The Pink Sheets got it's name from the old
Pink colored pieces of paper that it used to use to quote
stock prices before it became electronic in 2000. In fact,
the Pink Sheets dates back almost 100 years, as it provided
a venue for OTC stock prices long before there was a NASDAQ.
For those of you new to trading, the word “OTC,”
means over-the-counter (a word used to describe any stock
that is not listed on a major stock exchange). In fact, even
fully listed NASDAQ companies are technically OTC. So OTCBB
and Pink Sheet listed companies are both OTC.
The OTCBB, owned and
operated by NASDAQ, created in the early 1990s was in the
right place at the right time. As the dotcom frenzy exploded
by the late 1990s the OTCBB was the only online venue
available for investors for stock quotes of small,
speculative companies. The Pink Sheets, owned and operated
by a company called Pink Sheets, LLC was never able to
participate in the middle 1990's online trading frenzy
because it was still not electronic and quotes were not
available over the Internet. What good is a printed venue in
an electronic age where investors need real time, instant
quotes to gain the online advantage? By the year 2000, the
Pink Sheets finally developed an electronic system for
quoting in order to meet this demand. Pink Sheets stocks are
purchased and sold the same way that OTCBB stocks are –
through your broker. There is essentially no difference
between the two systems. In fact, a market maker recently
told us he feels the Pink Sheets is a better system because
it dynamically updates, meaning the maker does not have to
hit “refresh” in order to get the updated
information.
Unfortunately, the Pink
Sheets receives a bad PR wrap today because of their
history. They should have changed the name of the system to
something like Pink Sheets Over-the-Counter Bulletin Board
(PS-OTCBB) or something similar. This may have helped
prevent the perception problem, especially since the system
is truly an OTC electronic bulletin board just like the
OTCBB. Why did the Pink Sheets allow investors to believe
that the Pink Sheets is somehow inferior to the OTCBB? The
reality is this could not be further from the
truth.
There are some differences
in the companies perhaps, but not the trading systems. The
image of the Pink Sheets has to do mostly with appearances
rather than reality. One of the problems of the Pink Sheets
is that financial websites do not yet publish the bid and
ask price of the stock. They often quote the last price,
using the words “other OTC” or “other.”
Big deal. The Pink Sheets has its own quote system, complete
with the bid and ask price. In addition, real time quotes,
complete with bid and ask prices are currently available in
many real time quote services like Mytrack.com. A source at
the Pink Sheets even told us that in the 3rd or 4th quarter
Pink Sheet bid and ask prices will be made available to the
major financial portals like Yahoo, Quicken.com, etc. So it
seems like the Pink Sheets is taking steps so that it is up
and ready to fill in the gap left by the OTCBB.
So now that we have
established that the OTCBB and Pink Sheets are essentially
the same type of trading systems there are a few things to
be aware of before you jump right in and start trading Pink
Sheet stocks. There are no reporting requirements for Pink
Sheet companies (up until 2 years ago the OTCBB had no
reporting requirements). This means that the companies
listed on the Pink Sheets are not required to post SEC
filings. Sure there are lots of non-reporting companies.
Some of these are foreign issuers who are not required to
report US financials, like Russian conglomerate LukOil Oil
Corp. (LUKOY), BAE systems (BAESY), formerly British
Aerospace, Swiss giant Nestle SA (NSRGY), Wal Mart De Mexico
SA (WMMVY), Swiss financial giant Zurich Financial (ZFSVY is
not quoted electronically) and many others. Many Pink Sheet
companies are also fully reporting. This is significant; as
it means the fully reporting companies are essentially the
Pink Sheet equivalent of current OTCBB stocks.
Hopefully that clears the
record about the Pink Sheets and the stocks quoted there. So
don’t avoid a stock just because it is listed on the
Pink Sheets. Approach the stocks the same way you do any
OTCBB stock, do your research and due diligence. Establish
your investing criteria for the companies and then
decide.
So with the OTCBB being
dissolved where does this leave the Pink Sheets? The Pink
Sheets will soon become an even more important venue than it
is today. It has to step up to the plate and we believe it
will.
The OTCBB to
be replaced by BBX Exchange
(This is an old article, The change to the BBX has been
abandoned by NASDAQ, We left it up because it has some good
info on the OTCBB)
.SANTA MARIA, CA (OTCBB
NEWS NETWORK), May 17, 2002—The rumors have been
floating around for quite some time about the NASDAQ OTCBB
implementing some serious changes. It is no longer a rumor
but it is fact. In 2003 the OTCBB will be phased out and
replaced by a new stock exchange called Bulletin Board
Exchange (BBX), pending SEC approval. NASDAQ says it will
continue to operate the OTCBB for six months after the
launch of the BBX in order to facilitate the application
process for companies wishing to make the move from the
OTCBB to the BBX. The bottom line is all companies currently
trading on the OTCBB will be dropped as the OTCBB is turned
off in 2003. Companies who wish to be listed on the BBX will
have to apply from scratch for a listing. NASDAQ says the
BBX will appeal to the same companies that are currently on
the OTCBB but the changes will result in a higher quality
market.
Unlike the OTCBB, the BBX
will have listing fees, qualitative listing standards, but
no minimum share price, income, or asset requirements. The
BBX will also have an electronic trading system to allow
order negotiation and automatic execution. This is vastly
improved, as the OTCBB currently requires market makers to
execute customer orders over the telephone. The new BBX
system is designed to bring increased speed and reliability
to trading. NASDAQ says the BBX will offer a significant
improvement over the OTCBB for qualifying small companies by
increasing liquidity in the market for their securities and
enhancing the opportunity to raise equity capital. Companies
will also have the prestige of trading on a listed market.
This sounds great, but the companies have to be able to get
to the BBX first. With the new standards how hard will it be
to get listed?
According to many experts,
roughly 2,000 companies currently on the OTCBB will not be
able to meet the BBX listing requirements. So what will
happen to those companies that cannot meet the standards or
do not wish to the list on the BBX? These companies can have
their stock quoted on the other OTC trading platform called
the Pink Sheets. Like the OTCBB, the Pink Sheets is an
electronic bulletin board used by market makers to quote
securities.
The Pink Sheets does not
have the reputation as a place for emerging companies. Pink
Sheet companies do not have to file financials with the SEC.
Most investors view The Pink Sheets as a graveyard for
failed companies. This is fine, as investors should not buy
Pink Sheet stocks anyway. As we have stated many times, the
current OTCBB is not for investors either, but rather
short-term traders/speculators. Speculators will go wherever
stock prices fluctuate wildly (volatility) because this is
what creates a profit opportunity. Speculators thrive on
volatility.
On the other hand, true
investors look for emerging companies and hold the stock for
a long time while they watch the company grow (hopefully).
That is the reason the big dollar OTCBB stocks typically
have no volume. Those who use the OTCBB successfully are
speculators not investors. If investors are looking for a
$50 stock they are typically not going to buy it on the
OTCBB. They know or they should know that the OTCBB is a
speculators market. True investors will look for a stock
listed on a larger exchange. Whether the BBX will be a place
for investors rather than speculators remains to be seen.
How’s this for a statistic: roughly 0.5% of all OTCBB
companies graduate and move up to a larger exchange. I
wonder how many will graduate from the BBX and move up to
the full NASDAQ, AMEX, or NYSE? The reality is the Pink
Sheets will no doubt attract more speculators as 2,000
companies move there. So the games simply continue on the
Pink Sheets along with the speculators who flip the stocks
for a quick buck.
So where does this leave
investors? We can only guess what the BBX will be like after
it is up and running. Some experts believe that the same
kind of games that go on at the OTCBB will simply continue
on the BBX. We have seen companies listed on the NASDAQ
collapse through continuous selling of stock, just like on
the OTCBB today. Regardless of where a company is listed, if
it floods the market with excessive stock without bringing
in new buying the price will collapse. So it’s hard to
see how the BBX will be a new safer alternative for
investors, especially with no minimum stock price, asset or
revenue requirements. A company listed on the BBX could just
as easily sell their stock into the ground while they put
out glowing press releases. The longer a BBX company can
maintain the facade that they are growing, successful
companies the longer they will have to sell their stock into
the ground. Just like lots of OTCBB companies do
today.
The BBX is definitely a
great idea and a concept that is long overdue. It will be
interesting to see if it truly becomes a platform for
investors and emerging companies or just an upgraded version
of the speculative OTCBB with a different name. Either way
it is a good thing. If the BBX works out to be a junior
NASDAQ and the public is better protected from scams and
shams then it will be well worth it. If it works out to be
just another OTCBB then that is ok too. A name change and
major improvement is long overdue anyway.
But improvements in a
stock exchange system are not the answer in and of itself.
The real solution to protecting investors is much simpler
than restructuring markets and listing requirements. The
general public needs to be educated as to how the stock
markets work, whether it is the OTCBB, BBX, Pink Sheets,
NASDAQ, NYSE, AMEX or whatever exchange. With the Enron
debacle it is crystal clear that it makes no difference what
exchange a company is listed on and what the standards are
to get listed. The key is education. Educate yourself about
the exchanges and especially about the inner-workings of the
companies that are listed on them.
OTCBB Trading
Fundamentals
By Daryn P.
Fleming
Published by OTCBB News
Network
03/3/2002
How many times have you
missed a big stock move simply because you bought the stock
too late? A big press release story comes out, you
immediately buy the stock and it goes down. In many cases
you hold the stock for a while and it goes down further and
you lose big. Unfortunately this happens everyday in the
OTCBB market. If you look back at any of our news stories
from several days ago you will find that a vast majority of
these stocks are trading lower than they were when the
stories came out. For those of you new to the OTCBB stock
market this kind of event did not happen during the bull
market of the late 90s. It was the exact opposite back then.
You could buy almost any OTCBB stock with good stories and
it would run for days. Fortunes were made. With those times
gone, everyone is struggling to learn the best strategy for
making money in the current market conditions. Has anyone
found one yet?
The reality is,
today’s struggling market conditions make it now a
stock picker’s market. You need to buy stocks in a
carefully and calculated manner, with a short term in and
out strategy. Buy as little as possible. If you throw your
money to the wind you will likely lose everything. However,
if you position yourselves in a few special situations you
can still make money.
The first general
principle to making money on the OTCBB is to realize that
this market is NOT for investors but for traders. Investing
in OTCBB companies will only bring you heartache and loss,
as most of the companies have little if any fundamental
value. What this essentially means is that most of the
companies have little or no real asset worth or revenue.
Even those companies that do have successful and revenue
generating operations (at least according to their SEC
filings) seem to dilute the market with their
shares.
What is dilution? If you
follow most OTCBB stocks over time you will find that the
public float and total shares issued and outstanding gets
larger and larger. A company may have only 1 million shares
in the public float (the public float is the number of
shares that are out in the marketplace, freely trading or
tradeable) at one particular time. Two months later that
float could have increased to 10 million shares. One year
later it could have 200 million shares in the public float.
Dilution is where the companies issue more shares into the
market place over time. So the HOT Company that you saw run
from .20 to $25 but then fall again to .20 is NOT the same
stock today. It is for all practical purposes a totally
different company (as far as the structure of the stock). If
the public float has increased dramatically it will never
run to that price level again. Forget about it and move on
to another company, one with a smaller float.
Dilution has to do with
the fact that a company’s shares are like cash for
those who hold them. Abuses occur with those companies that
give away free shares or issue blocks of stock to people who
could care less about the company. Lots of service providers
(investor relations firms, investment bankers and the like)
could care less about the companies that have hired them and
simply dump their free shares into the market place at any
time. This causes the public float to get bigger and bigger.
Smart companies should SELL the shares to these service
providers, maybe at a small discount to the market, not give
it to them. If you simply give something of value to someone
there is a zero cost basis that threatens to destroy those
who had to pay for their stock. Greed can run rampant and
the little guy that bought the stock on the open market can
get killed. Yes, dilution is a necessary evil for tiny
companies that are growing and are desperately attempting to
attract and secure whatever market they are trying to
capture for their service or product. Dilution is necessary
because these companies are cash strapped. But this is often
taken to an extreme, with many companies issuing a bunch of
stock into the market place yet NEVER successfully getting
their product or service off the ground.
Many OTCBB of companies
simply end up filing bankruptcy or shut down the doors long
AFTER they unloaded all of their shares into the
marketplace. Others continue operating using the notorious
reverse stock split (artificially decreasing the number of
shares that are in the marketplace in an attempt to make the
stock buying sensitive like it was when the company first
started before dilution). After a reverse split has taken
place, the companies are free to simply dilute the stock all
over again. This is in total disregard for small investors
who bought on the open market. Those investors who paid for
their stock on the open market and who hold the stock
through the duration of such fiascos are left holding an
empty bag. This past year we have seen lots of companies do
reverse splits more than once. In my opinion, this practice
is nothing more than abuse of a country and beautiful
economic system that is designed to help companies raise
capital to bring their products and services to market. The
public pays a heavy price for such scams.
Trading is a different
story. Trading is truly the KEY to making money on the
OTCBB. A trader does not invest in a company but rather
looks for a situation to get in and out of very quickly. A
skilled OTCBB trader will get in and out of a stock to make
a quick buck. He takes no prisoners. Sometimes he is in the
stock for minutes, sometimes hours, and sometimes a few
days. A successful OTCBB trader knows that the longer he is
in a stock the more likely he will lose money. He
doesn’t care what the company does. If all the company
does is sell apples and oranges, a skilled trader could make
money trading the stock. A trader simply buys it low, before
others buy it, and then gets out during a run up. Yes he
runs the risk of losing like everyone else if the stock
never goes up. But if the company can successfully attract
investors to buy the stock the trader can make a fortune. I
have seen it happen literally overnight.
This simple trading
strategy of buying low and selling high does run contrary to
the grain, as everyday companies put out glowing press
releases about how good they are doing, the great contracts
they have signed, important letters of intent, big
acquisitions, successful financing, etc. The press releases
are written as if they are trying to attract long-term
investors. It almost seems like the companies really want
long-term investors. Yet is is often amazing how quickly the
stocks seem to fall after these kinds of press release
stories come out. Why? Dilution works against the stock and
at this time in the stock market there are typically more
people selling a stock than buying it. So this puts pressure
on a stock and it heads toward zero.
Some companies even hire
so-called “analysts” to put out recommendations on
the stocks. Keep in mind there are no real Wall Street
analysts for OTCBB stocks. Yes there are hired guns that
claim to be analysts. But always read the fine print, as you
will find 9 times out of 10 that these people have simply
been hired to tout a stock. Professional Wall Street knows
about the OTCBB world and its problems and that is why they
generally ignore it. Have you ever wondered why the Wall
Street Journal, CNBC, and others rarely cover OTCBB stocks?
Because they know about the things I have just told
you.
We received a letter from
someone several weeks ago who claimed to be a “large,
long-term shareholder” in a company. He was whining
about one of our news stories and our timing in releasing
the news. He must have been an insider, as we cannot think
of anyone who would be foolish enough to buy a big block of
stock in an OTCBB company and hold it as a long-term
investor. You don’t do that with OTCBB stocks unless
you want to lose all of your money. You can be a big
investor, long term, in mutual funds, real companies on
large exchanges, and the like. Not with OTCBB stocks. Only a
fool would do that. A fool and his money.
WASHINGTON
-- Jack Valenti predicts that Congress will require
copy-protection controls in nearly all consumer electronic
devices and PCs.
The
lobbyist nonpareil for the Motion
Picture Association of
America
delivered a stark warning to technology firms on Monday:
Move quickly to choose standards for wrapping digital
content in uncopyable layers of encryption or the federal
government will do it for you.
"If
we don't sit down and talk, others will do this for us,"
Valenti said, in a not-so-veiled reference to his allies on
Capitol Hill. "Unless you put a marker down for a deadline,
nothing gets done."
Valenti's
remarks came during a one-day workshop
titled "Understanding Broadband Demand: Digital Content and
Rights Management." Organized by the U.S. Commerce
Department, it was designed to ask whether some form of
digital rights management is required before more broadband
content appears online.
Hanging
over the event was the specter of federal legislation to
embed digital rights management in any "interactive digital
device," from personal computers to wristwatches. Sen. Fritz
Hollings (D-South Carolina) has
circulated
drafts of his bill, the Security Systems Standards and
Certification Act (SSSCA),
which is on hold until Congress is done with spending
measures and work related to Sept. 11.
Now
it may be set to move forward early next year. "I think
Senator Hollings and Congressman (Billy) Tauzin do believe
in deadlines if we delay in getting things done. If they
want to move in, they will," Valenti warned.
His
remarks drew applause from the Walt Disney Company, one of
the MPAA's member companies and an unabashed
fan
of Hollings' SSSCA approach.
"I
am openly, unabashedly in support of the government stepping
in to set standards," said Preston Padden, head of
government relations for Disney.
Rhett
Dawson, president of the Information
Technology Industry Council,
said: "I don't think that's a healthy way to do business. We
need to look at how these things do on technical
standards.... What I don't want to do is start down a path
where we're not relying on technical merit, where the threat
of legislation is motivating us."
The
bill drafted by Hollings, the powerful chairman of the
Senate Commerce Committee, represents the next round of the
ongoing legal tussle between content holders and their
opponents, including librarians, programmers and open-source
advocates.
Hollywood
executives fret that without strong copy protection in
widespread use, digital versions of movies will be pirated
as readily as MP3 audio files once were with Napster. With
the SSSCA enacted, the thinking goes, U.S. technology firms
will have no choice but to insert copy-protection technology
in future products.
The
SSSCA draft says that it is unlawful to create, sell or
distribute "any interactive digital device that does not
include and utilize certified security technologies" that
are approved by the U.S. Commerce Department. An interactive
digital device is defined as any hardware or software
capable of "storing, retrieving, processing, performing,
transmitting, receiving or copying information in digital
form."
It
also creates new federal felonies, punishable by five years
in prison and fines of up to $500,000. Anyone who
distributes copyrighted material with "security measures"
disabled or has a network-attached computer that disables
copy protection would be covered.
Academics
and free-speech groups such as the Electronic Frontier
Foundation have savaged the SSSCA. The EFF even has a
sample
letter
to send Congress that argues it will stifle technology and
thwart fair use rights.
Disney's
Padden wasn't buying it. "There is no right to fair use,"
Padden said at the event. "Fair use is a defense against
infringement."
A
Bush administration official suggested that content owners
should be careful what they wish for, saying that it might
be in their best interests to develop a non-governmental
standard. Bruce
Mehlman,
assistant secretary for technology policy at the Commerce
Department, said: "The irony is if government builds the
technical standard, it might include bigger fair use
(rights) that the private owners wouldn't build
in."
For
its part, Microsoft doesn't seem to be a huge fan of
Hollings' approach.
Andy
Moss, director of technology policy at Microsoft, said the
"Marketplace should answer this.... Where's the evidence the
marketplace doesn't work?"
The
SSSCA and existing law work hand-in-hand to steer the market
toward using only computer systems where copy protection is
enabled. First, the 1998 Digital Millennium Copyright Act
(DMCA) created the legal framework that punished people who
bypassed copy protection -- and now, the SSSCA is intended
to compel Americans to buy only systems with copy protection
on by default.
Last
week, the first person prosecuted under the DMCA, Russian
programmer Dmitri Sklyarov, was allowed to return
home
under court supervision.
+>+>+> THERE ARE 4 DATES
TO UNDERSTANDING DIVIDENDS...
They are important to know so that an investor or trader can
capture, or receive, the dividend. Avoiding receipt of the
dividend may also be a goal in certain situations. At any
rate, here are the dates to know.
The declaration date is the date on which the Board of
Directors of a company actually sets the amount of the next
dividend. As we previously mentioned, dividends are typically
paid on a quarterly basis. This declaration typically occurs
weeks in advance of the actual payment date.
The record date is the date that a person actually has to own
shares of stock in order to receive the dividend. On this date,
the company actually prepares a list of shareholders who will
receive the dividend payment.
The ex-dividend date is the day where shares will start trading
without the dividend. On this day the price of the stock will
be reduced by the amount of the dividend. The reduction comes
from the price of the last trade in the previous session. For
example, if a stock is selling at $20 on the day before the
ex-dividend date, and it pays a .25 quarterly dividend, then it
will open the next day at $19.75. This assumes that there are
no other factors that may affect the price of the stock at the
open on the morning that the stock trades "ex". Stocks that are
ex-dividend usually have an "x" next to their closing prices on
quote systems and in financial publications to indicate the
ex-dividend date.
In addition, all pending orders to buy or sell the stock are lowered
to reflect the amount of the dividend payment. The ex-dividend
date is usually three days before the record date. This gives time
for purchases and sales of the stock made on the ex date to settle
by the record date.
The payable date is the date that the dividend payment actually
goes out to the shareholders of record. It will be mailed to
those shareholders who hold the stock in physical form, meaning
that they actually hold the stock certificate registered in
their name. It will be sent to the brokerage firm on this date
if the stock is held in a brokerage account, as is very common
these days.
+>+>+> NOW, LET'S LOOK AT A SHORT TERM TRADING TACTIC...
It is called "dividend capture". This strategy is executed
when a trader buys a stock just before the ex-dividend date, so
that he or she will be a shareholder of record on the record
date, and will receive the dividend. Because the stock falls by
the amount of the dividend on the ex-dividend date, the
strategy calls for the trader to then wait for the stock to
move back to the price where he or she bought it before the
ex-dividend date. At this point, the stock is sold for a
break even trade. Thus the dividend is received, or captured by
the trader with no further exposure to the movement in the
stock price after it is sold for a break even.
When attempting to execute this short term trading strategy,
look for stocks with high volume, and a relatively large
dividend payment. Higher volume facilitates exiting the
position without affecting the stock price. The high dividend
allows for more profit potential. Use of a discount broker is
also beneficial as it will reduce the overall cost of the
trade, and increase the return of implementing the strategy.
Please note that this is an aggressive trading strategy, and
not appropriate for everyone. Study the concept. "Paper
trading", or practicing the strategy before using actual money
is always a prudent step when implementing new strategies
into your portfolio of trading tools
InfoBeat - RealNetworks debuts
copyright plan
By ALLISON LINN
AP Business Writer
SEATTLE (AP) - RealNetworks has developed technology that
would
allow Internet retailers to track the sale and use of
songs or
movies on the Web and make sure the goods aren't
distributed
illegally.
The product released Wednesday is aimed at companies that
want
to capitalize on the music site Napster's popularity,
while making
money and not violating copyright.
If a person rents a movie over the Internet, for example,
the
system would ensure it is transmitted securely to that
person's
computer, keep track of how many times or for how long it
is
watched, and make sure it isn't copied or shared.
Eventually, RealNetworks hopes the technology will be go
beyond
computers to television and virtually any other type of
digital
media.
``The potential for these initiatives are just so
enormous,''
said RealNetworks' president and chief operating officer
Larry
Jacobson.
RealNetworks said Sony Pictures Digital Entertainment,
the arm
of Sony that distributes movies over the Web, would be
among the
first customers for RealSystem Media Commerce Suite. It
also will
be key to Real's own plans for subscription media
services,
including MusicNet, a partnership with AOL Time Warner,
Bertelsmann
and EMI Group that seeks to distribute music over the
Internet for
a fee.
RealNetworks hopes to have an edge over competitors
because its
system builds on its existing products. That includes its
popular
RealPlayer, the dominant Internet digital media player
that
RealNetworks gives away, and its software that it sells
to
companies to deliver audio and video over the Web.
RealNetworks also is launching an effort to establish
an
industry standard for technology to distribute music and
video over
the Web. So far, RealNetworks has just a few supporters,
including
IBM, Sun Microsystems, EMI and Napster.
Seattle-based RealNetworks has been buoyed by its
inclusion in
AOL's Internet access software, used by 30 million AOL
customers.
Recent negotiations over whether Microsoft's Windows
Media
Player would also be part of AOL's software _ a sticking
point in
larger discussions over whether AOL would be included
in
Microsoft's new operating system, Windows XP _ faltered
Saturday
after they could not agree on terms.
AOL Time Warner vice president John Buckley said was
willing to
include Windows Media Player in the AOL system, but was
not willing
to make it work better than RealNetworks' technology.
Microsoft contends the talks broke down over a number of
issues,
and bristles at the suggestion that it requested
preference over
the RealPlayer.
``We do not need AOL to distribute the media player,''
Microsoft
spokesman Jim Cullinan said. ``We simply talked about
supplying our
mutual customers with a choice of format.''
Analysts say RealNetworks is the true winner of the
spat.
``Anytime you see AOL backing away from Microsoft
technology,
RealNetworks is automatically going to benefit,'' said
Phil
Benyola, a digital media research associate with Raymond
James &
Associates. ``It seems like AOL is willing to sacrifice
something
to keep Real as most-favored nation, so that's a good
endorsement
of Real's technology.''
Of course, AOL Time Warner also has a vested interest
in
RealPlayer remaining dominant _ the media giant owns a 20
percent
stake in MusicNet, which will run on RealNetwork's
technology.
AOL spokeswoman Kathy McKiernan would not comment
directly on
whether AOL's relationship with RealNetworks or MusicNet
played a
role in the Microsoft negotiations, but said that AOL
thinks
competition among media players is important.
RealNetworks stock was up $1.59 to close at $11.89 a
share in
Wednesday trading on the Nasdaq stock exchange.
Technology
and the corruption of copyright
By Joshua S. Bauchner
June 7, 2001 8:20 AM PT
COMMENTARY--In 2010, the
concept of copyright will celebrate its 300th anniversary
dating back to England's Statute of Anne. Over the past
three centuries, copyright laws promoted intellectual
freedom and discourse while ensuring a small incentive for
the creative author.
Interestingly, with the
onslaught of technology and promises of greater opportunity
to share and communicate, copyright is now a hindrance to
these ideals, serving only the moneyed interests of owners.
Historically, copyright
protections were afforded to promote expressive discourse
fundamental to a democratic society. Today, the very notion
of intellectual property serves to commoditize expressive
ideas, rather than fostering their dissemination. Whereas
initially the provision of an economic benefit was secondary
to the promotion of original works, modern copyright inverts
this ideal in a continuing effort to establish a marketplace
for ideas.
In doing so, modern-day
copyright holders focus solely on financial gain to he
detriment of the true purpose of copyright.
The corruption of
copyright harms the public interest. As described, the
increased restrictions contravene the principles of a
democratic society. Second, increased protections extend
monopolistic control over original works of expression.
Third, the commodization of copyright is not an incentive to
creativity.
Copyright holders, often
not the creative authors, ensured the massive expansion of
their monopoly. The monopoly now extends for seventy-years
plus the life of the author from an original twenty-eight
year renewable period. The adulterated derivative work right
warrants copyright protection for minor editions to the
original. Further, the degradation of the originality
requirement expands the scope of protection allowing a bare
minimum of creativity to justify a monopoly.
More recently, copyright
was extended to compilations, often evidencing no degree of
originality and serving merely to protect the compiler's
ability to sell a compendium even if the component parts
manifest no originality of their own to justify protection.
Finally, the monopoly was
expanded to protect nonliteral elements of works depriving
the public of the benefit of transformative uses and
preventing further development. Now the "essence" of the
work, in addition to the work itself, is protected by
copyright.
Copyrights and limited
protection
As the scope of copyright
protection has increased, so has its value. Accordingly,
copyright holders seek new ways to obtain financial benefit
from creative works treating copyright as a commodity.
However, copyright only should ensure limited protection for
creative works as is necessary in a democratic society.
Instead, the rights of the holder may be bought and sold at
an unprecedented level. Originally, the copyright
holder’s exclusive rights were transferable only as a
whole. However, with the shift toward pecuniary
exploitation, the value in these rights increased
dramatically permitting their license and transfer singly.
Thus, a holder can achieve substantial financial gain from
the sale of separate, defined rights to multiple parties.
Further, the monopolist may set any price for their sale as
the alternative to purchase is infringement and severe
penalties.
This mistreatment of
copyright led to the concept of beneficial ownership in
copyrighted works; possession of a mere economic interest
without necessarily manifesting any creativity.
Perhaps the most egregious
example of the bastardization of the founding principles of
copyright is the work for hire doctrine. This scheme treats
authorship solely as an economic concept preventing
copyright from vesting in the creative author by placing it
in the hands of a third-party. The burden then rests with
creators to prove they are entitled to the benefits of their
efforts. In fact, the work for hire doctrine is so corrupt
the WTO sanctioned the U.S. for perpetuating its existence
even after the EU has forsaken it.
Ultimately, the
commodization of copyright led to consolidation of
ownership. Accordingly, monopolistic control as a means of
promoting creativity is devoid of purpose. Copyright
conglomerates obtain the power to set any price, without
fear of competition, and without concern for dissemination
among the public in the promotion of democratic
ideals.
Fortunately, the
egalitarian effects of technology permit civil disobedience
in the face of an unjust, adulterated copyright regime. The
constant, evolutionary war between advanced protections and
circumventions regulates the role of copyright law to
irrelevancy.
Copyright protection
depends upon the ability of owners to enforce their rights.
The Internet prevents successful enforcement ventures by not
succumbing to territorial limitations and permitting
dissemination from countries with weak protections providing
convenient access to users without fear of legal
retribution.
Even as legal battles are
fought by corporate interests clinging to their outmoded
intellectual property paradigm, determined users seek to
return copyright to its original function-the promotion and
dissemination of original, creative works.
Civil disobedience in the
face of copyright laws promotes the democratic ideal that
information is a public good thereby sustaining the Internet
community’s founding belief that “information
wants to be free.”
Bauchner recently
completed his degree at Brooklyn Law School where he was
Editor in Chief of the Brooklyn Journal of International
Law. He previously managed the Internet and Litigation at
the Software Publishers Association where he developed the
group's Internet Anti-Piracy Program. He may be reached at
jbauchne@brooklaw.edu.
NASDQ Fifth Letter add ons to Symbols
A
Class A
shares
B
Class B
shares
C
Temporarily
exempt from NASDAQ listing
requirements
D
A new
issue of an existing stock - typically the
result of a reverse split
E
Delinquent
in SEC filing requirements per NASD
rules
F
Foreign
(non-USA) stock
G
First
convertible bond
H
Second
convertible bond
I
Third
convertible bond
J
Voting
shares
K
Non-voting
shares
L
Miscellaneous
situations, including foreign preferred,
preferred when-issued, second class units,
third class warrants, or sixth class
preferred stock
M
Fourth
class preferred stock
N
Third
class preferred stock
O
Second
class preferred stock
P
First
class preferred stock
Q
Currently
in bankruptcy proceedings
R
Rights
S
Beneficial
interest
T
With
warrants or rights
U
Units
V
When-issued
and when-distributed
W
Warrants
X
Indicates
shares in a Mutual Fund
Y
ADR's -
American Depositary Receipts
Z
Miscellaneous
situations, including second class of
warrants, fifth class preferred stock or
any unit, receipt or certificate
representing a limited partnership
interest
Remember to study the New Interim HIPS
Roller Report to see what issues have had a history of
rolling the past three months.
New Trading
Strategy Necessary for Current Market
Conditions.
In the current market it is important to identify good
rolling stocks in that they represent the best bet for
profits in this market which is not sustaining much growth.
The following sample HIPS Report covering rollers with a RR
of 4 and above over the previous 3 months should help
identify good trading stocks.
IMPORTANT NOTICE
.....The following sample report represents an
example of a 3 month analysis type report and the
technique used in finding rolling issues. To see
the most recent research reports please follow the
WebLine Archives where the most timely results are
reported.
Sample Interim HIPS
Report - Three Month Rolling
Rate
The best HIPS Rollers in the 3 months prior to
March 8, 2001
HIPS issues that Rate above a Rolling Rate (RR) of
4 are listed.
Rolling Rate
Described
Symbol
3 Month Rolling
Rate
Price
R. Rate = (Rolling Rate)
Measures the stock's history and potential for the
stock price to roll regularly up and down. The Rate
specifically represents the Hannaian (Jackie) type
of Roll which is a spikey, fairly frequent regular
type of roll. The rating looks at the regularity,
direction, size, frequency, and predictability of
the move. It represents volitivity in a regular
fashion and allows increased potential for profits
from trading the issue. This factor can change or
occur for short periods of time when traders
utilize certain circumstances affecting an issue
and use and/or manipulate it for trading profit
purposes. Watch for a pink highlight of the R.R.
cell of a stock to alert you to a stock not
historically a roller going through one of these
periods. Stocks can roll on the way up, on the way
down, or staying horizontally, either way they
represent opportunities for significant trading
profits.
VILW
9
.10
LOGC
9
1.44
AMCM
9
.33
UBIX
9
2
CFON
8
.07
IMDS
8
1.25
ONPT
8
1.60
MMTI
8
3.78
FNTN
8
.04
POST
7
.13
SGTN
7
.14
OPTI
7
4
ABTG
7
1.75
ARTM
7
.16
TNRG
7
.02
GTS
6
1.20
VGEN
6
.26
ADVR
6
.34
WDSO
6
.62
OLCMF
6
1.25
MDCH
6
.23
BTIOF
6
.23
SYBD
6
.28
WLGS
5
.19
ELST
5
.44
ITKG
5
.54
VCSY
5
.08
FLXI
5
.15
PENC
.5
.05
AFFI
5
.06
FASC
4
.11
MIGR
4
.44
ADGI
4
.05
TXMC
4
.10
PCBM
4
.16
RESEARCHING RECENT
ROLLERS WITH A 3 MONTH CHART
We are currently researching Stocks that have a tendency to
do a Hannaian Roll within the last 3 months. Remember the
Hannaian or "Jackie" Roll is is short spikey type of roll.
This type of roll happens on a fairly regular bsais over a
short period of time like rolling up and down at least once
every two weeks and maybe even faster , for example like GTS
has been doing almost every other day. In the current market
it is important to identify these stocks in that they
represent the best bet for profits in this market which is
not sustaining any growth.
Rolling Research
Technique
The technique we are using is to pull up the HIPS reports
1,2,3, and The quick report and review the three month
chart. The Quicken "3 month" chart using the "closing price"
type is very good for this in that their standard chart
shows the rolls well in a simple solid line. It is also good
to check the charts of different stocks against each other
to get a picture of how their rolling compares. For example
GTS has been a good roller, but when compared to VILW with
the same chart setup, it is obvious that VILW was the
superior roller during this period. Using the HIPS charts
and clicking on the name of the stock takes you directly to
the Quicken report from which you can pull up the Charts.
Once you have pulled up the first chart for the first stock
you review, you can then simple type over the current symbol
with that of the next stock you want to review and the chart
changes to the 3 month chart of the new stock. This provides
a quick way of looking at a lot of stocks in a short period
of time.
We are also reviewing non-HIPS issues in this way to see if
we can provide an interim report just on these recent
Rollers.
