RamjetSTOCKGATE TODAY Nov.23, 2005
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Holiday Reflections Congressional Style – November 23, 2005
David Patch
The past four or five years have been extremely enlightening to me regarding the inner workings of our Federal Government. Watching c-Span and ‘The West Wing’ do not do justice the quality of work that comes from the Federal employees that are paid off our tax dollars.
It was some four or five years ago I became caught in a game employed by Wall Street to strip the savings of innocent investors, middle class America, and divert those savings to finance the appetite of the wealthy and privileged of this nation. It was my responsibility as an investor to investigate this issue and seek the aide of our Federal Government to correct this wrong before it became unmanageable.
Boy did I have some learning to do.
Naked short selling has been a problem in our markets for decades. Reported regulatory enforcement against this abuse dates back to the late 1990’s when the NASD brought action against John Fiero and the brokerage firm Fiero Brothers for naked shorting on behalf of organized crime families. While this was not an isolated event, it was an isolated enforcement action.
Then, recent enforcement actions against Hilary Shane, Rhino Advisors, and Guillaume Pollet surfaced addressing 2000 and 2001 naked shorting abuses. The SEC and NASD are still in negotiations for settlement with Friedman, Billings, and Ramsey along with Refco Securities over 2001 naked shorting violations. Ironically the shorting abuses that appear systemic were occurring during a period in time where the markets were crashing. Coincidence?
We are nearing 2006 and the problems remain.
Back some years ago I initiated my personal lobby into Congress to review the issue of naked shorting abuses. History indicates it was a problem left unresolved. The lobbying expanded to involve the SEC and NASD requesting each to take a stronger role in enforcing laws that pre-existed on record.
The response was typical Washington Politics. Nothing happened. I didn’t come with a handful of cash in hand or a large bankroll to qualify to speak so I should have expected such.
Congress dismissed me as an individual without credibility and without justification. Congress was busy filibustering over Judges and discussing new roads to nowhere in Alaska. They hadn’t the time or the desire to protect our nations financial well being. Unfortunately this included the Senators that represent me, Senator John Kerry (D MA) who was too busy campaigning and Senator Ted Kennedy (D MA) who was too busy…being Teddy.
The SEC dismissed me as cranky, uneducated on matters, and misinformed. I didn’t know what they knew. How could I? It is their secret. Well yes cases did exist where companies were manipulated by naked shorting but it was not a big issue. Trade settlement failures in the system were an anomaly. The reported $6 Billion daily book value of failures at the DTCC amounted to nothing. The ruckus was over nothing.
Then in June of 2004 came the SEC’s new regulation into short selling. Regulation SHO was presented as a work package in the making over these past several years. Thousands of hours of research and study was now concluded and deciphered into a single reform package identified as the most sweeping reform in short selling in 60 years. The SEC identified in the presentation that naked short selling was a potential problem in the market and naked short sellers gained additional leverage used to manipulate the price of stock downward.
Where are the public hearings? Where are the open discussions with the people of this nation over Regulation SHO? Where is the enforcement?
Remember, by now I have been speaking to members of Congress for years and this issue was a nit. Late Trading and Research Analysts were big issues, not this one. Nobody is really getting harmed due to naked shorting.
The Senate Banking Committee was ‘working’ with the SEC in the draft of Regulation SHO and would insure the protection of the investor was achieved. Staff members of Senator Shelby (R AL), Chairman of the Banking Committee insured the people the issue would be resolved. The Senate Banking Committee had a handle on this. The Senate Banking Committee relied solely on the SEC and Industry Members.
The work of this staff and this Committee would have resulted in pink slips in private business but not in Congress. Failure is an acceptable attribute to a Federal employee.
The House Financial Services Committee also provided two forms of assistance. During a lobbyist fundraiser for Congressman Rick Renzi (R AZ) in 2003 [$2,000/plate] Congresswoman Sue Kelly’s (R NY) Office committed to this issue and to insure the safety of our small business enterprises. Even President Bush’s staff committed their assistance on this day. President Bush’s staff later asking the lobbyist to draft a white paper on naked shorting in September of 2004 saying the President was “concerned”.
To say nothing came from all this would be an understatement.
The Democrats were not to be left hanging and they too entered the fray. House Financial Services Minority Leader Barney Frank (D MA) had his staff working on Regulation SHO. Lawranne Stewart and I spoke on a regular basis and since I am not one to kiss butt for service, a Washington pre-requisite, I got little support or action. By the time Regulation SHO was released, the best Ms. Stewart could draft to me was a memo stating, “I am not denying that the SEC did not address all the issues” regarding Regulation SHO and naked shorting.
So much for the value of Congressional Oversight Committee’s! It isn’t right but lets go with what we have. We can spend more tax dollars later to correct our mistakes.
So with the Holidays approaching and the State Regulators holding an open public forum on November 30, 2005 in Washington D.C. to discuss the short comings of Regulation SHO I thought it best to reacquaint myself with that dynamo team of Federally employed people who run our nation. To find out what they have learned over this past year.
The only voice contact I made was with Lawranne Stewart. Ms. Stewart informed me the call went through because I had used a different phone so she didn’t recognize the call was coming – phone block and all. She was always good for sound bites when you tick her off. She did not disappoint me here.
According to Ms. Stewart Congress continues to have issues with Regulation SHO but will not make those issues public. Apparently that is not in our best interests to elevate persistent problems. When asked why there are no public hearings on this she indicated it was Majority Leader Congresswoman Sue Kelly who kept shutting down these discussions and that I should take it up with the Congresswoman Office. When asked why Congressman Frank did not simply speak publicly on his own, as SEC Commissioners in dissent do, I received no response. I guess neither member of Congress is really that committed to helping the abused yet need to play a role for the people so they can get re-elected.
Ms. Stewart did inform me that she has been in continuous contact with the SEC over Regulation SHO seeking direct answers to how trades are being settled and how Regulation SHO is working, that whole grandfather clause in Regulation SHO and all. Now here is where the rubber meets the road. Like I said lead a horse to water and….
I challenged the entire nature of the grandfather clause, legal and otherwise, and out came a response I never expected. According to Ms Stewart, a staff member of the Congressional Oversight Committee responsible for our Securities Markets “the grandfather clause makes no sense”. What? It makes no plausible sense and yet it is law? Ms. Stewart has indicated she has said as much to the SEC yet here it stands.
Ms. Stewart further detailed to me that while Congress hands down guidance to our securities markets under the Exchange Acts of 1933 and 1934, the SEC has governmental exemption authority to make laws that are contradictory to the guidance handed down as law. In other words, while the Exchange Act of 1934 requires the prompt settlement of trades, the SEC can create a law that exempts trades from settling promptly and Congress has no authority over that. They did just that in Regulation SHO. It is the “grandfather” clause.
I got a suggestion. Don’t waste tax dollars creating laws another agency of the government simply plans on ignoring.
To conclude our ‘discussions’ Ms. Stewart also pointed out that she had approached the State Regulators several years back on the issues of naked shorting abuses because ‘State regulators are more inclined to take swift actions in aid of their constituents than Federal Regulators’. The problem she identified was that the States were having a difficult time working through jurisdictional issues.
Stellar. Just stellar. We must rely on the competence of our nation’s political machine to do the right thing and to do it swiftly.
So on this Holiday Season as we reflect back on the year and life that has past us, take solace in the fact that this Holiday Season, like all others, Congress is not at work. They won’t have to answer silly phone calls from irate citizens asking why they have yet to see the light. No requirement to explain to people why a law that makes no sense remains in place to simply victimize so many more. Best of all, Congress will not be expected to make public statements of opinion that differs from party line or politics because --- they are on vacation. There will be no expectation of service by a Constituent. These guys work hard to disappoint us and need the Vacation time between Thanksgiving and January sometime to regenerate those disappointment energies.
We are only the People. We are here only for the privilege and disposition of our Congress.