Audience: Investors, entrepreneurs, companies considering going
public, policy makers. Summary: Rigged financial markets and
hopeless under-regulation on Wall Street are not new problems. In
this book, Susanne Trimbath gives a sobering account of naked short
selling, the failure to settle, and her efforts over decades,
trying to get this fixed.Part I. Opening ActThis is a cautionary
tale. What started as a regulatory failure has turned into a
regulatory crisis. Shareholder democracy is in shambles. The
institutions that were established to correct a problem of trade
settlement failures (failures to deliver shares for settlement)
have instead exacerbated the problem. They may not survive what
comes next. Chapter 1: Primer. A non-technical explanation of the
terminology and concepts used in the book, plus the economic
implications of trading ""phantom"" stock and bonds. Chapter 2:
Start at the Beginning. Twenty-five years ago, when I was working
""backstage at Wall Street"" a group of corporate trust specialists
told me about a problem in shareholder voting rights. When I went
to senior management at Depository Trust Company (DTC), then and
still the largest securities depository in the world, brushed it
off saying, ""You can't balance the world."" Part II. Back to Where
I Left OffChapter 3: A Sidewalk Cafe in New York. At the request of
a business colleague, I have coffee with a lawyer from Texas who
tells me that a problem was about to blow up the financial markets:
Wall Street brokers are using short sales and fails to deliver to
grab the assets of American entrepreneurs. I feel a pang of guilt
for not sticking it out to fix this before I left DTC in 1993. By
2003, it was a full-blown regulatory crisis! Chapter 4: Blind Men
Describe an Elephant. When I start working on the issues after
2003, the lawyers, companies, investors and consultants I meet are
like the blind men and a phantom share is the elephant. From a
dentist in Michigan to a Republic operative in Washington DC, few
of the self-described experts even knew what a naked short sale was
before it either happened to them or someone hired them to
pontificate on the subject. Part III. Committing to a CauseChapter
5: Real Experts Meet. The lawyers and several companies they
represent are relying on poorly written reports provided by the
Blind Men. Recognizing that the errors are piling up and having a
negative impact on the outcomes in the court room, I bring in real
experts, including the corporate trust specialists who first came
to me in 1993. We coin the term ""phantom shares"" to describe the
extra shares being created by short sales, stock lending and fails
to deliver. Chapter 6: STA White Paper. The industry organization
of corporate trust specialists, the Securities Transfer Association
(STA) issues a report on over-voting after they are unable to get
help from the Securities and Exchange Commission (SEC). Articles in
their newsletter include a survey showing that over-voting - the
direct result of investors voting phantom shares in corporate
elections - impacts every public company. Almost immediately, the
Securities Industry Association sends a letter to the NYSE
describing how they can hide over-voting and the NYSE removes the
last remaining rule that made it possible for a buyer to demand
delivery of shares. A year later, over-voting is found in every
corporate election surveyed by the STA. Even after the SIA
implements processes to hide over-voting, the STA finds one-third
of corporate elections are still receiving up to 25% more votes
than there are shares outstanding. Chapter 7: Tax Consequences. My
research shows that taxpayers and governments are losing out when
interest and dividends are paid on phantom shares. The loss of tax
revenue is not trivial: as much as $4.0 billion to the states and
$1.5 billion to the federal government every year. Part IV. Success
Seems PossibleChapter 8: Regulation SHO. I submit comment letters
to the SEC that outline the financial and economic consequences of
fails to deliver (FTD). When FTD reporting from NSCC to SEC begins,
we are optimistic. Even though it is a list of victims (companies)
but not the perpetrators (brokers), this is our first chance to see
weekly and then daily data. We still don't know how old a fail is,
but at least we have more frequent reports of the total value of
fails and the number of shares failed per company. This chapter
includes several of my comment letters explaining the implications
for capital markets and the economy of the unfolding regulatory
crisis, including the fact that Reg SHO had no enforcement teeth.
It includes the attachments I submitted, like a copy of an NYSE
audit proving that they knew that brokers were voting in corporate
elections without regard to shareholder rights. Chapter 9: Criminal
Cases Reveal Evidence. Although none of the lawsuits against the
central clearing and settlement organizations (DTCC and its
subsidiaries) is able to progress in the state courts, some
organized crime cases result in settlement agreements and federal
prosecutions. They move slowly but reveal evidence through
discovery that supports the civil claims for several issuers
against the brokers. This book does not detail financial crimes,
but the cases against the primary perpetrators involved in
manipulating Eagletech's stock are outlined to demonstrate the
criminal strategies. We visit the more complete story of Eagletech
Communications, Inc. in Chapter 10. Chapter 10: The Battle Goes
Public. When a Dateline NBC segment on Eagletech is announced, the
pajamahideen are emboldened, organizing protests and rallies
including one on the sidewalk in front of DTCC's headquarters in
Manhattan. The Dateline episode falls far short of the expose
everyone was hoping for. Later that year, the National Association
of Securities Administrators Association (NASAA) holds a public
forum in Washington, D.C. Publicity for the issue rises to the
mainstream media, with a cover story in Bloomberg Markets magazine
focused on the problems created by phantom votes. The CEO of a
large public company is in the audience. I challenge him to buy
shares of stock in his own company and find out if the seller fails
to deliver. His broker debits his bank account for over $1 million
dollars - then it takes two months for him to get delivery of the
shares. In the face of this evidence and the harsh reality that it
can happen to anyone, Patrick Byrne escalates his activities to
warfare. Part V. Escalating CommitmentsChapter 11: Byrne's War.
With the NASAA event as the backdrop, I push Patrick Byrne to stay
focused on the real issue: corporate governance. He has me added to
several email distribution lists with what he dubs the
""Pajamahideen"" - freedom fighters who work from home in their
pajamas. Patrick hires a firm specializing in ""legislative
strategies"" to arrange a media event in Washington DC. It is
poorly attended and not widely reported with only one congressional
aide at the event. Instead of explaining the important regulatory
changes needed to protect corporate governance, Patrick has the
team presentation focus on criminal activity. This chapter includes
the text of my online interview with The Sanity Check. Chapter 12:
Publicity Ramps Up with Meetings, Events and Interviews. I appear
at the confirmation hearing when a former DTCC Board members is
nominated as State Treasurer for New Jersey. I and some of the
pajamahideen point to his Board role as making him complicit in
hiding the fails to deliver. Afterward, DTCC will attempt to use
one obscure new article about the hearing in an effort to disparage
me (Chapter 15). Stories show up in every financial news outlet
from print and online to radio and television. Bloomberg produces
and airs a special report on ""Phantom Shares"" and I am the
keynote speaker at the Securities Lending Conference in New York. I
am contacted by an agent from the FBI-NY and he asks me to meet
with the SDNY Attorney's office to brief them on fails and shorts.
I present them with shocking evidence of system-wide problems in
post-trade processing. I don't hear from them again. Chapter 13:
Naked, Short and Greedy in LA. The CFA-LA initially agrees to put
on an event about naked short selling. Bloomberg TV is prepared to
broadcast the event. Then DTCC threatens action against CFA-LA if
they have me as a speaker. CFA-LA caves and cancels the event.
Overstock CEO Patrick Byrne steps up with a small sponsorship and
STP Advisory Services funds the remainder for a new event in
October. With just a shoe-string budget, we are able to fill a
meeting room at the Park Hyatt in Century City (Los Angeles) with
attendees from all over the US. Part VI. All Seems LostAfter a
series of promising events, what happened next offered one setback
after another. In a painful, emotionally charged series of events
for me, the goal of resolving the regulatory crisis seemed to move
further and further away. Things were happening too quickly to have
feelings about them: by the time it was over, I was just starting
to have feelings about the kind of feelings I had when it was
happening. DTCC's efforts to banish me to the background left me
raw as I constantly had to keep up my guard against it.
Paradoxically, all of the negativity drew a sense of even deeper
commitment from me. Chapter 14: Resistance from Wall Street. DTCC
escalates their efforts against me. It has the opposite effect,
making more companies and investors trust me to speak out on their
behalf. They contact the producers and sponsors for events that
invite me to be keynote speaker. They even threaten to cancel
program participation for a transfer agent who hires me as a
consultant. In the end, the people and organizations that I worked
with in my years at DTC come to my support with more speaker
invitations. Chapter 15: Corporate Governance Fails at Overstock.
The real blow comes when Patrick has the chance to close it out
with the proxy voting charade at his annual meeting. He does
nothing because he got the chairman slot he was so afraid ""they""
would take away from him. The real experts I bring in are ignored
completely. I feel Patrick and his lawyers push me aside in favor
of a series of yes-men and consultants with worn-out low-level
government titles. He will lose his appeal in a million-dollar
lawsuit brought against him and one of his writers for libel and
defamation. Chapter 16: Senate Inaction. Patrick is a big political
donor who is able to get some statements about ""naked short
selling"" read into the record by congressmen from Utah. I was able
to include a couple of paragraphs about fails to deliver. Under
pressure from DTCC, the SEC and Wall Street's own political
donations, Congress refuses to hold hearings to air the investors'
side of the story. In 2012, the Washington Post will report finding
lawmakers in 2008 were investing hundreds of thousands of dollars
in short-selling funds. Part VII. When the Music StopsThen came the
Wall Street bailout, appointing Geithner to Treasury to replace
Paulson (who pillaged the Treasury on his way out of town),
Dodd-Frank which does nothing but order a bunch of studies. Soon,
everyone is so wrapped up in trying to figure out what the rules
are going to be that no one is able to move forward with any
action. Chapter 17: Media Interest after the Financial Crisis. When
the financial crisis hits the markets, I am doing radio interviews
every month. In September, Matt Taibbi interviews me for the
Rolling Stone magazine article that would be quoted extensively
because he called Goldman Sachs a ""great vampire squid wrapped
around the face of humanity, relentlessly jamming its blood funnel
into anything that smells like money."" In 2013, Forbes was still
referencing that article. The Daily Show produces a segment on
short selling that gets attention as far up as the White House
daily briefing. Chapter 18: CMKM and the UnShareholders. A diamond
mining firm, CMKM, orders a ""cert pull"" to get all the company's
shares out of the DTC. It reveals how many phantom shares are in
circulation as a multitude of investors - dubbed the UnShareholders
- are left holding the empty bag. Brokers begin deleting share
positions as they stop returning calls to angry customers around
the world, including several active-duty members of the military
stationed overseas. But the evidence is there: brokers assigned
phantom shares to their most vulnerable customers while getting
real certificated-shares for themselves and favored clients. Before
it shuts down, the UnShareholder project reveals the same
circumstances applied to over 100 investors for 21 more companies
across 15 brokerage firms. Launched June 9, 2008; closed in 2010.
The investors were located throughout the US and in 5 other
countries on three continents. In 2007, shareholders in British
Columbia (Canada) sue their broker for refusal to provide
certificates for shares shown in their account. The same day it was
filed, it went directly before B.C. Supreme Court Justice H.
Groberman, who ordered Canaccord to provide the share certificates
""without delay."" Chapter 19: Two Documentary Films. Sandra Mohr's
Stock Shock is first out of the blocks among several films,
including a few big Hollywood productions that would make the
connection between failures in supervision, regulation and
post-trade processing and the 2008 collapse of global capital
markets. ""The bad guys won."" I am interviewed for the documentary
Wall Street Conspiracy in July. When the stock market crashes in
September, the producers invite me back to explain the connection
with what I told them 2 months earlier. The transcript of that
interview is included in this chapter. Part VIII. The Tragedy of a
Downer EndingChapter 20: GAO Faults SEC and Other Revelations. In
2009, GAO would fault SEC for ignoring thousands of ""NSS""
complaints. My interview with the GAO is included in this chapter.
The deeper tragedy is that so many companies lost access to the
capital that is a keystone on US capital markets. Of the three
companies highlighted in this book, Eagletech folded in 2006, CMKM
held on until 2019 (as NHHI). Only Barker Minerals remains a
functioning business despite the fact that the shares ceased
trading after they could no longer afford to have financial
statements produced by an external auditor. Chapter 21: Barker
Minerals' Unique Approach. A Canadian mining firm, Barker Minerals
Ltd. approached me in 2010 for help with a strategy they developed
to ferret out which brokers were failing to deliver their stock for
settlement. In contrast to denouncing short sellers, which was the
basis for most complaints in the US, Barker called their analysis
the ""Pro Long Strategy"" for its emphasis on protecting and
supporting long-term shareholder investments. Barker Minerals
continues in operations today, primarily using personal funding
after the stock ceased trading on 5 April 2019. Part IX. Unresolved
Regulatory CrisisFor decades, investors have settled for a small
rate of return in their investment accounts, while the companies
holding their money have earned trillions of dollars in income. If
there is one lesson learned from my experiences over the last 15
years, it is that even a disorganized protest is still a protest. A
small but vocal group of investors and entrepreneurs can shake up
the system at least enough to get some transparency. The financial
sector has lost its moral compass. Investors and entrepreneurs are
on their own when they venture into US capital markets. They have
to protect themselves and the wealth they hope to accumulate to
ensure the future.
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