Posted on

Article: Field of Schemes: David Einhorn’s latest short

Article - Media

Field of Schemes: David Einhorn’s latest short

Richard Smith

NakedCapitalism, 15 October 2010

Einhorn is the famous Lehman short of 2008; he got a lot of flak from Clueless Charlie Gasparino for that. I seem to remember our own Lehman bear, Yves, getting snarled at by Charlie G somewhere along the line, too. But of course, Einhorn, via his vehicle Greenlight Capital, had it right; as did Yves (something that those decrying the “Yellow Journalism” of recent NC posts on “foreclosuregate” would do well to consider).

Read full article.

Posted on

Article: Whistle. Then Worry and Wait.

Article - Media

Whistle. Then Worry and Wait.

Edward Wyatt

New York Times, 9 October 2010

Sitting in a Minneapolis mansion and listening to a charismatic investment manager describe a currency trading system that kept earning handsome returns year after year, Arthur F. Schlobohm IV was certain he had stumbled onto a Ponzi scheme.

A longtime trader who started running tickets on the floor of the New York Stock Exchange as a teenager, Mr. Schlobohm, known as Ty, knew that Minneapolis, his home for nine years, was too small a town for a $4.4 billion investment fund to have escaped his notice.

Read full article.

Posted on

Article: Short selling in initial public offerings

Article - Academic

Short selling in initial public offerings

Amy K. Edwards, Kathleen Weiss Hanley

Journal of Financial Economics, 1 October 2010

Short sale constraints in the aftermarket of initial public offerings (IPOs) are often used to explain short-term underpricing that is subsequently reversed. This paper shows that short selling is integral to aftermarket trading and is higher in IPOs with greater underpricing. Perceived restrictions on borrowing shares are not systematically circumvented by “naked” short selling. Short sellers, on average, do not appear to earn abnormal profits in the near term and our findings are not driven by market makers. Short selling in IPOs is not as constrained as suggested by the literature, implying that other factors may be responsible for underpricing.

Paywall access to article.

Posted on

Paper: Fails to Deliver: The Price Impact of Naked Short Sales

Paper

Fails to Deliver: The Price Impact of Naked Short Sales

Elizabeth Stone

Stanford University, 27 September 2010

The effect of naked short selling on asset prices and trading dynamics is a prominent topic of debate among market participants, regulators, and the popular press. This paper evaluates the validity of the claim that naked shorting leads to negative excess returns by creating additional selling pressure. While data on naked short sales is not publicly available, Securities Exchange Commission data on failures to deliver is a strong proxy. Fail to deliver data for 2004 covers a period during which the prevalence of naked short selling was not public knowledge since neither the fail to deliver data nor the Regulation SHO List were publicly available. In excluding information and regulation effects, the analysis presented in this paper isolates potential microstructure price effects.

Read full paper.

Posted on

Article: Morgan Stanley Challenges “ETF Collapse” Theory

Article - Media

Morgan Stanley Challenges “ETF Collapse” Theory

ETF, 24 September 2010

Matt Tagliani, head of European and Asian ETF product at Morgan Stanley in London, has challenged the theory of an ETF collapse caused by the lending and short sale of ETFs.

The theory, promulgated by Bogan Associates, LLC in a 15 September white paper entitled “Can an ETF Collapse?” was publicised in a subsequent FT Alphaville blog and then featured as the topic of a CNBC strategy session on Wednesday this week.

Read full article.

Posted on

Article: Naked Short Selling Banned By EU

Article - Media, Publications

Naked Short Selling Banned By EU

Global Custodian, 15 September 2010

European Regulators have issued new rules aimed at controlling naked short selling and derivatives trading. Naked short selling, where the investor sells shares short without confirming the availability of the stock, has been banned.

Investors will also be forced to disclose their short position in a firm to regulators if it exceeds 0.2%, and to the market as a whole if it crosses 0.5%. Investors will have to disclose short positions on sovereign bonds, even if the position was obtained using credit default swaps.

The ban on naked short selling by the European Commission will be enforced from July 2012 after approval from the European Parliament. Previously, the seller did not have to prove their ability to obtain the stock. According to todays proposal, in order to “to enter a short sale an investor must have borrowed the instruments concerned, entered into an agreement to borrow them, or have an arrangement with a third party to locate and reserve them for lending so that they are delivered by the settlement date [at the latest 4 days after the transaction].” Continue reading “Article: Naked Short Selling Banned By EU”

Posted on

Article: Chinese coal company’s share placement produces interesting collection of investors

Article - Media

Chinese coal company’s share placement produces interesting collection of investors

Chris Carey

sharesleuth, 13 September 2010

Sharesleuth took a closer look at the registration statement covering the resale of those shares, and found that no fewer than eight people who participated in the placement have been the subject of Securities and Exchange Commission actions or criminal prosecutions.

The list includes at least four people who were directly or indirectly linked to stock-manipulation schemes. Several other investors were previously involved in a small cluster of U.S. companies whose placements were manipulated by a ring of boiler room brokerages in the 1990s.

Read full article.

Posted on

Article: Manhattan District Court Writes Final Chapter in Litigation Between Internet Law Library and Hedge Fund Adviser Southridge Capital Management; Orders Tech Firm to Pay Adviser Almost $1.2 Million in Attorney’s Fees on Top of Damages

Article - Media, Publications

Manhattan District Court Writes Final Chapter in Litigation Between Internet Law Library and Hedge Fund Adviser Southridge Capital Management; Orders Tech Firm to Pay Adviser Almost $1.2 Million in Attorney’s Fees on Top of Damages

Alisa Greenstein, Hedge Fund Law Report, 27 August 2010

On August 9, 2010, the United States District Court for the Southern District of New York (Southern District) effectively ended the decade-long litigation between Internet Law Library, Inc. (INL), its executives and several of its shareholders, and Southridge Capital Management, LLC (Southridge), its principals and affiliates, including hedge fund Cootes Drive, LLC, and its broker, Thomson Kernaghan & Co., Ltd. (TK & Co.). The litigation arose out of a “floorless” or “toxic” convertible securities purchase agreement between INL and Cootes Drive.

The agreement allowed Cootes Drive to demand conversion of its INL preferred stock into common stock based on a floating conversion ratio tied to the common stock’s market price, and obligated Cootes Drive to float a $25 million line of equity, so long as INL common stock remained priced above a certain level. This arrangement arguably provided Cootes Drive and its affiliates with an incentive to aggressively short-sell INL common stock, because the further they decreased its price, the more common stock Cootes Drive could obtain on conversion (which it could use to cover its short positions and profit from the difference), and because that decrease would eliminate its obligation to provide a line of equity. The agreement proved disastrous for INL, just as it has for many other companies with similar financing arrangements. Continue reading “Article: Manhattan District Court Writes Final Chapter in Litigation Between Internet Law Library and Hedge Fund Adviser Southridge Capital Management; Orders Tech Firm to Pay Adviser Almost $1.2 Million in Attorney’s Fees on Top of Damages”

Posted on

Article: Naked Shorting Will Cause U.S. Exchange Exodus

Article - Media

Naked Shorting Will Cause U.S. Exchange Exodus

Bud Burrell

Financial Wire, 5 August 2010

This week, an important online news service released an article that should send shockwaves into our public markets. In very curt form, the article chronicles the many abuses of U.S. public companies by short selling manipulators, particularly through naked short selling and regular and derivative based synthetic shorting. By implication, the article recites the sheer embarrassing ineffectiveness of our regulators, who are engaged in a pattern of systematic conflicts of interest with revolving doors that are a major disgrace to our own government.

Read full article.

Posted on

Article: Wall Street’s Big Win

Article - Media

Wall Street’s Big Win

Matt Taibbi

Rolling Stone, 4 August 2010

Cue the credits: the era of financial thuggery is officially over. Three hellish years of panic, all done and gone – the mass bankruptcies, midnight bailouts, shotgun mergers of dying megabanks, high-stakes SEC investigations, all capped by a legislative orgy in which industry lobbyists hurled more than $600 million at Congress. It all supposedly came to an end one Wednesday morning a few weeks back, when President Obama, flanked by hundreds of party flacks and congressional bigwigs, stepped up to the lectern at an extravagant ceremony to sign into law his sweeping new bill to clean up Wall Street.

Read full article.

Posted on

Article: Short selling – legitimate trading or market abuse?

Article - Media

Short selling – legitimate trading or market abuse?

Kevin Terhaar, CFA Institute

Financial Times, 1 August 2010

Naked shorting runs afoul of rules and regulations in most jurisdictions, and for good reason. It can undermine investor confidence because uninformed buyers are deprived of the basic benefits of ownership, such as voting and dividends, when naked short sellers fail to deliver shares or deliver unauthorised shares. In essence, naked shorting is a fraud perpetrated on buyers because sellers may have no ability (and indeed no intention) to fulfil their end of the deal.

Paywall Access to the Article.