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UPDATE: Naked Short Selling, “Wall St. Conspiracy?”

Posted by Larry Doyle on May 16, 2012 4:34 AM |

How many people in America today are questioning the very integrity of our markets?

More than we can measure.

Regrettably, there has been strong evidence of practices in selected corners of Wall Street which have violated the trust of investors, betrayed any semblance of fair dealing, and destroyed the development of otherwise viable businesses and companies.

Specifically a month ago, I introduced readers to the artifice of naked short selling in promoting a documentary, “The Wall Street Conspiracy.”

Yesterday, Bloomberg dropped a bombshell on this practice in reporting . . . . . 

Goldman, Merrill E-Mails Show Naked Shorting, Filing Says:

Goldman Sachs Group Inc. (GS) and Merrill Lynch & Co. employees discussed helping naked short-sales by market-maker clients in e-mails the banks sought to keep secret, including one in which a Merrill official told another to ignore compliance rules, Inc. (OSTK) said in a court filing.

The online retailer accused Merrill, now part of Bank of America Corp., and Goldman Sachs of manipulating its stock from 2005 to 2007, causing its shares to fall. Clearing operations at the banks intentionally failed to locate and deliver borrowed shares for clients shorting stocks, including two traders who were fined and suspended from the industry, Overstock’s attorneys said in court papers filed earlier this year.

Lawyers for Overstock, whose California state court lawsuit in San Francisco was dismissed in January, asked a judge to make public e-mails sent in 2005 and 2006 that it said “reflect business decisions to put profits and corporate ambition over compliance” at Goldman Sachs and Merrill. Defendants’ decisions to intentionally fail to deliver Overstock stock caused large scale naked short selling of Overstock stock, the filing states.

After a Merrill executive expressed concern that a colleague intentionally failed, or didn’t complete, a short sale, an executive at the clearing unit responded with an expletive, telling the executive to ignore “the compliance area — procedures, schmecedures,” Overstock lawyers said in the filing, citing an excerpt from a May 2005 e-mail. The Merrill executive later told a judge the statement was a joke, Overstock said in the court document.

In June 2005, Thomas Tranfaglia, then president of Merrill’s clearing unit, said in an e-mail about the possibility of failing market-maker trades, “Why would we have to borrow them? We want to fail on them,” according to the filing.

“As far as I’m concerned, this is totally unacceptable — we are failing when we have over a million shares of stock available,” said another Merrill executive in an e-mail cited by Overstock in its filing. “Is there a blanket agreement that we allow every market-maker client to continue failing even if there is enough availability?” the executive asked in the e- mail. “There needs to be some assessment done here, and fails cleaned up regardless of who is causing them.”

Four media organizations, including Bloomberg LP, the New York Times, Wenner Media and The Economist, intervened in the Overstock case and joined the company’s request to unseal court files.

Let’s add Sense on Cents to the list of these organizations calling for the court files to be unsealed. Remember, transparency is the great disinfectant and the truth shall set us free. That’s right!!

Bloomberg News obtained a copy of the March 1 filing describing the e-mails. The document was filed by attorneys for Goldman Sachs and Merrill as an exhibit to another filing, said Karl Olson, an attorney for Bloomberg and other news outlets.

The full text of the e-mails isn’t included in the court filing by Overstock.

William Halldin, a spokesman for Charlotte, North Carolina- based Bank of America, said Tranfaglia is no longer at the bank and didn’t immediately comment on the document. Michael DuVally, a spokesman for New York-based Goldman Sachs, also didn’t immediately comment on the document. Tranfaglia didn’t return a call or e-mail seeking comment. Both banks have denied any wrongdoing.

We are supposed to blindly trust these banks? Right? No, actually WRONG!! No transparency . . . NO TRUST!!

In October 2008, naked shorting mostly ended after the U.S. Securities and Exchange Commission put in place rules that made it harder to short a stock without first borrowing it or locating it.

“Mostly” ended does not mean “totally” ended. October 2008 is a LONG time from the 2005 – 2007 time frame of this situation with Overstock. Do you think there might have been other companies which also suffered from naked shorting? You think?

Were the systems at the DTCC (Depository Trust & Clearing Corporation) violated and compromised by those engaged in naked shorting? Were DTCC officials aware if this practice was ongoing? Are DTCC officials assured that naked short selling is not still going on currently?

Let’s dismiss the platitudes already put forth by the aforementioned bank representatives. Let’s similarly dismiss any “neither admit nor deny” potential peace offerings typically offered by weak-kneed regulators.

Let’s revisit the serious questions I put forth in my commentary a month ago:

1. How widespread was this practice?

Remember, an exterminator never finds just one mouse.

2. Was the SEC totally ill-equipped or merely unwilling to address naked short selling?

Will we ever know? Do we need an independent outside counsel? Get Spitzer on the phone as he was New York AG until the end of 2006. What might he know about this practice?

3. Can the SEC go back and reconnect the dots to expose the practice and the practitioners? Will they?

4. Can the American public stomach the blatant assault on basic rules of capitalism?

5. Will naked short selling be another nail in the coffin of those who view Wall Street as a rigged game?

6. Might this all be about to change?

RELEASE THE E-MAILS . . . so we can get these questions answered on this specific case AND see where it may lead us elsewhere within the hidden tunnels and back alleyways of Wall Street.

Keep your head up and . . . navigate accordingly.

For those with even greater interest in this topic, please find attached a complaint brought on behalf of Particular focus should be directed to pages 14-19 for quotes from e-mails at Merrill Lynch and Goldman Sachs.  Truly riveting. (credit to Matt Taibbi at Rolling Stone)

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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