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Investing 101 - Jun 9, 2006 - Printable Version
- The Circle of Greed: "Let us Prey"
by Mark Faulk
A few months ago, somewhere around the time that the NASAA held their forum on naked short selling in November of last year, and shortly after Patrick Byrne wandered unwittingly into the cause and became our eloquent mouthpiece on the big stage, advocates of stock market reform began discussing the issue of “critical mass.” We described this phenomenon in an article in February of this year, called The Circle of Greed: A Voice in the Wilderness: What is a turning point in history? The dictionary defines it as “the point at which a very significant change occurs; a decisive moment.”
In every battle, every cause, every war, there is a turning point. At the time, that turning point might be obvious to only a few involved individuals, but the significance of those moments in history are undeniable. Some turning points involve positive developments, while others are the result of negative forces going "too far."
Critical mass is the scale or volume at which processes becomes self-perpetuating. The minimum amount of people with shared understanding or needs to tip the balance and instigate change.
Well folks, it’s official – the balance has been tipped, and sure enough, the negative forces have gone too far. In a Wall Street Journal article this morning called “NYSE Probes Whether Short Sellers Fueled Steep Decline in Vonage Shares” (you’ll have to subscribe to read that one, some people are only in it for the money), reporters told the story of Vonage, an internet calling company that went public only to have its stock beaten unmercilessly into the ground by hedge funds and brokers who “sold the company short” and then didn’t settle the trades…in other words, they never delivered, or in this case, never borrowed the shares that were sold. They manipulated the price of the stock by creating artificial supply though naked short selling, and now NYSE regulators want to know why and how it was allowed to happen.
And finally…FINALLY…The Wall Street Journal, and federal regulators, came out and said the “N word,” no, not the racial slur, “naked short selling.” Here is an excerpt from that article:
Some of the NYSE regulatory questions in the letter appear aimed at determining whether dealers or their customers may have violated rules curbing the practice of "naked short selling," or selling shares without having them available or knowing how they can be provided to the buyer when the transaction settles after a few days.
The rules against naked shorting were tightened in mid-2004 by the Securities and Exchange Commission, and took effect in January 2005. They put new requirements on exchanges to police trading. As an SEC official noted at the time, naked shorting could drive down a stock price in an "abusive or manipulative way."
On the first day of trading, more than five million shares were sold short, according to someone familiar with the IPO. The bulk of such short-sale orders were placed early in the day, just as the stock began trading.
Other NYSE questions asked for information about failures to deliver stock after the offering. The questions specifically sought information about trades by prime-brokerage customers. Prime brokerage is a booming business in which Wall Street dealers provide services including stock lending to hedge funds, some of which use borrowed stock for short sales.
Dealers are allowed to execute short sales on behalf of customers that don't actually hold the borrowed shares if the dealers have "reasonable grounds" to believe the stock can be borrowed by the time the stock is due to be delivered, according to a Big Board Web site.
However, under the new SEC rules, dealers executing short sales based on a customer's assurance that a stock had been "located" elsewhere must document the customer's source, and whether the same customer's prior assurances resulted in delivery failures.
Critical mass. Balance tipped. The negative forces have gone too far. Every week, new progress is made in this crusade to save our country from financial ruin. As I said in February, this is our national shame. Not since the days of Tammany Hall and Boss Tweed has there been a more corrupt system controlled by so few at the expense of so many. Just as the city of New York, and in fact, our entire nation, was literally owned by criminals who worked their way into the government so deeply that they eventually began to blatantly commit their crimes in broad daylight, they too “went too far.” And why not? When you own the police, you don’t even have to pretend that you’re not committing a crime.
And that was their downfall. It took time, but ultimately, their own arrogance was their undoing. Boss Tweed went to jail, and Tammany Hall eventually lost its stranglehold on the American public. Let’s just hope that history truly does repeat itself.
And that's the Faulking Truth.
Among the voices that helped to expose Tweed and his regime was a political cartoonist by the name of Thomas Nast, who incited the anger of the American public through the use of cartoons that depicted Tweed and his henchmen as the common criminals that they were. In one of his most famous cartoons, a simple piece of editorial journalism depicted Boss Tweed and his cronies as vultures sitting high above the city of New York, with the simple caption of:
“A group of vultures waiting for the storm to blow over -- “Let us prey.”
Mark Faulk is the Editor of The Faulking Truth, and the author of the upcoming book about the CMKX saga entitled "The Naked Truth: Counterfeiting the American Dream," due to be released at the end of July or early August. For more information on the book and on the stock market scandal, go to http://www.faulkingtruth.com , and to pre-order your copy, go to http://www.theownersgroupinc.com/cart/
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