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Short[1]

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Published by sgdividends
This is an article on shorting in US and its loopholes
This is an article on shorting in US and its loopholes

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Categories:Business/Law, Finance
Published by: sgdividends on Apr 29, 2009
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05/11/2014

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`Phantom Shares,' Failed Trades and Naked Shorts: (Transcript)
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 March 14 (Bloomberg) -- Bloomberg's Michael Schneider reports on the practice of naked short selling,its impact on companies such as Overstock.com Inc. and efforts by the Securities and ExchangeCommission to combat abuses. Naked short selling involves selling stocks short without borrowing theshares first, meaning sellers theoretically can place unlimited orders to drive down a company's stock.Patrick Byrne, chief executive officer of Overstock.com, and others speak. (Source: Bloomberg)(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)HATCH: Well how can we allow $6 billion a day not to be reported? It ought to be stopped.COX: And intentionally failing to deliver that stock within the standard three-day settlement period canbe market manipulation that is clearly violative of the Federal Securities laws.O'QUINN: Which is just stealing is all it is. This is all an example of stealing.CHANOS: It sounds ominous. It sounds nefarious. And by and large it's a non-issue in the marketplace.ANGEL: Is somebody manipulating the shares? What is going on here? It certainly smells bad.SCHNEIDER: Welcome to this Bloomberg News Special Report. I'm Mike Schneider.Stock manipulation. It's a problem that dates back to a time when Wall Street was just a wall. Built bythe Dutch back in 1653, stood 12 feet high, it ran pretty much beneath where I'm standing right now.Over the centuries, investors have learned many tricks to drive stocks both up and down. One of thenewest ways to drive them down - and you can make lots of money doing that - is with an obscure WallStreet trading tactic called naked short selling.In a normal short sale, an investor borrows shares and sells them. If the price falls, he profits byreplacing those borrowed shares with cheaper ones. But in a naked short sale, an investor fails todeliver the shares because he doesn't borrow them.In extreme cases, he even sells phantom shares, shares that don't even exist.While naked short selling is legal, manipulating markets is not, and regardless of intent, the effect of naked short selling can be the same - driving share prices lower.Our story now begins with a man who has done more to call attention to this problem than anyone else.BYRNE: There is in place a system. There is an Al-Qaeda, so to speak, a loosely organized group of people who are destroying small companies and looting the savings of America.Gather round. We're doing our morning meeting this afternoon. Come on in.SCHNEIDER: Meet Patrick Byrne, the outspoken CEO of Overstock.com, an Internet retailer based inSalt Lake City that went public in May 2002.For the past two years, Byrne has been complaining that naked shorting has driven down share prices inthousands of small public companies, including his own, by permitting the sale of stock that, in somecases, doesn't exist.
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From January 2005 to January 2007, Overstock share prices dropped nearly 70 percent.BYRNE: It's a really simple concept, and when you get to it, you think, what's all the hullabaloo about?It's really basic. There are people selling things and not delivering.SCHNEIDER: The 43-year-old Byrne, who counts Warren Buffett among his friends, says his troublesbegan after Overstock reported a profit for the second time in its history, in the fourth quarter of 2004.UNIDENTIFIED: It is my privilege to welcome Overstock.com to NASDAQ this morning as we honor theiraccomplishment as one of the most innovative and successful Internet companies in recent history.SCHNEIDER: In 2004, Overstock's sales had more than doubled, to nearly $500 million. Its stock hadtripled.But the high fives and champagne soon gave way to disbelief. From a high of $77.18 in December 2004,Overstock shares began tumbling. By December 2005, they collapsed to a low of $28.02.Byrne become convinced his shares were being manipulated, a conclusion also reached by Tom Ronk,the President of Buyins.net. Ronk sells data on short sales to companies and investors.RONK: Overstock is a - is the poster boy of naked short selling. What's interesting is that, from January1st, 2005, Overstock.com has been on the naked short list for 91 percent of the trading days. In thatexact same period of time, over 86 million shares have been shorted in Overstock.How is that possible? It shouldn't be.SCHNEIDER: Ronk says naked short selling explains the huge decline in Overstock shares that January,when the stock fell 20 percent in just one month.RONK: We have found very large drops in U.S. stocks in one- month trading periods. So, we're seeingthat, when they first come in and attack, they hit it hard. They really hit it hard, because they can getaway with it. And they cause the largest damage to the stock usually in the first wave of selling.SCHNEIDER: Overstock is just one of hundreds of companies considered at risk for manipulation bynaked short sellers. They appear on stock exchange lists mandated by the Securities and ExchangeCommission's Regulation Short Sales, or Reg SHO. These threshold lists consist of companies with toomany trades that can't be settled because stock is not delivered to the buyer, so- called failures todeliver.ANGEL: I mean, some people use the phrase counterfeit stock to describe the phenomenon, that if youcan sell stock and you never have to deliver, it's going to have the same impact as selling, selling andselling. It's going to push the price down.What is naked short sell?SCHNEIDER: Angel says not all failures are the result of traders trying to manipulate stock prices. Somemay be caused by clerical errors.Overstock was on the list of failed deliveries that U.S. Exchanges released in January 2005. Along withOverstock were more than 240 other companies on NASDAQ's list, among them some familiar names -Trump Hotels and Casino Resorts, Global Crossing, Netflix, TASER and, U.S. Airways.The New York Stock Exchange had nearly 60 companies on its list, including Delta Airlines, MarthaStewart Living Omnimedia, Krispy Kreme Doughnuts, and Winn-Dixie Stores.And the problem is not going away. Since Reg SHO took effect, more than 4,500 companies have beenaffected by stock delivery failures severe enough to qualify them as threshold securities. That's roughlyone in three companies traded on U.S. exchanges, the majority of them with small or very small marketcaps.BYRNE: I don't opposed hedge funds. I don't oppose short selling. I object to the accumulation of unsettled trades in our financial system.
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SCHNEIDER: Reg SHO is supposed to restrict short selling in threshold securities. Once a company is onan exchange's threshold list, Reg SHO requires prime brokers to settle any new trade failures after 13consecutive trading days.But Byrne and other CEOs say the SEC's own data prove that Reg SHO is failing to stop naked shortselling. Companies including Overstock, Krispy Kreme, and Martha Stewart each have been on thresholdlists for more than 400 trading days.ANGEL: I can see no reason why sellers should be able to fail to deliver shares for years in name-brandcompanies. It just doesn't make sense. It raises the question, what is going on here?SCHNEIDER: Patrick Byrne was convinced that illegal activity was responsible for the failures inOverstock trades.BYRNE (?): There's people going to go to prison. There's nothing they can do to make me stop.SCHNEIDER: When we return, Byrne's fight would take him to a place that is one of Wall Street's best-kept secrets.But first - what naked short selling has in common with the Producers.UNIDENTIFIED: There, how much percentage of a play can there be altogether?UNIDENTIFIED: Max, you can only sell 100 percent of anything.UNIDENTIFIED: And how much of Springtime for Hitler have we sold?UNIDENTIFIED: Twenty-five thousand percent.SCHNEIDER: In the Producers, down on his luck Broadway impresario Max Bialystock and his haplessaccountant, Leo Bloom, sell more shares in a play than is mathematically possible.CEOs like Frank Dobrucki have complained for years that the same Producers style accounting is at workwhen abusive naked short sellers target small companies.DOBRUCKI: Twenty thousand, eight hundred percent of our company was traded in a single month. Theshares weren't available. They weren't there. There was no way they could be trading.SCHNEIDER: In March 2005, the Senate Banking Committee confronted then-SEC Chairman WilliamDonaldson with a story about Frank Dobrucki's company, the Nevada-based real estate holdingcompany, Global Links. An investor named Robert Simpson had set out to prove that small companieswere indeed frequent targets of abusive naked short sellers.Simpson placed an order for $5,000 worth of stock in Global Links. That got Simpson ownership of all1.1 million Global Link shares in the market. Not some of them, all of them.UNIDENTIFIED: There were no shares available to be borrowed, and yet in two days, there were over 50million shares traded. That's clearly something that needs work.SIMPSON: I was absolutely blown away when I bought 1,282,050 shares, which equated to 111 percentof the issued and outstanding. I just couldn't even fathom that. So, it wasn't just crooked, it was WildWest times 10.SCHNEIDER: The day all this started, trading in Global Links opened at 10 cents a share. Within asecond, the price dropped to a penny. An hour and 16 minutes later, Global Links stock was trading ateight one-hundredths of a penny. Prices dropped 99 percent in less than two hours.Global Links CEO Frank Dobrucki wrote shareholders telling them the selling of Global Links shares wasevidence of illegal trading, and when that occurs, he said ?DOBRUCKI: The company cannot meet its goals, and shareholder equity is diluted so that brokers canline their pockets with illegal cash.SCHNEIDER: The same conviction motivated Patrick Byrne to hire six-foot six-inch John O'Quinn, one of 
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