How the GameStop Hustle Worked
Lucy Komisar, 22 June 2021
I have written previously for the Prospect about the frenzy over GameStop (GME), the video game and electronics company. By now, you know the story. Millions of retail investors made the stock soar by over 1,000 percent in January 2021. This brought disaster upon a handful of hedge funds that had bet on GameStop’s stock to drop. According to Markets Insider, one analyst estimated losses in February of roughly $19 billion. The hedge fund Melvin Capital reportedly closed out its position after taking a drubbing of 51 percent. Another fund, Maplelane, lost 40 percent.
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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:
Continue reading “Paper: Overview of Clearance and Settlement system”
Part 10 of Illegal Naked Shorting Series: Legal Shorting of Stocks is a Loser’s Game but Illegal Naked Shorting Transforms It into a Winner’s Game
Smith On Stocks, 24 July 2019
When I launched my research on stock manipulation and the prominent role played by illegal naked shorting, I believed that I had a fair understanding of the subject and could knock out comprehensive research in just a few blogs. However, as I dug in I was taken aback at how complex and widespread this subject is. I think that a team of hundreds of experts with unlimited resources would have difficulty ferreting out all of the details on a scam that Wall Street has been perpetrating and perfecting for over 40 years.
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Part 8: Illegal Naked Shorting Series: Who or What is Cede and What Role Does Cede Play in the Trading of Stocks?
Smith On Stocks, 1 July 2019
ost investors when they buy a publicly traded stock believe that they own a part of some company. They think that somewhere there is a stock certificate or some indication of ownership that has their name on it, but this is not the case. When you buy a “stock” you are actually purchasing a security that affords certain entitlement rights related to registered stock which actual owners hold. The registered shares of a private company are directly owned by shareholders. In contrast, the registered shares of nearly all publicly traded equities are owned by Cede & Co., which is the nominee of the Depository Trust Company (DTC). (A nominee is a company whose name is given as having title to a stock, but does not receive the financial benefits of ownership.) Cede is a subsidiary of the Depository Trust Company (DTC) which is a subsidiary of the Depository Trust and Clearing Corporation (DTCC) and the DTCC is a private company owned by elite Wall Street firms and money center banks. If you need background or a refresher on DTC and DTCC, click on this link. Effectively, elite Wall Street firms and money center banks, not institutions and individual investors, own almost all of the registered shares of publicly traded companies in the US.
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See All Larry Smith Posts @ SNSS
Part 7: Illegal Naked Shorting: DTCC Continuous Net Settlement and Stock Borrowing Programs Have Loopholes That Facilitate Illegal Naked Shorting
Smith On Stocks, 31 May 2019
There is an integral relationship between the DTCC and hedge funds. The DTCC is owned by Prime Brokers; these are Goldman Sachs, Morgan Stanley, Merrell Lynch and other household name investment banks. Prime Brokers provide basic services to hedge funds that allow them to trade with multiple brokerage houses while maintaining a centralized master account at their prime broker containing cash and securities. The prime broker offers stock loan services, portfolio reporting, consolidated cash management and other services. Hedge fund support is a very meaningful percentage of the net income of Prime Brokers.
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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
Dole Food Had Too Many Shares
It’s enough to make you wish for a blockchain.
Bloomberg, 17 February 2017
Oops! Somehow shareholders owned 33 percent more Dole Food shares than there were Dole Food shares.
Continue reading “Article: Dole Food Had Too Many Shares It’s enough to make you wish for a blockchain.”
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues. All article in The Intercept.
The Money is Gone (22 September 2016)
Big Players, Little Stocks, and Naked Shorts (23 September 2016)
Naked Shorts Can’t Stay Naked Forever (24 September 2016)
Calling the SEC (25 September 2016)
Turning Up Like A Bad Penny (26 September 2016)
Were Paper Losses the Goal All Along (27 September 2016)
The Half Billion Glitch (28 September 2016)
Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting
Sanity Check via Wayback, 5 August 2008
To hear them tell it, they are powerless to deal with NSS, acting more as a vessel through which stock flows. They ignore that they are an SRO, chartered with regulating the business conduct of their owner/members. They pretend that they don’t become the intermediary, and thus the contra-party to the trade to both buyer and seller, and thus in full control of buying in failed trades (if they wanted). They pass self-serving rules that declare they can’t force a failing member to buy in the fail, even though they are chartered with ensuring timely clearance and settlement. And for years they have been claiming that NSS is basically a non-issue, while their press geeks and counsel employ mind-numbing doubletalk.
Access archived page.
The ‘Phantom Shares’ Menace
John W. Welborn
Securities & Exchange, 24 April 2008
In 1985, the National Association of Securities Dealers (nasd) commissioned Irving M. Pollack, a securities law expert and former Securities and Exchange commissioner, to conduct a comprehensive review of short selling in nasdaq securities. The nasd sought to determine what, if any, additional short selling regulation was needed for the nasdaq market. The result was the now-famous “Pollack Study,” which described the short selling landscape of the day and made important recommendations regarding the disclosure, reporting, and settlement of short sales.
PDF (10 pages): The ‘Phantom Shares’ Menace
The Economics of Naked Short Selling
Christopher Culp and J. B. Heaton
Despite the cries of alarm, we believe that naked short selling
is unlikely to have significant detrimental effects on capital markets.
In this article, we will first examine the relevant economics
and regulation, and then argue that, from an economic perspective,
naked shorting is little different from traditional shorting.
PDF (6 Pages): Paper Economics of Naked Short Selling
Continue reading “Article: The Economics of Naked Short Selling — The Koch Brothers Approve!”
Illegal naked shorting and stock manipulation are two of Wall Street’s deep, dark secrets. These practices have been around for decades and have resulted in trillions of dollars being fleeced from the American public by Wall Street. In the process, many emerging companies have been put out of business. This report will explain the magnitude of this problem, how it happens, why it has been covered up and how short sellers attack a company. It will also show how all of the participants; the short hedge funds, the prime brokers and the Depository Trust Clearing Corp. (DTCC) — make unconscionable profits while the fleecing of the small American investor continues unabated.
Who Profits from this Illicit Activity?
The short answer is everyone who participates. Specifically:
- The shorts — They win over ninety percent of the time. Their return on investment is enormous because they don’t put any capital up when they sell short — they get cash from the sale delivered to their account. As long as the stock price remains under their short sale price, it is all profit on no investment.
- The prime brokers — The shorts need the prime brokers to aid in counterfeiting shares, which is the cornerstone of the fraud. Not only do the prime brokers get sales commissions and interest on margin accounts, they charge the shorts “interest” on borrowed shares. This can be as high as five percent per week. The prime brokers allegedly make eight to ten billion dollars a year from their short stock lend program. The prime brokers also actively short the victim companies, making large trading profits.
- The DTC — A significant amount of the counterfeiting occurs at the DTC level. They charge the shorts “interest” on borrowed shares, whether it is a legitimate stock borrow or counterfeit shares, as is the case in a vast majority of shares of a company under attack. The amount of profit that the DTC receives is unknown because it is a private company owned by the prime brokers
Read full primer online.
PDF (14 Pages): Counterfeiting Stock (Primer)
Naked Short Selling: How Exposed are Investors?
James W. Christian, Robert Shapiro, John-Paul Whalen
The Houston Law Review, 10 November 2006
Regulation SHO is a start, but in order to guarantee a fair market place, the SEC must close the loopholes in Regulation SHO and institute comprehensive reforms to the clearing and settlement system. Until the SEC makes these necessary reforms and addresses the DTCC’s mismanagement of the Stock Borrow Program, investors will continue to be exposed to the manipulative potential of naked short selling.
PDF (58 Pages): HLR Naked Short Selling 2006-11-10
Research Capital Corporation to SEC on Proposed Amendments to Regulation SHO
Geoffrey G. Whitlam, Vanessa M. Gardiner
6 September 2006
Research Capital Corporation (“RCC”) and Research Capital USA Inc. (“RECA”) have reviewed both the existing regulation and the proposed amendments and we have the following submission regarding the proposed changes to Regulation SHO and the problems created by naked short sales.
RCC is a Canadian Investment Dealer that is registered with the Investment Dealers Association of Canada (“IDA”). RCC is a full service brokerage firm that provides selfclearing for both RCC and RECA. RECA is a U.S. Broker Dealer registered with the NASD. Both organizations are headquartered in Toronto, Canada.
PDF (4 pages): Research Capital Corporation to SEC on Proposed Amendments to Regulation SHO