What is a Wells Notice?

On August 25th I posted about The Problem of “fails to deliver”

From FreeRepublic via financialwire.net, StockGate: Is All Heck About To Break Loose? The NY Fed has called a special meeting for 14 companies who dominate the credit-derivatives market. The 14 companies include JPMorgan Chase & Co. (NYSE: JPM), Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc., Morgan Stanley (NYSE: WMD) and Merrill Lynch & Co. (NYSE: MER). There have been allegations of illegal naked short selling, and regulators are smarting over allegations that they gave super hedge funds a free pass because regarding “fails to deliver” (FTD). Regulation SHO included a “grandfather clause” to fix the FTD problem, but the FTDs are so massive a problem that even with a six months notice it has not been cleaned up.

I just learned that on May 17th, Refco received a Wells Notice. STOCKGATE TODAY informs us that

A Wells Notice is notification issued by regulators to inform individuals and companies of completed investigations where infractions have been discovered.In 2001 Sedona Corporation stock was manipulated through an orchestrated scheme of illegal shorting [naked shorting]. In February of 2003 the SEC brought to conclusion an enforcement action against financier Rhino Advisors and Rhino Executive Thomas Badian for their orchestration of the manipulation. The $1 Million civil fine was only the tip of the proceedings against Rhino as the SEC handed over audiotapes whereby the Rhino Executives were reportedly recorded bribing US Brokers to collapse the stock of Sedona. Excerpts of the audiotapes were later used in December 2003 criminal arrest warrants issued against Thomas and Andreas Badian.

The second firm besides Rhino involved in this “naked shorting was Refco!

Over at The Street.com on Oct. 6th in SEC Looking at Hedge Funds in Stock Placements

The Securities and Exchange Commission is close to bringing enforcement actions against at least two hedge funds that have been active players in the $14 billion-a-year market for PIPEs, or private investments in public equity, people familiar with the inquiry say.Within the past few months, the SEC formally notified one of the hedge funds that it is facing potential regulatory action by sending it a so-called Wells Notice. The other hedge fund has yet to receive a Wells Notice, but regulators are close to taking that next step, sources say.


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

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

As I understand it, Hedge funds can may bets that a stock will go down by shorting the stock. You and I would have to be able to borrow the stock in order to short it. What the SEC is concerned about is shorting “naked”, not borrowing the shares. When delivery is due, the hedgies can’t deliver, it is considered a “fail” an FTD, but there is no enforcement of the rules to deliver.

Regulators pursued a potential enforcement action against Friedman Billings Ramsey (FBR), an investment banker that lined up hedge funds to invest in the PIPEs. This summer, Knight Capital (NITE) disclosed that its Deephaven Asset Management Group could face potential regulatory action over its trading in a series of PIPE deals from June 1999 through March 2004. And, Refco, meanwhile, set aside $5 million to cover the cost of settling allegations that some of its brokers acted improperly in arranging trades for an investor in a PIPE transaction.

There are over 8000 hedge funds. I hear there aren’t 8000 good portfolio managers. The spreads are so thin that you have to use a lot of leverage to make the spreads work for you. And, the competition is fierce. We had 20 year bull market that has created a lot of exccesses. Those excesses are in the process of being purged from the system. Look for powerful money interests to fight hammer and claw to keep all of this under the rug through deals and manipulation. You can manipulate markets for awhile, but you can not fight the trend.

fails to deliver Refco Wells Notice hedge funds

Who is 990N?

See also: A Recap of the Week’s Events at Refco

One Response to “What is a Wells Notice?”

  1. Gigantic Bank Pool Pledged To Avert Disaster as Second Big Crash Stuns Wall Street

    Largest Financial Powers in the City Meet After Day of Hysterical Liquidation Sinking Prices Below Thursday’s

    By Laurence Stern

    After the stock market had come crashing down again in a veritable deluge of forced and hysterical liquidation, word sped through the financial district last evening that the largest banks in the city were prepared to exert their organized power this morning to prevent further disaster.

    Arrangements described as “fully adequate” were completed at a conference at the offices of J. P. Morgan &Co. at Broad and Wall Streets…


    Who sits in JP Morgan’s shoes this time around?

    Who will cover the OIC’s loss on stocks purchased with money from a recent 200 million dollar bond issue, on the promise of grand returns? Will someone go to jail . . . or run for Governor instead?

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