Stop the Game!: How To Chill Bubbles Sensibly
John C. Coffee Jr., 17 March 2021
Much of the excited journalism on GameStop has focused on its asserted “Democratization” of the markets or the new “populism” sweeping Wall Street. This sort of commentary is the product of journalists being on tight publication deadlines and willing to generalize based on a data sample of one. Those of us who take a longer-term view see it differently: Bubbles are bad; GameStop was a bubble; and the influences that caused it (which were indeed new and novel) need to be chilled. Those who disagree with the last sentence should probably stop reading here.
But how you chill a bubble is not a simple question. Many commentators have unrealistic solutions: (1) Prosecute everyone (or at least those on Reddit) for manipulation; and (2) subject websites to tight regulatory controls. Such solutions, proposed by those who can reach legal conclusions faster than the average knee can jerk, face formidable obstacles. First, manipulation is a crime of intent that requires the actor to attempt willfully to move a stock price (up or down) to an “artificial” price that the actor knows is different than that which would be reached by the normal intersection of supply and demand in a fully informed market. Currently, the circuits are split, but both the U.S. Courts of Appeals for the Second Circuit and D.C. Circuit insist that the defendant must intentionally send a false pricing signal (such as a wash sale or a factually false statement). See Fezzandi v. Bear Stearns & Co., 777 F.3d 566 (2d Cir. 2015); Koch v. SEC, 793 F.3d 147 (D.C. Cir. 2015). Second, the First Amendment largely precludes any attempt to shut down social media. In addition, §230 of the Communications Decency Act gives immunity to websites, such as Reddit, for what their users say on them. Beyond that, mere statements of opinion—even manic opinions—are not fraudulent. Most of the lost souls on WallStreetBets sound like true believers, not cynical manipulators, and their prediction that GameStop was “going to the moon” were silly, but not fraudulent. According to Motley Fool, the average investor in a Robinhood account had an account balance (in 2020) between $1,000 and $5,000. A colleague tells me that his account balance on Draft Kings (a different betting venue) is greater than that. In short, Robinhood’s investors are not big-time and are probably feeling their losses keenly at this point.
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Timothy Franz Geithner is a former American central banker who served as the 75th United States Secretary of the Treasury under President Barack Obama, from 2009 to 2013. He was the President of the Federal Reserve Bank of New York from 2003 to 2009, following service in the Clinton administration. Since March 2014, he has served as president and managing director of Warburg Pincus, a private equity firm headquartered in New York City. At the New York Fed, Geithner helped manage crises involving Bear Stearns, Lehman Brothers, and the American International Group. Geithner graduated from Dartmouth College (BA) and Johns Hopkins University (MA).
Federal Reserve Bank of New York
Justin Lubell is Head of Citadel Global Equities and is a member of Citadel’s Portfolio Committee. He joined the firm in 2019 as a Senior Managing Director and was subsequently appointed Head of Citadel Global Equities in 2020. Prior to joining Citadel, Mr. Lubell spent more than a decade at Point72 Asset Management, where he was a Portfolio Manager specializing in the Media, Internet, Telecom, and Services industries and was a member of the firm’s Risk Committee. Before that, he was a Managing Director within the Equity Derivatives Strategy team at Bear Stearns & Co. He is a CFA charterholder and graduated magna cum laude from the University of Pennsylvania with a dual bachelor’s degree in Economics and Political Science.
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Naked Short Selling
Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a “failure to deliver” (“FTD”). The transaction generally remains open until the shares are acquired by the seller, or the seller’s broker settles the trade.
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How phantom shares on Wall Street threaten U.S. companies and investors
The Komisar Scoop, 26 March 2020
As stocks are in free fall, a scam run by the big banks/broker-dealers for the benefit of themselves and their hedge fund clients threatens to worsen the situation of large and small American companies and investors.
It’s when the bank/broker-dealers buy stocks, pocket the money and fail to deliver to clients the shares they are supposed to settle through the national stock clearing house. In another industry that might be called embezzling.
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JPMorgan’s Metals Desk Was a Criminal Enterprise, U.S. Says
By Tom Schoenberg and David Voreacos
The head of the bank’s global precious metals desk, Michael Nowak, 45, and two others ripped off market participants and even clients as they illegally moved prices for gold, silver, platinum and palladium, the Justice Department said Monday. Nowak was placed on leave last month, a person familiar with the matter has said. The other traders charged were Gregg Smith, 55 and Christopher Jordan, 47.
Three J.P. Morgan precious metals traders charged as criminal probe continues
CNBC, 16 September 2019
Federal prosecutors on Monday accused three J.P. Morgan precious metals traders, including the global head of base and precious metals trading, of participating in a racketeering conspiracy in connection with a multiyear scheme to manipulate the markets and defraud customers.
The alleged scheme saw the nation’s largest bank by assets profit handsomely, while investors suffered losses.
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The Truth About Naked Short Selling: Commentary
Investopedia, 25 June 2019
The basic form of short selling is selling stock that you borrow from an owner and do not own yourself. In essence, you deliver the borrowed shares. Another form is to sell stock that you do not own and are not borrowing from someone. Here you owe the shorted shares to the buyer but “fail to deliver.” This form is called naked short selling.
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5,000 Reasons Why the Overstock.com Saga is Crazier Than Ever
gary-weiss.com, 30 January 2018
It’s been a long time since the financial press has cast a skeptical eye on Overstock.com and its CEO, Patrick Byrne, Yet there are multiple reasons to do so. Five thousand to be exact. So I’ve dusted off my blog for an update on my favorite fraudulent stock.
As in all soap operas, its continuing story line is not new: Byrne wants the stock to go up. The stock has a history of manipulation, mainly through cooking the books, resulting in multiple restatements. But it takes an expert to sniff out accounting irregularities. All you need to detect the latest Overstock scam is a working pair of eyes and an Internet connection.
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The Creation of Counterfeit Shares — There are a variety of names that the securities industry has dreamed up that are euphemisms for counterfeit shares. Don’t be fooled : Unless the short seller has actually borrowed a real share from the account of a long investor, the short sale is counterfeit. It doesn’t matter what you call it and it may become non–counterfeit if a share is later borrowed, but until then, there are more shares in the system than the company has sold.
The magnitude of the counterfeiting is hundreds of millions of shares every day, and it may be in the billions. The real answer is locked within the prime brokers and the DTC. Incidentally, counterfeiting of securities is as
It is estimated that 1000 small companies have been put out of business by the shorts.
PDF (12 Pages): Paper Counterfeiting Stock
Illegal Naked Short Selling Appears to Lie at the Heart of an Extensive Stock Manipulation Scheme
SmithOnStocks, 16 June 2015
Only a motivated enforcement agency with subpoena power and an accompanying powerful enforcement infrastructure can prove that naked shorting is at the heart of an extensive stock manipulation scheme. However, I believe that the observational evidence is overwhelming that naked shorting practices are widely used to manipulate the stock prices of emerging biotechnology companies as well as many other small and large companies. Unfortunately, naked shorting is an investment variable that investors must understand if they are going to make investments in the emerging biotechnology space in particular and the equity markets in general.
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RGM Communications Archive on Naked Short Selling
Accessed via Wayback, 31 January 2001 – 31 March 2014
Listed below are a large number of public information articles and reports detailing the brokerage houses, market makers and the conduct of the main “street” characters engaged in the illegal practice of “naked short selling”, “death-spiral financing”, “failure to delivers (FTDs)” and/or stock fraud. This page is a resource for anyone wishing to educate themselves regarding the depth and breath of these illegal activities. Please note that some of the articles may have been added out of time sequence because they were discovered weeks or months after publication. All the dates are, to the best of our knowledge, when they came into the public domain.
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Secrets and Lies of the Bailout
Rolling Stone, 4 January 2013
It has been four long winters since the federal government, in the hulking, shaven-skulled, Alien Nation-esque form of then-Treasury Secretary Hank Paulson, committed $700 billion in taxpayer money to rescue Wall Street from its own chicanery and greed. To listen to the bankers and their allies in Washington tell it, you’d think the bailout was the best thing to hit the American economy since the invention of the assembly line. Not only did it prevent another Great Depression, we’ve been told, but the money has all been paid back, and the government even made a profit. No harm, no foul – right?
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SEC under Schapiro struggles to turn around amid political, financial head winds
David S. Hilzenrath
Washington Post, 7 October 2011
Mary L. Schapiro took over a discredited SEC in early 2009 and vowed to rebuild it.
She promised tougher enforcement — “war without quarter” on financial fraud. Modernized rules to keep up with Wall Street. And a new, more effective organization.
Her tenure at the federal agency responsible for protecting investors and policing markets offers a Washington lesson: Even when epic crises create a sense of urgency, it is tough to tighten the reins on powerful industries. Dramatic results can prove elusive.
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Bank of America: Bondholders’ Naked Play for a “Do-Over” on Mortgages
CBS, 20 October 2010
Yesterday’s Bank of America (BAC) bond scare was an interesting reminder of just how much of a mess the foreclosure crisis really is. It may not be the same kind of swoon we experienced two years ago, but the vulnerabilities created by the shoddy mortgage origination and servicing industry will probably haunt the financial system for years to come — like war reparations.
It took a while for the financial world to sort out the meaning of the letter PIMCO, Blackstone and the New York Federal Reserve Bank sent to Bank of America yesterday asking that $47 billion in bonds be “put back” to the bank because of deficient servicing by Countrywide, the Bank of America subsidiary that originated the loans. The markets and the journalistic community can be forgiven for over-reacting.
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