RE: RE: RE: Naked Short Victim Strikes BackAnd Here's another case :
Suspicious trading last year in shares of Global Links, a small Nevadareal estate holding company, was far more intense than previouslythought.
New data from the U.S. Securities and Exchange Commission reveals tradesettlement fails in early February 2005 that were 27 times greater thanthe total number of shares Global Links (other-otc: GLLC - news -people ) had issued at the time. The data show suspicious trading inGlobal Links far earlier and to a far larger degree than any previouslyreleased by the SEC.
The data was obtained this week by a Freedom of Information Actrequest from David Patch, an outspoken critic of the SEC and an activeparticipant in the drive for reform of market regulations andenforcement.
It was posted on anti-naked-short-selling blogs Thursday night,igniting a fresh round of calls for a special prosecutor to investigateclaims of market manipulation by aggressive short-sellers. This comesas the SEC is working to close loopholes and otherwise strengthen itstrading regulations.
An SEC spokesman had no comment on the data, which showed GlobalLinks trade fails totaling 27.3 million shares on Feb. 4, coincidingwith the first day that Feb. 1 trades should have settled. They were 23million the next day and tapered off from there.
Data released to Patch earlier this month had shown trade fails of10 million shares starting in mid-April, a time when 4 million sharesof Global Links were issued and outstanding.
Questionable trading activity was not lost on Global Links ChiefExecutive Frank Dobrucki, who told shareholders in March 2005 that hebelieved there was fraud occurring. Without the reverse split and theevents that came after it, "we may never have discovered how blatantlyour stock was being abused."
Global Links owns a development in Arizona and office property inLas Vegas. Dobrucki says, "We have millions of dollars in real estateassets. We are not going to fall apart."
The broader issue is so-called naked short-selling. Normally, atrader looking to sell a stock short must borrow or at least identify ashare to borrow before making the sale trade. But naked short-sellersdon't borrow the shares, and manipulative naked short-sellers use thetactic to drive a stock into the ground.
Stock transactions are supposed to settle within three days, and ifthe shares fail to be delivered to the buyer, that failure is reportedto the SEC and to the national stock markets, which keep track ofrepeated trade failures. Large and persistent failed trades in a stockcan be a sign that something is amiss.
The Global Links matter came up briefly in a Senate BankingCommittee hearing in March 2005, when Sen. Robert Bennett, R-Utah, toldthen SEC Chairman William Donaldson that his constituents, among themInternet retailer Overstock.com (nasdaq: OSTK - news - people ), hadcomplained that a new regulation designed to curb abusive trading wasnot working.
That regulation, called Reg SHO, went into effect in January 2005and was supposed to impose strict close-out requirements on stocks thatshowed consistent and frequent settlement failures over a specificperiod of time. But even the SEC has admitted that companies haveremained on the SHO list for far longer than the rule was intended, anindication it has been less than effective.
Current SEC Chairman Christopher Cox acknowledged this practice inJuly when he put out for comment proposed amendments to Reg SHO. Largeand persistent failures can be "indicative of manipulativeshort-selling," the SEC said. Well more than 120 public comment lettersare now posted on the SEC Web site.
Reformers like Patch have demanded that regulators and marketoperators do their jobs of enforcing existing rules and have expressedexasperation about seemingly lax oversight. They point to a Julyenforcement action by the New York Stock Exchange's regulation divisionagainst four brokers, including Daiwa Securities, Goldman Sachs (nyse:GS - news - people ), Citigroup (nyse: C - news - people ) and CreditSuisse, for failing to have adequate Reg SHO Compliance in place.
"Regulation SHO is an important federal securities rule meant toprotect the market and investors from short-sale abuses," said Susan L.Merrill, chief of enforcement, NYSE Regulation in a press release. "Asthese cases demonstrate, firms that fail to enact effective proceduresand systems by the compliance date threaten to undermine the importantpolicies served by this rule."
Despite the tough talk, the collective fines imposed were $1.25 million.
Other "large and persistent" failures have been reported in sharesof Overstock.com, Netflix (nasdaq: NFLX - news - people ), MarthaStewart Omnimedia (nyse: MSO - news - people ) and Novastar Financial(nyse: NFI - news - people ), all of which have been on Reg SHO listspractically since the beginning. Global Links calculates that it's beenon the list for 556 days as of the end of last week.
Global Links was caught off guard by the events that transpired inFebruary 2005 when it implemented a one-for-350 reverse split of itsstock, the result of which would reduce its float from 350 millionshares to 1.1 million.
The reverse split went into effect Feb. 1. In the first four days oftrading, more than 143 million shares traded hands. This is despite thefact that the stock was trading under a new ticker and a new tradetracking number, and despite the fact that it had only 1.1 millionshares issued. The Depository Trust & Clearing Corp., which handlesthe lion's share of U.S. stock settlement, had just 929,277 sharesavailable for trading.
Global Links stock, which in theory should have risen, dropped to.08 cents from 10 cents within hours. "It became very clear that we hadno control of the volume or price of our stock in anyway," said GlobalLinks' Dobrucki, in a March 15, 2005, letter to shareholders. "Outsideforces were now manipulating our stock."
Stockholders reported they could not obtain delivery of shares theyhad bought. One such individual, Robert Simpson, a Michigan businessmanwho had inadvertently purchased 100% of the common stock outstanding inFebruary, has yet to receive any of the shares he purchased.
Some have said it is all a simple matter of broker error. Accountsshowing 350,000 old shares of Global Links should have been adjusted bythe broker to show 350 of the new shares, but some have said thatdidn't happen.
Pat Donahoo, the manager of marketing services for Global Links,said Friday, "The process of issuing the new symbol on Feb. 1, 2005,worked just as it should. If the brokers tried to trade the stock onthe old symbol, they would not have been able to. It was no longer anactive trading symbol."
Donahoo adds, "When we saw the trading taking place in February of2005, all we could do is stand back and watch the parade march down thestreet in total disbelief."