Let’s Just Grandfather It!

I didn’t know it then, but on August 25th, when I wrote about “naked shorting” and the problems of Fails to Deliver (FTDs), I would be revisiting the subject again in regards to Refco.

Regulation SHO was passed by the SEC and gave brokerage firms marching orders to eliminate FTDs after Jan 3rd and

“The SEC, wanting to avoid short-squeezes in dozens of stocks caused by the closing out of naked short positions, opted to ‘grandfather in’ any failed deliveries before Jan. 3.

Grandfathering Under Regulation SHO

The requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to positions that were established prior to the security becoming a threshold security. This is known as “grandfathering.” For example, open fail positions in securities that existed prior to the effective date of Regulation SHO on January 3, 2005 are not required to be closed out under Regulation SHO.

The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions. The Commission will continue to monitor whether grandfathered open fail positions are being cleaned up under existing delivery and settlement guidelines or whether further action is warranted.

It is important to note that the “grandfathering” clause of the Regulation does not affect the Commission’s ability to prosecute violations of law that may involve such securities or violations that may have occurred before the adoption of Regulation SHO or that occurred before the security became a threshold security.

Bottom line: 1.5% of daily trading or $6 Billion daily is involved in naked shorting. The Feds called a meeting of the top 14 firms involved in derivatives, suspected of “unconfirmed trades”. Short sales after Jan 3rd, 2005 must be settled after 13 days or the firm is obligated to buy the shares in. Naked short sales prior to Jan 3rd are grandfathered, basically told to sin no more.

Now Time Magazine in an article titled Watch Out, They Bite! HOW HEDGE FUNDS TIED TO EMBATTLED BROKER REFCO USED “NAKED SHORT SELLING” TO PLUNDER SMALL COMPANIES By DANIEL KADLEC, quotes James Angel, associate professor of finance at Georgetown University.

He (Angel) says the rate of short selling has nearly doubled in the past five years, to 36% of all trades.

We already know that Refco was singled out by the SEC in the case of naked selling in Sedona.

February 2003 the SEC fined Rhino Advisors $1 Million for their participation in the manipulation of Sedona Corporation.
In the Rhino case, the SEC had obtained audio recordings of Rhino Executives bribing US Brokers to manipulate Sedona Corp. stock by selling with ‘unbridled levels of aggression.’ The Rhino Executives were later recorded congratulating the US Brokers on ‘collapsing’ the security. While the SEC has the audio recordings, they have not to date taken any actions against the Brokers bribed to manipulate the stock. The period of the recorded manipulation was 2001. The SEC has recently issued a Wells notice to Refco which acts as both a Brokerage House and Clearing Agent for firms like Rhino Advisors.

We also know that Refco 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 PIPEs (private investments in public equity) transaction.

The question is how big was the naked shorting at Refco?

Remember the old saying: He who sells what isn’t his’n, buys it back or goes to prison.I have a feeling when this all shakes out there will be a lot of money lost and a lot of new people in prison!

That’s the other shoe!

When will the SEC enforce Reg SHO and when will they clean up the problems prior to Jan 3rd. That stuff is toxic!

refco naked shorts sedona mover mike

2 Responses to “Let’s Just Grandfather It!”

  1. Carnival of the Capitalists Goes Back to College!

    Before we get into our usual Carnival of the Capitalists rants, we wanted to take a few moments to remember one of the greatest management thinkers and visionaries of all time, Peter Drucker, who passed away this past week….

  2. Carnival of the Capitalists Goes Back to College!

    Before we get into our usual Carnival of the Capitalists rants, we wanted to take a few moments to remember one of the greatest management thinkers and visionaries of all time, Peter Drucker, who passed away this past week….

Discussion Area - Leave a Comment




Copyright © 2007 Mover Mike. Design by Anthony Baggett.


Fatal error: Call to undefined function is_sidebar1_page() in /homepages/7/d182093141/htdocs/movermike/wp-content/themes/networker-10/footer.php on line 13