Paper: Overview of Clearance and Settlement system


Subject:  Overview of Clearance and Settlement system

You have requested an overview of how the clearance and settlement system deals with the large amount of stock that is not being delivered in the U.S. and elsewhere.  All of the following are detailed in the enforcement actions I enclose.  While the cases we have handled have similar evidence, I cannot discuss those (as they are subject to a confidentiality order that prohibits disclosure to people outside the lawyers and clients in the case).

Let’s understand what occurs based on the enclosed:

1)  Brokers have programs that are designed to mark trades long when they are short.  This distorts the real reported short interest and attempts to circumvent REG SHO in the U.S.

2)  Brokers have programs that are designed to classify a stock as “easy to borrow” when it is “hard to borrow”.

3)  Firms lie on their blue sheets.

4)  Locates are given (in massive quantities) far beyond the inventory on hand.  As a result, an electronic entry that shows you have a good borrow is not checked (it totality) with respect to the lending brokers inventory at the time (in totality).

5)  Synthetic, counterfeit shares are created as if they are real shares.  How?  By putting a fake “put contract” with a fake “call contract”, which is intentionally never consummated.  Once compliance discovers it was never consummated, another contract is created and on and on and on…..  The “Put & Call” contracts marked on the same date, create a synthetic share.

6)  “Fails to deliver” are hidden in the parent’s subsidiaries in the U.S.

7)  “Fails to deliver” are hidden in the parent’s foreign subsidiaries.

8)  The firms point to their cash capital sufficient to buy in and remedy the fail without anyone seeing if there is enough real shares that can be purchased.  In other words, auditors do not look at the totality of the shares at the DTC, CDS or Euroclear.  Rather, they only look at the brokers position at the time.  In doing so, they count as a credit all IOU’s from other banks some of which are not real.

9)  They bifurcate the sale from the delivery.  The perpetrator consummates the sale, takes the money and sends the delivery overseas or somewhere else in a “repo certificate”.  There the fails to deliver sit; outside the purview of the SEC or FINRA.

10)  They use reverse conversions to appear as real shares.

11)  They illegally use customers cash account shares to cover their fails to deliver.

Simple version, the system is full of a bunch of IOU’s  (referred to legally as “security entitlements”) that cannot be fulfilled as the totality of all shares printed on customers account statements (in most cases) greatly exceeds the total issued and outstanding shares of the issuer.

Auditors only look at the brokers piece of the pie; not the whole pie.  In doing so, the auditor counts other shares to which the broker is entitled to receive; when in reality if everyone made good on the IOU’s, there would not be enough shares to deliver as more shares have been sold than have been issued.

What we have done in our lawsuits is determine the total shares printed out on customers account statements; and compared them (by broker) to the total shares  (by broker) at the Depository (CDS, DTC or Euroclear).  In all the cases, the broker has printed out on customers account statements millions more in shares than the total number of shares issued by the issuer.

This list is not all inclusive but is a good start.

Call me with any questions.