1. How do I buy or sell stock in a company that is quoted on the OTC Bulletin Board ® (OTCBB)?
The process of buying or selling OTCBB stock is the same as buying or selling any other stock. You must open an account with a broker (a party that executes buy and sell orders). You cannot buy OTCBB stock directly from the OTCBB or the OTCBB.com.
2. Can a security be traded on the OTCBB and NASDAQ ® at the same time?
No. The OTCBB is a quotation service for securities which are not listed or traded on NASDAQ or a national securities exchange.
3. What are some of the differences between companies quoted by an OTC quotation service and companies listed on a stock market?
Stock markets (including NASDAQ and the registered exchanges, such as NYSE or AMEX) have specific quantitative and qualitative listing and maintenance standards, which are stringently monitored and enforced. Companies listed on a stock market have reporting obligations to the market, and an on-going regulatory relationship exists between the market and its listed companies. OTC quotation services (OTCBB, Pink Sheets) facilitate quotation of unlisted securities. As such, any regulatory relationship between an OTC quotation service and the issuers may be relatively limited or non-existent.
4. What is the difference between OTC, other-OTC and OTC Bulletin Board (OTCBB)? And where do the Pink Sheets fit in?
An over-the-counter (OTC) security is generally considered to be any equity security that is not listed on NASDAQ, NYSE or AMEX. The OTCBB and the Pink Sheets are both quotation services for OTC securities. NASDAQ operates the OTCBB service and permits NASD members to quote any OTC security that is current in certain required regulatory filings (see Listing requirements ). The Pink Sheets is a privately owned company that permits NASD members to quote any OTC security and does not maintain regulatory filing requirements. An OTC security can be dually quoted on both the OTCBB and the Pink Sheets. As well, there are many OTC securities that are not quoted on either the OTCBB or the Pink Sheets; however, they have trading symbols assigned to them so NASD members can comply with trade reporting obligations and report transactions in these securities. These securities are sometimes said to be on the "grey market".
Other-OTC/NBB . Any OTC security that is not quoted on the OTCBB but is eligible for trade reporting on the Automated Confirmation Transaction Service (ACT) is categorized as "other-OTC" or non-Bulletin Board (NBB). You will see both of these terms throughout the OTCBB.com website. This includes, but is not limited to, securities quoted on the Pink Sheets. Because other-OTC securities are not quoted on the OTCBB, you will not be able to access quotes on these stocks through the OTCBB.com website, the NASDAQ Workstation II, or any other NASDAQ product. If they are quoted on the Pink Sheets, you may be able to obtain quotes for other-OTC securities on the Pink Sheets website at www.pinksheets.com.
5. What is the correct way to refer to the OTCBB or securities quoted on the OTCBB?
Correct and accurate terminology when referencing the OTC Bulletin Board are as follows:
OTC Bulletin Board Quoted on the OTC Bulletin Board
Listing and Eligibility Requirements
6. What are the "listing" requirements for the OTCBB?
Because the OTCBB is a quotation service for NASD Market Makers, not an issuer listing service or securities market, there are no listing requirements that must be met by an OTCBB issuer. Accordingly, there are no financial requirements and there is no minimum bid price requirement.
7. Are OTCBB companies considered to be "listed"?
No, the OTCBB is not an issuer listing service, and there is no listing agreement between either the OTCBB or NASDAQ and the issuer. There are, however, certain requirements an issuer must meet in order for its securities to be eligible for a market maker to enter a quotation on the OTCBB.
8. What are the eligibility requirements for the OTCBB?
In order for a security to be eligible for quotation by a market maker on the OTCBB, the security must be registered with the Securities and Exchange Commission (SEC) or other federal regulatory authority that has proper jurisdiction (see below) and the issuer must be current in its required filings with such federal authority.
Domestic issues quoted on the OTCBB are limited to the following securities:
securities of issuers that make current filings pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Act"); securities of depository institutions that are not required to make filings under the Act, but file publicly available reports with their appropriate regulatory authorities; securities of registered closed-end investment companies; and securities of insurance companies that are exempt from registration under Section 12(g)(2)(G) of the Act. Foreign issues and ADRs must be registered with the Securities & Exchange Commission (SEC) pursuant to Section 12 of the Securities Exchange Act of 1934.
9. How many market makers are required for a security to be on the OTCBB?
A minimum of one market maker is needed.
10. What are the listing fees for the OTCBB?
There are no listing fees for the OTCBB. Market makers do pay a fee for participating in the OTCBB of $6 per security per month.
11. Does the OTCBB have shareholder approval rules?
No. The OTCBB does not have shareholder approval rules.
12. Is an OTCBB issuer required to have an audit committee?
OTCBB issuers may choose to have an audit committee, and certain OTCBB issuers may be required to have an audit committee by virtue of an applicable law or rule. However, the OTCBB rules do not separately require OTCBB issuers to establish or maintain an audit committee.
13. How does a company get on the OTCBB?
An issuer may not submit an application directly to be quoted on the OTCBB. A market maker must sponsor the security and demonstrate compliance with SEC Rule 15c211 before it can initiate a quote in a specific security on the OTCBB.
14. How does a security delisted from NASDAQ or an exchange get on the OTCBB?
For a security being delisted from NASDAQ, NYSE, or AMEX, a Market Maker must file a Form 211 and a Form 211 Addendum.
15. Can a company be "delisted" or removed from the OTCBB?
OTCBB issuers that become delinquent in their required regulatory filings will have their securities removed from the OTC Bulletin Board. Further, all OTCBB issues must maintain at least one registered Market Maker to remain on the OTCBB. When the last Market Maker in a security withdraws from the stock, the issue is removed from the OTCBB after 4 days pursuant to Rule 15c2-11. An issuer cannot voluntarily withdraw from the OTCBB; only a market maker can voluntarily withdraw it's quote from the OTCBB. If an OTCBB security becomes listed on NASDAQ or an exchange, it will no longer be eligible and will be removed from the OTCBB.
16. Can a company appeal the removal of its securities?
The issuer of a security quoted on the OTCBB may appeal the removal of its securities to a Hearings Panel that consists of independent persons appointed by the NASD board. The pool of panellists includes accountants, investment bankers, corporate officers and securities lawyers. A request for a hearing will stay the determination to remove the securities pending a determination by the Hearing Panel. Such requests should be faxed to the Hearings Department at 301.978.8080 no later than 4:00 pm , two business days prior to the scheduled removal date. All hearings will be governed by the Rule 9700 Series of the NASD Rules. Hearings are limited to the question of whether the issuer is current in its required filings.
17. May a company appeal the Panel's decision?
Yes. The issuer may appeal the Panel's decision to the NASDAQ Listing and Hearing Review Council ("NLHRC"). The NLHRC may also decide to call the decision for review. The appeal to the NLHRC does not stay the Panel's determination; consequently, a company that has been removed by the Panel will not be reinstated prior to a final determination by the NLHRC. If the NLHRC overturns the Panel, then the company's securities may be reinstated on the OTCBB. After a determination by the NLHRC, the company may appeal to the SEC, and, from there, it may proceed to the Federal court system.
Form 211 (SEC Rule 15c2-11)
18. What is a Form 211?
The Form 211 is the form which must be completed and submitted to NASD OTC Compliance Unit to initiate or resume quotations in the OTCBB, the "Pink Sheets", or any other comparable quotation medium pursuant to SEC Rule 15c2-11
19. After a Form 211 is filed, how long until the security can begin quotation on the OTCBB?
There is no standard time to process a 211 and clear the market maker to begin quoting a security on the OTCBB. The time it takes to review a 211 may vary significantly depending on many factors including whether or not NASD has to request additional information from the market maker that submitted the form and upon how long it takes the market maker to respond to requests for additional information.
20. How do I check the status of a Form 211 filing?
Contact the. NASD OTC Compliance Unit Please note that the Form 211 review process is proprietary and, thus, NASD will only discuss details of the filing or review directly with the firm that submitted the Form 211.
21. Do financials submitted with the Form 211 have to be audited?
Yes, the periodic reporting requirements under NASD Rule 6530 require annual audits of an OTCBB issuer's financial statements. However, current NASD rules do not require the financial statements of Pink Sheet issuers to be audited, but they should be prepared in accordance with GAAP or, for foreign issuers, in accordance with their home country's accounting standards.
22. Do I have to file a Form 211 for a security delisted from NASDAQ?
A delisted Nasdaq Issuer that wishes to be quoted on the OTCBB should contact their market makers to request that they complete a Form 211 for review and processing
23. Do I have to file a Form 211 for a New York Stock Exchange or American Stock Exchange delisted security?
Yes. Prior listing on NYSE or AMEX does not exempt a Market Maker from the Form 211 filing requirement."
U.S. Stocks and Options Easy to borrow TRADING PLATFORM Realtick® InstaQuote The following stocks are listed as 'easy to borrow' for short selling. QuoteTracker This list is updated only once every morning on market days. TradeStream DETAILS Please contact us if you have questions. Email: info*ecnbroker.comm Commissions & rebates "
[gotta see the site, to see the window with latest tickers -- tex]
NASD hosts a number of conferences and events focusing on regulatory securities issues of interest to legal and compliance personnel and others.
2007 Holiday Schedule
NASD will be closed in observance of these holidays:
January 1 New Year's Day (Observed) January 15 Martin Luther King, Jr. Day February 19 Presidents' Day (Observed) April 6 Good Friday May 28 Memorial Day July 4 Independence Day September 3 Labor Day November 22 Thanksgiving Day December 25 Christmas Day
NASD and financial markets may close early the day before a holiday.
Holiday Calendar and Events
NASD hosts a number of conferences and events focusing on regulatory securities issues of interest to legal and compliance personnel and others.
2007 Holiday Schedule
NASD will be closed in observance of these holidays:
January 1 New Year's Day (Observed) January 15 Martin Luther King, Jr. Day February 19 Presidents' Day (Observed) April 6 Good Friday May 28 Memorial Day July 4 Independence Day September 3 Labor Day November 22 Thanksgiving Day December 25 Christmas Day
NASD and financial markets may close early the day before a holiday.
quote:The 2007 holiday schedule for NASDAQ is as follows:
January 1 New Year's Day January 15 Martin Luther King Jr.'s Birthday (Observed) February 19 Presidents' Day April 6 Good Friday May 28 Memorial Day July 4 Independence Day September 3 Labor Day November 22 Thanksgiving Day December 25 Christmas Day
The NASDAQ Stock Market and the securities exchanges will be closed on Monday, January 1, 2007, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Martin Luther King, Jr., Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, January 15, 2007, in observance of Martin Luther King, Jr., Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* Jan. 9 Jan. 12 Jan. 17 10 16 18 11 17 19 12 18 22 15 Markets Closed -- 16 19 23
Presidents' Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, February 19, 2007, in observance of Presidents' Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* Feb. 13 Feb. 16 Feb. 21 14 20 22 15 21 23 16 22 26 19 Markets Closed -- 20 23 27
Good Friday 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Good Friday, April 6, 2007. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* April 2 April 5 April 10 3 9 11 4 10 12 5 11 13 6 Markets Closed -- 9 12 16
Memorial Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, May 28, 2007, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* May 22 May 25 May 30 23 29 31 24 30 June 1 25 31 4 28 Markets Closed -- 29 June 1 5
Independence Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Wednesday, July 4, 2007, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* June 28 July 3 July 6 29 5 5 July 2 6 10 3 9 11 4 Markets Closed -- 5 10 12
Labor Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, September 3, 2007, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* Aug. 28 Aug. 31 Sept. 5 29 Sept. 4 6 30 5 7 31 6 10 Sept. 3 Markets Closed -- 5 7 11
Columbus Day 2007 The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 8, 2007. On this day, The NASDAQ Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.
Trade Date Settlement Date Reg. T Date* Oct. 2 Oct. 5 Oct. 9 3 9 10 4 9 11 5 10 12 8 11 15 9 12 16
Note: October 8, 2007, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board. Transactions made on Wednesday, October 3, will be combined with transactions made on Thursday, October 4, for settlement on October 9. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 8.
Thanksgiving Day 2007
The schedule of trade dates-settlement dates below reflects the observance of the financial community of Thanksgiving Day, Thursday, November 22, 2007. All securities markets will be closed on Thursday, November 22, 2007, in observance of Thanksgiving Day.
Trade Date Settlement Date Reg. T Date* Nov. 16 Nov. 21 Nov. 26 19 23 27 20 26 28 21 27 29 22 Markets Closed -- 23 28 30
Christmas Day 2007 and New Year's Day 2008
The NASDAQ Stock Market and the securities exchanges will be closed on Tuesday, December 25, 2007, in observance of Christmas Day and Tuesday, January 1, 2008, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Going long on a pennystock? cuz it's a "real company," right?
quote:Posted by: cws9 In reply to: None Date:9/20/2005 9:46:20 PM Post #of 11736
Copied from another board. I don't have a link but it is interesting anyways.....
BEFORE YOU BUY AN OTC PENNY STOCK
There are several key areas to look at when doing DD on an Over-the-counter pennystock. And it doesn't even include looking at the financial information.. . that is the least important thing to look at.
Share structure and distribution is the FIRST place our eyes should go when looking at an OTC stock. Don't even READ the news until you know whether or not 5 million shares were sold at .005 to a company in the Cayman Islands.
If so, you can rest assured that there will be heavy selling on any run up, as each new buy is met with an insider sell. And the stock will probably then get heavily shorted near the top. . and driven down to nothing. . and I do mean NOTHING.
And if the company does not report their financials to the SEC. . .RUN AWAY. Don't even consider them, because they will surely rip you off any way that they can. And if they SAY that they will soon be reporting their "audited" financials. . .run even faster. . .this means they have NO INTENTION of filing with the SEC. And even if they say "we will be filing with the SEC" or even "we HAVE submitted our financials to the SEC." DON'T BELIEVE THEM.
MDCE put out a half dozen press releases telling shareholders that they filed their financials with the SEC. . .but somehow. . .as if by magic. . .they have never appeared on the Edgars.
This stuff is the BASICS of penny trading.
SECOND, look at the HISTORY of the stock. . .was there a reverse split or reverse merger in its past? If so, there will probably be more problems or more reverse splits in the future. How long has the company been in business? It is one thing for a company to come up with an idea. . .it is CLEARLY another for same company to figure out a way to successfully market that product or service. . . and it is another thing yet, for the company to properly manage their money.
Take down the names of the officers of the companies, the investor relations people or firm and any other important parties. . .and do a "entire website" search at the SEC. This is not an Edgar search. . and can be found on the main page of the SEC, which EVERY penny trader should know very well. If your party comes up in the search, you can know their history. . if not, it does not mean they are "clear". . .they still could be under investigation or have played a smaller role in other scams, etc. . . .or just have never been caught. Be UN-trusting as a defense to loss and you will increase your chance at gains.
The easy way to do searches on SEC is to use "adj" between names like John Smith. . ."john adj smith" . . if it is an odd last name, it should be fine by itself. . "stephanapolous" or "gianapolitana" or "santodominguez" etc. . .otherwise use adj on firm names like "La Jolla adj Capital" or "La adj Jolla adj Capital" . . this will keep the thousands of uses of "capital" or the city "La Jolla" from coming up in the search. It means literally adjacent" words.
THIRD, read the press releases with a cynical eye. . . if they say that the industry is reported to generate 14 billion in revenues each year and we estimate that our revenues in the coming year will be between 40 million and 60 million dollars. . .. RUN away.
If there is no LOGICAL and detailed explanation of HOW the company plans to make ANY money. . .then they don't. . . they just plan to sell shares. . to you? . . hopefully NO. . to the suckers that don't have a clue what they are doing. ANY reports of "projected" revenues should be based on PRIOR performance. . .if not, it is just a pie-in-the-sky arbitrary number picked out to make them look good to prospective penny traders.
If the company headquarters is in Vancouver, Boca Raton, La Jolla, Denver or Las Vegas. . . . RUN AWAY. There is an old saying in the record biz, where thousands of demo tapes are sent every week. . . "if we reject 100 percent of those wanting a record deal, we will be correct in our decision 99 percent of the time. . .and that ain't bad"
By catagorically denying ANY company hailing from these cities, thus rejecting 100 percent of them. . .we will be correct in our decision 99 percent of the time. And that is not bad.
Other suspect cities, which would require EXTENSIVE DD to justify,include New York City, Dallas, Houston, Palm Springs or other cities of the Coachella Valley, Ft. Lauderdale or other cities in South Florida, any city in Nevada, ANY city in Canada where everyone can short-sell penny stocks, any other "resort" city. . .
If Gucci has a store there. . .then chances are your company does not operate a 50,000 square foot building in the same town. . but rather is just one of many operations out of a small office there.
FOURTH. .INVESTIGATE. . . A good way to find out about the company? CALL THEM. NO, I don't mean to call the number they provide you. . .I mean call the local area directory assistance and ask for the company name. . . I have even gone as far as asked for the numbers of each of the officers of suspect companies, only to find that NOBODY had a listed number. . not even the company.
If the company has an unlisted number. . .think about it. . their customers or clients will not be able to find them. . they are absolutely bogus. If the CEO or his wife answers. .or there is a baby crying in the background. . .guess what? The company is being run out of the kitchen table of a house, and they want your money. . .why? There are bills that need paid, that's why.
Another good trick, is to offer to visit the company headquarters on short notice. . .say something like I will be in town first thing in the morning and would like directions to the company headquarters, so you can report back to your thread on Silicon Investor. . .yes they all read our threads.
If they say the company is moving, under construction or give ANY reason whatsoever for not allowing you there. . . you have your answer. . they are bogus. .don't believe them. . .if they offer to meet you elsewhere or to guide you in. . . decline and say, you may be late and insist on getting precise directions to the company headquarters. You will be amazed at the number of companies that will refuse to tell you.
If you are still interested in the company at this point. . .then you must ask yourself how much you are willing to lose. . . if you are "investing" 2,000 or more dollars, then go to Southwest Airlines website on a Tuesday thru Thursday and book a 33 to 99 dollar "internet special" flight there and go and see them for yourself. For just a same day trip. . or overnight if you feel adventurous. . .for just a few hundred bucks. . you can get a first hand account of where your money is going.
If they sell goods. . .you want to see the warehouse, shipping, receiving department. . .it should be impressive. . even if it is tiny. . if they sell services. . you want to see the laborers performing these services. . .if the company is nothing more than a small office with no laborers, because they "farm out" or their workers work "out of their homes" . . .RUN away. That is a lie. . the company is in business just to sell shares. In which case, be sure to note the leather interior of the CEO's car. . because that is what your 2,000 bucks bought.
Note the name or names on the door. Instead of the company name, does it say "capital.. .equity. . .investor. . .relations. . .financial". . etc??? Do you know why? Because they operate NUMEROUS companies from the same office. . . in which case, your presence is not only NOT WANTED. . .it is threatening to their livelyhood.
If that is the case, I would not bother to even enter, as it may be a potentially dangerous or threatening situation. . . I would turn around and never look back.
But here is the part of penny trading that is the most important of all.. .and what I expect from each of us here on the fishing thread. . . when you have information about these companies like that described above. . and someone else is getting suckered into the same company. . . have the decency to tell them.
You don't need to go on the thread and tell eveyone they are invested in a bogus company. . .chances are good that they have already figured that out. . . but in the course of daily discussion, when the name pops up. . and you can shed some light. . do not hold back.
If they were unlisted. . say so. . if they have convertible debentures from an offshore placement. . say so. . .if there was a 1 for 100 reverse split a year ago. . .say so . . etc etc etc.
Not every company on the OTC or the Nasdaq is bogus.. . . but as I said on the Scammy Awards:
Welcome to the Over-The-Counter market of Electronic Bulletin Board and Pink Sheet stocks.
Out of 100,000 issues, 90,000 are scammys 9,000 are clueless 900 are really trying Leaving 100 that are worth buying.
JUICEY, got that one, but as a youtube link--sure won't hurt to have a coupla different links for that one...
Boo? that's a nice link...
btw, just read the first one on the list, ". . . Stock Operator" the other night; had heard of it of course, but had never read. Fascinating...what struck me was how well it stands it...very modern, in a sense. For example, once he set up an office, he had "wires" installed...lol, early online, he was...
anyway, that link on Bob's list didn't work for me, so here's one to a freebie, .pdf download. Well, can be read online, too, if download not wanted...
"Stock issued as part of a bankruptcy reorganization..."
Posted by: matrix In reply to: 2ligit2quit who wrote msg# 980 Date:4/2/2007 9:43:06 PM Post #of 1002
When a company issues stock, the recipient is restricted from reselling it unless: -- he's held the stock for a certain period of time (normally one year or more); OR -- a registration statement is filed and deemed effective; OR -- the issuance falls under an exemption to registration
Stock issued as part of a bankruptcy reorganization plan happens to fall under category #3. In other words, the stock can be immediately free-trading and sold into the float if they so desire. Since the filings say they want to do a merger, they'll probably retain enough to keep control. It's possible the BK order may restrict how much they can sell prior to the merger occurring.
< ** remember, though: don't get confused when the rules aren't "strictly followed"; i.e., go by the ex-date regardless of record and payable dates. If you're considering a significant chunk of change, always CALL NASD for verification...although rare, dailylist screwups have been known.** -- tex >
Division of Market Regulation: Key Points About Regulation SHO Date: April 11, 2005 I. Short Sales A. What is a short sale? A short sale is generally the sale of a stock you do not own (or that you will borrow for delivery).1 Short sellers believe the price of the stock will fall, or are seeking to hedge against potential price volatility in securities that they own.
If the price of the stock drops, short sellers buy the stock at the lower price and make a profit. If the price of the stock rises, short sellers will incur a loss. Short selling is used for many purposes, including to profit from an expected downward price movement, to provide liquidity in response to unanticipated buyer demand, or to hedge the risk of a long position in the same security or a related security.
B. Example of a short sale. For example, an investor believes that there will be a decline in the stock price of Company A. Company A is trading at $60 a share, so the investor borrows shares of Company A stock at $60 a share and immediately sells them in a short sale. Later, Company A's stock price declines to $40 a share, and the investor buys shares back on the open market to replace the borrowed shares. Since the price is lower, the investor profits on the difference -- in this case $20 a share (minus transaction costs such as commissions and fees). However, if the price goes up from the original price, the investor loses money. Unlike a traditional long position — when risk is limited to the amount invested — shorting a stock leaves an investor open to the possibility of unlimited losses, since a stock can theoretically keep rising indefinitely.
C. How does short selling work? Typically, when you sell short, your brokerage firm loans you the stock. The stock you borrow comes from either the firm's own inventory, the margin account of other brokerage firm clients, or another lender. As with buying stock on margin,2 your brokerage firm will charge you interest on the loan, and you are subject to the margin rules. If the stock you borrow pays a dividend, you must pay the dividend to the person or firm making the loan.
D. Are short sales legal? Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.
II. "Naked" Short Sales In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. 3 As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").
Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period. A fail may also result from naked short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.
Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security4 generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks such as securities quoted on the OTC Bulletin Board,5 as there may be few shares available to purchase or borrow at a given time.
III. Regulation SHO Compliance with Regulation SHO began on January 3, 2005. Regulation SHO was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938. Some of the goals of Regulation SHO include:
Establishing uniform "locate" and "close-out" requirements in order to address problems associated with failures to deliver, including potentially abusive "naked" short selling.
Locate Requirement: Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.6 This "locate" must be made and documented prior to effecting the short sale.
"Close-out" Requirement: Regulation SHO imposes additional delivery requirements on broker-dealers for securities in which there are a relatively substantial number of extended delivery failures at a registered clearing agency7 ("threshold securities"). For instance, with limited exception, Regulation SHO requires brokers and dealers that are participants of a registered clearing agency8 to take action to "close-out" failure-to-deliver positions ("open fails") in threshold securities that have persisted for 13 consecutive settlement days.9 Closing out requires the broker or dealer to purchase securities of like kind and quantity. Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions (for example, an introducing broker)10 may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as the "pre-borrowing" requirement).
Temporarily suspending Commission and SRO11 short sale price tests12 in a group of securities to evaluate the overall effectiveness and necessity of such restrictions. The Commission will study the impact of relaxing the price tests for a period of one year.13
Creating uniform order marking requirements for sales of all equity securities. This means that orders you place with your broker-dealer must be marked "long," "short," or "short exempt."14
IV. Threshold Securities A. The Basics 1. What is a Threshold Security?
Threshold securities are equity securities that have an aggregate fail to deliver position for:
five consecutive settlement days at a registered clearing agency (e.g., National Securities Clearing Corporation (NSCC));15
totaling 10,000 shares or more; and
equal to at least 0.5% of the issuer's total shares outstanding.16
Threshold securities only include issuers registered or required to file reports with the Commission ("reporting companies").17 Therefore, securities of issuers that are not registered or required to file reports with the Commission, which includes the majority of issuers on the Pink Sheets,18 cannot be threshold securities. This is because the SROs need to look to the total outstanding shares of the issuer in order to calculate whether or not the securities meet the definition of a "threshold security." For non-reporting companies, reliable information on total outstanding shares is difficult to determine.
2. Who is Responsible for Identifying Threshold Securities?
Regulation SHO requires the SROs to disseminate a daily list of threshold securities where such SRO, or its market center,19 is the primary listing venue for any such security.
3. Where Can I Find Threshold Lists?
Each SRO is responsible for providing the threshold securities list for those securities for which the SRO is the primary market. You can obtain SRO threshold lists at the following websites:
The Boston Stock Exchange, Philadelphia Stock Exchange and National Stock Exchange are not the primary listing exchange for any securities at this time and, therefore, are currently not publishing threshold securities lists.
4. Inclusion on, and Removal from, Threshold Lists.
At the conclusion of each settlement day, NSCC provides the SROs with data on securities that have aggregate fails to deliver at NSCC of 10,000 shares or more. For the securities for which an SRO is the primary market, that SRO calculates whether the level of fails for each security is equal to, or greater than, 0.5% of the issuer's total shares outstanding of the security. If, for five consecutive settlement days, such security satisfies these criteria, then such security is a threshold security. Each SRO includes such security on its daily threshold list until the aggregate fails level for the security falls below these levels for five consecutive days. (See below for a discussion as to why a security may appear or remain on a threshold list.)
5. Implementation Dates for Threshold Lists.
The SROs disseminated the first threshold lists on January 10, 2005. Regulation SHO does not require a broker or dealer to close-out the open fail position until a security appears on a threshold list for 13 consecutive settlement days and an open fail position for such security exists for each of those days.. Therefore, the first day on which a close-out action could have been required for a threshold security was January 28, 2005.
6. Mandatory Close-Outs of Threshold Securities.
Regulation SHO requires broker-dealers to close-out all failures to deliver that exist in threshold securities for thirteen consecutive settlement days by purchasing securities of like kind and quantity ("close-out").20
Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions (for example, an introducing broker),21 may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as a "pre-borrowing" requirement).
7. Key Points to Remember.
Any equity security of an issuer that is registered or required to file reports with the Commission could qualify as a threshold security. Therefore, threshold securities may include equity securities:
listed on an exchange, 22
quoted on Nasdaq,23 or
quoted on the OTCBB.24
Whether or not a security is a threshold security does not affect the Commission's ability to prosecute manipulative or fraudulent activity that may have occurred before or after adoption of Regulation SHO.
B. Reasons Why A Security May Appear on a Threshold List A security's appearance on a threshold list does not necessarily mean that any improper activity has occurred or is occurring. An equity security will appear on a threshold list if it meets the definition of a threshold security set forth in Regulation SHO, meaning that failures to deliver the stock (i.e. to the party on the other side of the trade) have reached an aggregate of 10,000 shares or greater at NSCC for five consecutive settlement days and are equal to 0.5% of total shares outstanding;
C. Reasons Why A Security May Stay on a Threshold List for Longer Than 13 Consecutive Settlement Days Even when broker-dealers close-out delivery failures, a security may remain on an SRO's threshold securities list for longer than 13 days. Examples of why securities may remain on the threshold securities list:
after broker-dealers close-out all delivery failures, the security stays on the threshold list for five consecutive days;
new delivery failures resulting from long or short sales may have crossed the threshold, keeping the security on the SRO's threshold securities list; or
the delivery failures at NSCC may have been established prior to a security's appearance on the SRO's threshold securities list, and are grandfathered from the close-out requirement of Regulation SHO.
For information about specific securities, contact the appropriate SRO or its market center listed above.
D. Reasons Why A Security With a Large Short Position May Not Appear on a Threshold List There are various reasons why an equity security with a large short position may not appear on an SRO's threshold securities list, 25 for example:
the aggregate delivery failures do not meet the definition of a threshold security in Regulation SHO;
the security's issuer is not registered or required to file reports with the Commission. For instance, the majority of issuers quoted on the Pink Sheets do not file reports or register with the Commission, and so would not appear on threshold lists.26
E. Who Do I Contact For More Information About Securities On a Threshold List? If you have a question regarding a security on a particular SRO's threshold security list, contact that SRO directly. The following SROs are publishing threshold securities lists:
for a particular OTCBB or Pink Sheet security on the threshold list, you may call NASD Market Operations at (866) 776-0800 or send an email to nasdmarketoperations*nasd.com;
for a particular NYSE listed security, you may contact NYSE at RegSHOQ*nyse.com;
for a particular Amex listed security, you may e-mail regsho*amex.com;
for a particular ArcaEx security, you may call ArcaEx Clearing Hotline at (312) 442-7989 or send an e-mail to exchangesecop*archipelago.com;
for a particular CHX security, you may e-mail regshoinfo*chx.com.
F. Grandfathering Under Regulation SHO The requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to positions that were established prior to the security becoming a threshold security. This is known as "grandfathering." For example, open fail positions in securities that existed prior to the effective date of Regulation SHO on January 3, 2005 are not required to be closed out under Regulation SHO.
The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions. The Commission will continue to monitor whether grandfathered open fail positions are being cleaned up under existing delivery and settlement guidelines or whether further action is warranted.
It is important to note that the "grandfathering" clause of the Regulation does not affect the Commission's ability to prosecute violations of law that may involve such securities or violations that may have occurred before the adoption of Regulation SHO or that occurred before the security became a threshold security.
V. Answers to Frequently-Asked Questions from Investors 1. Is all naked short selling abusive or illegal? When considering naked short selling, it is important to know which activity is the focus of discussion.
Selling stock short without having located stock for delivery at settlement. This activity would violate Regulation SHO, except for short sales by market makers engaged in bona fide market making. Market makers do not have to locate stock before selling short, because they need to be able to provide liquidity. However, market makers are not excepted from Regulation SHO's close-out and pre-borrow requirements.
Selling stock short and failing to deliver shares at the time of settlement. This activity doesn't necessarily violate any rules. There are legitimate reasons why a seller may fail to deliver on the scheduled settlement date.
Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price. This manipulative activity, in general, would violate various securities laws, including Rule 10b-5 under the Exchange Act. Regulation SHO does not address this issue.
2. Is naked short selling the reason my stock has lost value? Investors should always use caution before investing in high-risk, speculative stocks, especially with regard to their retirement portfolios, because all stocks may decline in value. There are many reasons why a stock may decline in value. The value of a stock is determined by the basic relationship between supply and demand. If many people want a stock (demand is high), then the price will rise. If a few people want a stock (demand is low), then the price will fall. The main factor determining the demand for a stock is the quality of the company itself. If the company is fundamentally strong, that is, if it is generating positive income, its stock is less likely to lose value.
Speculative stocks, such as microcap stocks, often have a high probability of declining in value and a low probability of experiencing above average gains.27 For example, investors should take extra care to thoroughly research any company quoted exclusively in the Pink Sheets.28 With the exception of a few foreign issuers, the companies quoted in the Pink Sheets tend to be closely held, extremely small or thinly traded. Most do not meet the minimum listing requirements for trading on a national securities exchange, such as the New York Stock Exchange or the Nasdaq Stock Market. Many of these companies do not file periodic reports or audited financial statements with the SEC, making it very difficult for investors to find reliable, unbiased information about those companies.
There also may be instances where a company insider or paid promoter provides false and misleading excuses for why a company's stock price has recently decreased. For instance, these individuals may claim that the price decrease is a temporary condition resulting from the activities of naked short sellers. The insiders or promoters may hope to use this misinformation to move the price back up so they can dump their own stock at higher prices. Often, the price decrease is a result of the company's poor financial situation rather than the reasons provided by the insiders or promoters.
Naked short selling, however, can have negative effects on the market. Fraudsters may use naked short selling as a tool to manipulate the market. Market manipulation is illegal.29 The SEC has toughened its rules and is vigilant about taking actions against wrongdoers.30 Fails to deliver that persist for an extended period of time may result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled. Regulation SHO is intended to address these effects by reducing the number of potential failures to deliver, and by limiting the time in which a broker can permit a fail to deliver to persist. For instance, as explained above, Regulation SHO requires brokers and dealers to close-out the open fail-to-deliver positions in "threshold securities" (i.e., securities that have experienced a substantial number of extended delivery failures) that have persisted for 13 consecutive settlement days.
3. Do all failures to deliver reflect improper activity that should be closed out? A "fail to deliver" occurs when a broker-dealer fails to deliver securities to the party on the other side of the transaction on settlement date. There are many justifiable reasons why broker-dealers do not or cannot deliver securities on settlement date. A broker-dealer may experience a problem that is either unanticipated or is out of its control, such as (1) delays in customers delivering their shares to a broker-dealer, (2) the inability to obtain borrowed shares in time for settlement, (3) issues related to the physical transfer of securities, or (4) the failure of a broker-dealer to receive shares it had purchased to fulfill its delivery obligations. Fails to deliver can result from both long and short sales.
Regulation SHO was designed to target potentially problematic failures to deliver. Prevention of fails is the goal of the locate requirement. Regulation SHO requires broker-dealers to identify a source of borrowable stock before executing a short sale in any equity security with the goal of reducing the number of situations where stock is unavailable for settlement. But, because the locate is usually done three days before settlement, the stock may not be available from the source at the time of settlement, possibly resulting in a fail.
Regulation SHO also requires some fail positions to be closed out. When a broker-dealer has a fail position in a "threshold security," and that fail position has persisted for 13 consecutive settlement days, the broker-dealer must take immediate steps to close-out the fail by purchasing securities of like kind and quantity. Even market makers that have such persistent fails in threshold securities must close-out their positions.
4. Is it a violation of law when trades do not settle on T+3? Generally, investors must complete or "settle" their security transactions within three business days. This settlement cycle is known as "T+3," shorthand for "trade date plus three days."
T+3 means that when you buy a security, your payment must be received by your brokerage firm no later than three business days after the trade is executed. When you sell a security, you must deliver your securities, in certificated or electronic form, to your brokerage firm no later than three business days after the sale.
The three-day settlement date applies to most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. Government securities and stock options settle on the next business day following the trade.31
Because the Commission recognized that there are many reasons why broker-dealers may fail to deliver securities on settlement date, it designed and adopted Rule 15c6-1 to prohibit broker-dealers from contracting to settle transactions later than T+3. However, failure to deliver securities on T+3 does not violate the rule.
5. Does inclusion of a stock on the threshold list mean that improper trading is occurring in the stock? The appearance of a security on a threshold list does not necessarily mean that there has been abusive naked short selling or any impermissible trading in the stock. Delivery failures can be caused by both long and short sales. In addition, notwithstanding actions by broker-dealers to close-out delivery failures, certain securities may remain on an SRO's threshold securities list for an extended period for a variety of legitimate reasons, such as:
Despite proper action to close-out fails, new delivery failures from long or short sales, at the same or other broker-dealers, result in the security staying on the threshold list;
One or more broker-dealers may have temporary but legitimate problems in obtaining the stock they borrowed in time for delivery;
Long sellers may have difficulty in producing stock in good deliverable form to their broker-dealer;
The delivery failures were established prior to a security's appearance on the SRO's threshold securities list, and thus are "grandfathered" from the close-out requirement.
6. Should all equity securities with high levels of fails appear on a threshold list? Although Regulation SHO's locate provision applies to all equity securities, the close-out provisions and inclusion on a threshold securities list apply only to equity securities of companies required to register or file reports with the Commission ("reporting companies").32 As described above, reporting companies typically trade on an exchange or are quoted on the Nasdaq or OTCBB. Only some reporting companies are quoted on the Pink Sheets.33 Regulation SHO is limited to reporting companies because of the difficulty in obtaining accurate total shares outstanding data for non-reporting companies.
7. Does grandfathering permit illegal activity to go unaddressed? Regulation SHO does not require close-outs of "grandfathered" fails. As noted above, "grandfathered" status applies where the fail position was established prior to the security becoming a threshold security. However, any new fails in a security on the threshold list are subject to the mandatory close-out provisions.
Any grandfathered position that resulted from illegal activity, such as manipulation, continues to be fully subject to redress by the Commission.34 The Commission will continue to monitor whether grandfathered open fail positions are being cleaned up under existing delivery and settlement guidelines or whether further action is warranted.
8. Do the issuers of threshold securities have "problems?" Inclusion on the threshold list simply indicates that the aggregate failures to deliver in an issuer's equity securities have reached the level required to become a "threshold security" as defined in Regulation SHO. Inclusion on the list should not be interpreted as connoting anything negative about the particular issuer.
9. Will close-out purchases required by Regulation SHO drive up a security's price? Close-out purchases of stock on threshold securities lists will not necessarily drive up prices of such stocks. One of the primary purposes of Regulation SHO is to clean up open fail positions in threshold securities when they reach a relatively low aggregate level, but not to cause short squeezes. The term "short squeeze" refers to the pressure on short sellers to cover their positions as a result of sharp price increases or difficulty in borrowing the security the sellers are short. The rush by short sellers to cover produces additional upward pressure on the price of the stock, which then can cause an even greater squeeze. Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.
To date, there has been little evidence of rapid and unusual upward price movement in threshold stocks.
10. Where can I obtain information on short sale positions? The SROs publish monthly statistics on short interest in securities that trade on their markets.35 Short interest is the aggregate number of open short sale positions. Short interest does not address the number of fails to deliver that may have occurred or may occur in connection with these short sales.
There also are many commercial websites and some newspapers that offer this information. If you enter the words "short interest" into most Internet search engines, you'll quickly find websites that can provide this information.
11. Can I obtain fails information? Currently, threshold lists include the name and ticker symbol of securities that meet the threshold level on a particular settlement date. Some investors have requested that the SROs provide more detailed information for each threshold security, including the total number of fails, the total short interest position, the name of the broker-dealer firm responsible for the fails, and the names of the customers of responsible brokers and dealers responsible for the short sales. The fails statistics of individual firms and customers is proprietary information and may reflect firms' trading strategies. The release of this information could be used to engage in unlawful upward manipulation of the price of the securities in order to "squeeze" the firms improperly.
12. I read on an internet chat room or website that a specific security has a large number of fails; are these sources reliable? Investors should always be cautious that issuers, promoters, or shareholders may be seeking to stimulate buying interest by making false, misleading or unfounded statements in internet chat rooms or other such forums about alleged large naked short positions in some smaller issuers, particularly those trading on the OTCBB or Pink Sheets. Some individuals may encourage other investors to buy these issuers' securities by claiming that there will be an imminent "short squeeze," in which the alleged naked short sellers will be forced to cover open short positions at increasing prices. These claims in fact may be false.
The Commission's Office of Investor Education and Assistance has made available publications on the Commission's Internet web site (www.sec.gov) that provide helpful guidance on the securities markets and sales and trading practices, including short selling. Investors and prospective investors should be cautious of rumors on chat rooms where the intent of nameless and faceless computer users is in doubt.
14. Does NSCC's stock borrow program create "counterfeit shares?" NSCC's stock borrow program, as approved by the Commission, permits NSCC to borrow securities from its participants for the purpose of completing settlements only if participants have made those securities available to NSCC for this purpose and those securities are on deposit in the participant's account at DTC.
15. Where can I submit information on potential violations of the federal securities laws? If you have specific enforcement-related information, please see http://www.sec.gov/complaint.shtml for information on how to submit a complaint. You may also call 1-800-SEC-0330.
16. Where can I find information on investigations or enforcement actions pending against specific issuers or regarding specific securities? As a policy, the SEC will neither confirm nor deny the existence of an investigation unless, and until, it becomes a matter of public record as the result of a court action or administrative proceeding. SEC investigations are conducted on a non-public and confidential basis to help assure the integrity of the investigative process. See http://www.sec.gov/investor/pubs/howoiea.htm for more information on how the Commission handles complaints.
VI. Reporting Alleged Abusive Naked Short Selling Activity The markets and the SROs are primarily responsible for the surveillance and enforcement of trading activity pursuant to their rules. The SEC, however, independently or in conjunction with the SROs and other regulatory authorities, actively investigates and prosecutes violations of the federal securities laws.
The SEC takes information alleging violations of the federal securities laws very seriously. If you have specific enforcement-related information, please send it in an email to enforcement*sec.gov. Please note, however, the SEC will neither confirm nor deny the existence of an investigation unless, and until, it becomes a matter of public record as the result of a court action or administrative proceeding. As you may also be aware, SEC investigations are conducted on a non-public and confidential basis to help assure the integrity of the investigative process. See http://www.sec.gov/investor/pubs/howoiea.htm for more information on how the Commission handles complaints.
VII. Regulation SHO – Releases and Other Guidance The final adopting release for Regulation SHO and other key documents relating to short sale regulation, such as the "Frequently Asked Questions Regarding Regulation SHO" published by the Staff of the Division of Market Regulation, are available on the Commission's website at: http://www.sec.gov/spotlight/shortsales.htm.
VIII. Who Do I Contact If I Have Questions about Regulation SHO? Individual investors who have comments or information should feel free to contact the SEC's Office of Investor Education and Assistance at 1-800-SEC-0330 or (202) 942-7040. Investors can also file complaints at http://www.sec.gov/complaint.shtml.
_______________________ 1 For more information on short sales, see http://www.sec.gov/answers/shortsale.htm. 2 For information regarding margin, please see http://www.sec.gov/answers/margin.htm. 3 For more information on the three-day settlement period, also known as "T+3," see http://www.sec.gov/answers/tplus3.htm and http://www.sec.gov/investor/pubs/tplus3.htm. 4 For more information about market making, see http://www.sec.gov/answers/mktmaker.htm and http://www.sec.gov/answers/specialist.htm. 5 For more information on the OCTBB, see http://www.sec.gov/answers/otcbb.htm. 6 Broker-dealers engaged in bona-fide market making are excepted from having to borrow or arrange to borrow shares due to their potential need to facilitate customer orders in fast-moving markets without possible delays associated with complying with Regulation SHO. For instance, as explained above, they may be required by their market making obligations to sell short in situations where it may be difficult to quickly locate and borrow securities. However, this exception is limited. For example, bona-fide market making does not include activity that is related to speculative selling strategies or investment purposes of the broker-dealer or that is disproportionate to the usual market making patterns or practices of the broker-dealer in that security. Further, bona-fide market making does not include transactions whereby a market maker enters into an arrangement with another broker-dealer or customer in an attempt to use the market maker's exception for the purpose of avoiding compliance with Regulation SHO by the other broker-dealer or customer. 7 Clearing Agencies are self-regulatory organizations that are required to register with the Commission. There are two types of clearing agencies -- clearing corporations and depositories. Clearing corporations compare member transactions (or report to members the results of exchange comparison operations), clear those trades and prepare instructions for automated settlement of those trades, and often act as intermediaries in making those settlements. Depositories hold securities certificates in bulk form for their participants and maintain ownership records of the securities on their own books. Clearing corporations generally instruct depositories to make securities deliveries that result from settlement of securities transactions. In addition, depositories receive instructions from participants to move securities from one participant's account to another participant's account, either for free or in exchange for a payment of money. See http://www.sec.gov/divisions/marketreg/mrclearing.shtml and www.dtcc.com for more information about the clearance and settlement process and DTCC. 8 A participant of a clearing agency means any person or firm, such as a broker-dealer, that uses a clearing agency to clear and settle securities transactions or to transfer, pledge, lend, or hypothecate securities. It does not include a person or firm whose only use of a clearing agency is (a) through another person or firm that is a participant or (b) as a pledge of securities. Section 3(a)(24) of the Exchange Act, 15 U.S.C. 78c(a)(24). 9 Settlement day means any business day on which deliveries of securities and payments of money may be made through the facilities of a registered clearing agency. 10 Introducing brokers are typically brokers that perform all the functions of a broker except for the ability to accept money, securities, or property from a customer. They are usually not participants of registered clearing agencies and do not perform clearance and settlement functions. See Footnote 9 for more information about participants of a clearing agency. 11 A self-regulatory organization is a membership-based organization that creates and enforces rules for its members based on the federal securities laws. SROs, which are overseen by the SEC, are the front line in regulating broker-dealers. See http://www.sec.gov/about/whatwedo.shtml for more information. 12 For example, the tick test of Rule 10a-1 of the Securities Exchange Act of 1934 provides that, subject to certain exceptions, an exchange-listed security may only be sold short: (i) at a price above the immediately preceding reported price ("plus tick"), or (ii) at the last sale price if it is higher than the last different reported price ("zero-plus tick"). The New York Stock Exchange has a similar tick test under NYSE Rule 440B, and NASD has a bid test under NASD Rule 3350. 13 Specifically, the price tests will be relaxed for securities included on a list of approximately 1,000 actively-traded securities, and after-hours trading (4:15 p.m. until the open of the consolidated tape the following day) of another list of approximately 1,000 securities. For more information on this pilot, see http://www.sec.gov/spotlight/shopilot.htm, and http://www.sec.gov/news/press/2004-164.htm. 14 Under the rule, an order can be marked "long" when the seller owns the security being sold and the security either is in the physical possession or control of the broker-dealer, or it is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than settlement. However, if a person does not own the security, or owns the security sold and does not reasonably believe that the security will be in the possession or control of the broker-dealer prior to settlement, the sale should be marked "short." The sale could be marked "short exempt" if the seller is entitled to rely on an exception from the tick test of Rule 10a-1, or the price test of an exchange or national securities association. Short sales of pilot securities effected during the pilot should be marked "short exempt." 15 The majority of equity trades in the U.S. are cleared and settled through systems administered by clearing agencies registered with the Commission. The National Securities Clearing Corporation ("NSCC"), the largest registered clearing agency for equity securities, clears and settles through its Continuous Net Settlement system ("CNS"). The CNS system nets the securities delivery obligations and the payment obligations of all clearing corporation participants. Clearing corporations notify participants of their securities delivery and payment obligations each day. In addition, the clearing corporation guarantees the completion of all transactions and interposes itself as the contraparty to both sides of any transaction. Clearance may be accomplished on a trade-by-trade basis or through netting of trades either bilaterally between the two counterparties or multilaterally among all members of a clearing corporation to yield balance orders reflecting a single day's trades or all open positions to date (continuous net settlement or "CNS"). See http://www.sec.gov/divisions/marketreg/mrclearing.shtml for more information on clearance and settlement. 16 Outstanding shares (or outstanding stock) are the total amount of shares of a corporation's stock that have been issued. 17 See http://www.sec.gov/answers/regis33.htm,http://www.sec.gov/investor/pubs/microcapstock.htm and http://www.sec.gov/info/smallbus/qasbsec.htm for more information on who is required to register and report. 18 See http://www.sec.gov/answers/pink.htm for more information about the Pink Sheets. 19 See http://www.sec.gov/answers/market.htm for information on market centers. 20 The requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to any positions that were established prior to the security becoming a threshold security. This is explained in more detail below. 21 Introducing brokers are typically brokers that perform all the functions of a broker except for the ability to accept money, securities, or property from a customer. They are usually not participants of registered clearing agencies. See Footnote 9 for more information about participants of a clearing agency. 22 See http://www.sec.gov/answers/market.htm for more information about the exchanges. 23 See http://www.sec.gov/answers/nasdaq.htm for more information about Nasdaq. 24 See http://www.sec.gov/answers/otcbb.htm for more information about the OTCBB. 25 These lists do not reflect short interest positions of securities. Short interest is the aggregate number of open short sale positions. Short interest does not address the number of fails to deliver that may have occurred or may occur in connection with these short sales. 26 See http://www.sec.gov/answers/noinfo.htm for more information on which companies are required to register and report. 27 See http://www.sec.gov/investor/pubs/microcapstock.htm for more information. 28 Many of these stocks are also considered "penny stocks." See http://www.sec.gov/answers/penny.htm. Because penny stocks are generally risky investments, before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The broker-dealer must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer's account. 29 The Commission recently brought an enforcement action against certain parties, alleging manipulative naked short selling, in a scheme sometimes termed as a "death spiral." See Rhino Advisors, Inc. and Thomas Badian, Lit. Rel. No. 18003 (February 27, 2003) at http://www.sec.gov/litigation/litreleases/lr18003.htm. 30 See http://www.sec.gov/investor/pubs/microcapstock.htm. 31 For more information about T+3, see http://www.sec.gov/investor/pubs/tplus3.htm. 32 See http://www.sec.gov/investor/pubs/microcapstock.htm for more information. 33 See http://www.sec.gov/answers/pink.htm for more information about the Pink Sheets. 34 See http://www.sec.gov/answers/tmanipul.htm for more information on manipulation. 35 In addition, each SRO has agreed to make publicly available the trading data in connection with the pilot. The trading data will contain information on each executed short sale involving an exchange-listed or Nasdaq National Market equity security reported by an SRO to a securities information processor. For information on where to find this data, please see http://www.sec.gov/spotlight/shopilot.htm.
quote:What is rule 15c211 Written by Joseph Quinones
What is rule 15c211? 15c211 Was designed to allow fully reporting public companies to have their securities quoted on Over-The-Counter Bulletin Board (“OTCBB”) by filing some simple disclosure.
Rule 15C211 Under SEC Rule 15C211, a U.S. securities broker or dealer may not publish a quotation for any security unless certain information concerning issuer is available and broker or dealer has a reasonable basis for believing that information is accurate. The information requirement is satisfied, in simple terms, if: 1) a Securities Act registration statement (F-6, F-1) has been filed within last 90 days, 2) issuer is complying with filing requirements and has in its records issuer's most recent annual report, 4) issuer is complying with Rule 12g3-2(b), 5) broker or dealer has on record information relating to issuer, its securities, its business, products and facilities. Management information, financial statements of issuer and certain other data must also be on record. Form 15C211, also known as Form 211, refers to specific filing form a broker/dealer must provide containing information necessary to publish a quotation on company. For more information visit: " target="_blank">www.genesiscorporateadvisors.com[/quote]
quote:DTC’s Custody Service allows Participants to outsource all, or part, of their physical securities processing. Used in conjunction with DTC’s Branch Deposit Service and New York Window (NYW) Service, Participants can retain control of their securities without having to handle and secure them. The service enables Participants to deposit securities not traditionally eligible for DTC, including securities such as customer-registered custodial assets, restricted shares, and certain non-DTC-eligible securities, like certificated money market instruments, private placements, and limited partnerships.
Security – DTC’s vault and certificate-handling practices ensure tight security and accurate processing. "Online" Vault File – Detailed information on every certificate and document is available, including certificate number, registration, negotiability status, restricted indicator, etc. Contingency – As part of DTC, Custody offers the benefit of total system reliability including DTC’s dedicated back-up site, which is available in the event DTC’s main offices are inaccessible. Imaging – Images of all certificates and documents held in Custody are available through an imaging workstation. Interfaces – Participants can choose to interface with DTC’s Custody Service via CCF (batch files), MDH (real-time transaction processing), or PTS. (Not all components of the service are currently available via each method. By year-end 2000, all will.) The various components of DTC’s Custody Service are explained, below, in more detail. These services can be used in any combination to customize the service to best fit your business needs. Deposit-Related Features
Deposits – Deposits can be made via the Branch Deposit System (BDS) or as individual Custody Deposits using the PTS system’s CUST function. DTC performs a full examination of deposits, including reviewing the securities for negotiability, as well as ensuring the accuracy of the data transmitted by the Participant in its deposit expectancy file. DTC performs 100% SIC verification and makes calls to the transfer agent on all SIC hits, identifies and creates reorg deposits when applicable, and makes any ineligible issues eligible for custody services on a same-day basis. (PTS, CCF, or MDH) Legal Deposits – Legal deposits are fully examined, and missing legal requirements are identified and reported to the Participant. The securities are held until made negotiable by a subsequent Trailing Document deposit, or returned to the customer. (PTS, CCF, or MDH) Trailing Document Deposit – Document deposits can be made into custody, as long as the document deposit identifies a previous deposit of securities. DTC attaches the document deposit to the securities and the item is re-examined for negotiability. (PTS, CCF, MDH) Legal Deposit Customer Returns – Any item that needs to be returned to the customer or branch because necessary documents were not supplied can be returned with an explanatory letter on the Participant’s letterhead. (PTS, CCF, MDH) Foreign Securities – DTC will hold foreign securities, but does not provide transfer services. We can, however, attach instructions on your letterhead and forward them to a global custodian, for deposit into your account. (CCF, MDH) Mutual Funds – DTC can attach a customized letter instructing the fund to credit your firm’s house account. Additionally, we can instruct the fund to perform partial and full redemptions. Payment is made directly to the Participant according to standing bank account instructions. (CCF, MDH) Government Securities – If government securities are received on a Custody Deposit or via the NYW, DTC can present them to the Treasury Department or the FRBNY for deposit, or in the case of GNMA’s, we can credit your MBS account. (CCF, MDH)
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Reorganization Presentation – You can instruct DTC to present any position held in custody for any type of reorganization activity, including redemption, mandatory and voluntary activities. Allocations are made upon receipt through DTC’s existing reorg systems. (PTS, MDH and CCF) Reorg "Sweeps" – For mandatory activities, DTC automatically presents positions in certain custody locations to the agent for payment or exchange. Reorg Research – Occasionally, Participants deposit older securities into Custody that may have been the subject of one or more prior reorganization activities. DTC researches such deposits and determines where to present them and what proceeds are due. If the research reveals that proceeds have been escheated, we will pass specific information back to the Participant for follow-up action. Short-term Redemptions – Certain money market instruments require presentation to the paying agent on payment date and may have payments made too late in the afternoon, to make DTC’s settlement cutoff. DTC captures payment information on these securities when received. On payment date, we deliver the securities to the paying agent with instructions to wire funds to your firm. Physical Settlement and Clearance Services Receive and Deliver Activity – The Custody Service is completely integrated with the NYW. This enables Participants to make deliveries directly out of the custody vault. The NYW uses the Envelope Settlement Service (ESS) or makes deliveries via messenger (i.e., over the window). Receives are examined for negotiability and reclaimed if need be. Receives can be booked directly into custody, returned to your firm, or turned for same-day delivery. (PTS, CCF, MDH) Settlement Balancing – The NYW reconciles all Receive and Deliver activity to NSCC to ensure proper booking on both sides. Direct Clearing – The NYW can accommodate physical receive and deliver activity for Participants that do not use DTC for Custody — in effect, we act as a New York office for these firms. Position Maintenance Service
Location Moves – Participant’s inventory is segregated in various locations, sometimes referred to as "boxes". Certificates can be moved from one box location to another to reflect changes in the status of the securities. Account Number Changes – Each certificate received into custody is identified by your corresponding customer account number. Participants are able to update the customer’s account number on certificates, globally or individually. (PTS, MDH, CCF) Audits – On occasion, the Participant’s auditors or a custodial customer may require access to your inventory. Given 24-hour notice, DTC will provide a secure room under camera surveillance where securities can be examined. Bearer Bonds – Coupons can be clipped and presented for payment. Allocations occur as coupon deposits via DTC’s existing coupon service. Balancing – To make reconciliation simpler, end-of-day positions and activity reports are available on the same files as all other DTC positions and activities (APIBAL and DTFPART).
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quote:15-12G filing is to certify and notify termination of registration and/or the suspension of duty to file reports.
It's normally done by OTC BB's when they don't want to file any more and don't care if they go pink. Also it's done when a company intends to go private.
Now and then a pinkee will file if they have more than 300 shareholders and were previously filers and now want to make sure they are legit before doing an r/m since the SEC has been going after some pink shells.
For some weird reason in the last few months especially, some people have decided that shells file them before doing an r/m and they run them on that reason. Whatever works I guess.
I will highlight the part that I believe is the reason they were delisted, despite filing the necessary, and late, 10-k...
=-= "(e) Notwithstanding the foregoing paragraphs, a member shall not be permitted to quote a security if: (1) while quoted on the OTCBB, the issuer of the security has failed to file a complete required annual or quarterly report by the due date for such report (including, if applicable, any extensions permitted by SEC Rule 12b-25) three times in the prior two-year period; or" =-=
Here's the deal, They have actually been late, and filed NT's, 4 times in the last 11 months. They simply got popped for it.
Still the same company... er wait, is that a good thing? No, but who cares, really? I am not in this for the long term investment. They diluted like mad, which made it hard to see bottom, and I will admit, I missed it. But, I also see that the MM's have taken the brunt of a lot of the dilution, as have shareholders over the last month or so. However, none of us want to sell down here. So maybe the MM's will still run it? They have a lot of shares now, and the numbers say yes (volume and price takedown)...
Aside from that, I wanted to share why they were delisted, as I was unaware of the "3 strikes and you're out" rule, until today.
I saw A LOT of companies get axed for it today, pretty interesting, and something to be aware of...
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OTC BB | Miscellaneous | Bancorp International Group Inc (BCIT) BCIT Quote/Level II - News - Quote - Chart
Public Reply | Private Reply | Keep | Last Read Replies (3) | Next 50 | Previous | Next Posted by: glaszman In reply to: stockasaurus rex who wrote msg# 73326 Date:5/1/2007 9:44:32 AM Post #of 73377
OK, heres another template to send your congressperson and Senators, be sure to replace the names i put in or they might put you on iggy ...LOL
Dear Senator Stuff T. Shirt,
I have recently been sued for securities fraud in the State of Oklahoma. I beleive that the only reason I am being sued is that the company I bought stock in has had a "global freeze" placed on it by the DTCC for over a year. The company name is Bancorp International, symbol BCIT. The court case is No CJ-2007-3818, and is posted on the internet here:
I am confident that I will be found not responsible for the actions outlined by the plaintiff. My letter to you is to point out to you the extraordinary lengths to which the "powers that be" within the markets are forcing companies to go to because of the common practice of selling shares and not delivering the shares to our brokerage accounts. The following is a long but apparently accurate representation of the problem in the marketplace.
Subject: File No. S7-12-06 From: Glen SmithApril 15, 2007 Christopher Cox and Annette Nazareth is this how the game is being played? Everybody knows now its only a matter of time Game Over NAKED SHORT SELLING (excerpted from Dateline Research) To get a handle on the concept of naked short selling, one has to know a little about the steps and players involved in the processing of a buy order on the OTCBB and Pink Sheets. Step 1: The purchaser either calls his broker on the phone or reaches his brokerage firm on the Internet. Lets assume he decides to buy a 1% interest in a penny stock that has 100 million shares issued and outstanding. The buy order is thus for 1 million shares. Lets assume the buy order is at market. Step 2: The broker on the receiving end of the order then writes up the buy order and places the order on his firms Trading desk. Step 3: Assuming that the firm does not make a market in this security, they will hand the order on to a market maker that does. Step 4: This buying market maker will then either go to the selling market maker showing the lowest offer or to a favorite market maker of his and ask him to match the lowest offer. The trade is executed between the buying and selling market makers at the agreed upon lowest offering price. Step 5: Assuming the buying and selling brokerage firms are small and do not have the facilities to clear the trade, they then send the details of the trade to their respective clearing firms. Step 6: Since both clearing firms have both cash and shares accounts at the DTCC, the buying clearing firm wires the purchase price from their cash account to that of the selling clearing firm in exchange for the selling clearing firm wiring the 1 million share block from their shares account to the buying clearing firms shares account. This is called Delivery versus payment. The buying brokerage firm then sends out both a trade confirmation and a monthly statement to their client, the buyer of the 1 million shares, indicating that he does indeed own the 1 million shares, what he thinks to be 1%, of that company. Thus the transaction is complete. A real buyer paid real cash to a real seller for real shares. An intermediary known as a market maker provided a mechanism to bring the buyer and seller together. This basically is an over-simplified explanation of the system used on these trading venues, the OTCBB and the Pink Sheets. Selling market makers do not really have to have a sell order in hand to sell securities. Their job is to provide liquidity and to buffer the market from sharp peaks and deep troughs when an imbalance of buy or sell orders appears. The phenomenon of illegal naked short selling (INSS) is a form of market manipulation/securities fraud that can be perpetrated at any step in the process. A legitimate short sale involves the seller following the letter and spirit of Rule 10(a)1, The short sale rule. It involves the selling firm making affirmative determination in writing that the shares being sold are indeed borrowable. It also prohibits short sales on a downtick. The borrowed shares are later returned. In illegal naked short selling, the shares were not only not borrowed, but they never did exist in the first place. They were created out of thin air. The legal term that describes this fraud is that the perpetrators created an Artifice to defraud the purchasers of the shares. Rule 10(b)-5 of the 1934 Exchange Act addresses this behavior. PREEXISTING CONDITIONS AMENABLE TO NAKED SHORT SELLING In order for this fraud to be perpetrated on unsuspecting investors, two main prerequisites exist. The first is the fact that purchasers of shares on these trading venues do not request the registration and home delivery of their shares. They see an entry on their monthly brokerage statement and have no reason to question its validity. The second prerequisite is the fact that brokerage firms do not monitor for the good delivery of shares purchased by their clients as mandated by The Customer Protection Rule or Rule 15 (c) 3-3. With the presence of these two prerequisites as being the norm on these trading venues, clever opportunists have realized that they can sell nonexistent shares through Canadian margin accounts, in an undetected fashion, and thereby assume a naked short position. This followed by the subsequent selling of yet more nonexistent shares tends to result in a precipitous drop in the share price, a share rollback of the victim corporation and its disastrous loss of market cap, or the outright bankruptcy of the victim corporation which circumvents the need for the naked short position to be closed, as it no longer trades. This lack of closure of the sell then buy circuit allows the massive proceeds of this fraud to bypass the taxman. The typical naked short selling campaign or bear raid results in the death of the victim company within a 6 to 9 month period. The management teams and investors are often left scratching their heads wondering what hit them. A variety of other preexisting conditions are present on these trading venues that allow this fraud to be perpetrated with little chance of detection. One of these is the inherent inability of a public corporation to communicate with its shareholders holding shares in Street Form. The advent of the Internet has helped somewhat though. Statistics show that 8 of 10 companies trading on these 2 trading venues, the OTCBB and Pink Sheets, will die within their first three years of existence. These thinly traded and under-capitalized companies are often no more than shell companies whose existence was designed to line the pockets of their creators. The level of chicanery on these trading venues is distinct and the investment community knows about it. When the Vancouver Stock Exchange drastically buckled down on fraudulent behavior several years ago, the scamsters headed south of the border to the OTCBB and Pink Sheets. The above statistic of 8 of 10 failures combined with the knowledge of the massive amounts of pump and dump programs in effect has caused the investment community to collectively look upon these companies as future bankruptcies. This mindset leads to certain behaviors among those opportunists that have visibility of buy orders for these future bankruptcies. When a buy order for one of these presupposed scams lands then the entire investment community has their antennae up and a certain feeding frenzy occurs wherein the investment professionals fight amongst themselves to be the one to naked short sell into this buy order. Also these trading venues have very little supervision by the regulators who are strapped for cash as well as manpower. There really are no cops on the beat. The Pink Sheets, for example, are a privately run trading venue, owned and operated by the National Quotation Bureau. Who needs regulators though when you have naked short sellers determining which corporations are scams and systematically annihilating them? The markets themselves have no visibility whatsoever to investors, even those with Level 2 machines, and market makers pretty much can do what they please. If a market-making firm is selling 50 million shares per month of a certain victim company and buying only 2 million shares per month and has been doing this for several years, then this would surely be nice to know. The tremendous amount of money involved here attracts these opportunists by the boatload. Investor naivet is also a cornerstone. Very few people, with the exception of the perpetrators of this fraud, know how this game is played. The inherent confusion involved with millions of trades settling at any given time creates a certain cloud of dust that can obscure the perpetration of this fraud. There is no Day of reckoning for these trades. The IOUs just fly around in Cyberspace and never seem to land. It becomes incumbent on the victim corporations to call a Legal time out to get a peak at these IOUs. There is a certain psychology involved also that is inherent to some naked short sellers. They think of themselves as self-appointed sheriffs trying to rid the wild west of companies they diagnose as scams. If their diagnosis is incorrect then it usually doesnt make much of a difference anyway because they will bankrupt both legitimate and scam corporations. Bankrupting legitimate corporations is seen as collateral damage which occurs in any war. Brokerage firms hosting the accounts of Offshore Corporations, especially those located in the tax havens, do not follow the Know Your Customer rules. A commission is a commission. The Patriot Act is buckling down in this regard and brokerage firms are to be on high alert for suspicious money flow activity. For those in need of laundering the proceeds of illicit activity, naked short selling provides a handy way to launder that 200% margin maintenance requirement attached to naked short sale orders for especially penny stocks. Actually the crimes of naked short selling, wire fraud, money laundering, and tax evasion go hand in hand on these venues. Another key preexisting condition is that market makers are not forced to make public their naked short positions on a monthly basis as they must on the more senior exchanges. This is yet another example of the lack of transparency on these trading venues. As far as the Pink Sheets go, there are basically no demanding standards to match or surpass in order to be granted membership. Another contributing factor has to do with the fact that input into the DTCC comes solely from the broker/dealers. Any picture that the brokerage firms want to paint regarding the disposition of a corporations shares can be painted at will. The fox is guarding the henhouse. All of these factors combined form an environment within which this fraud can be perpetrated with very little risk of detection. If the laws were to drastically change tomorrow then these same fraudsters would just tweak their modus operandi accordingly and not even miss a beat. THE MECHANICS OF NAKED SHORT SELLING Referring back to the 6 steps involved in a model buy order, one can see the myriad of ways available to naked short sell into this purchase order. The first individual with a shot at this opportunity is the broker who gets the phone call from his client, the purchaser. There are two main modalities used to naked short sell at this level. Weve seen where the broker himself can naked short sell into the buy order by picking up the phone and placing a matching sell order, usually through his own non-U.S. margin account, into the market at an opportune time. The more common technique used at this level is the broker picking up the phone and telling an associate of his about the opportunity that has just landed on his desktop. The broker is used as a scout and is usually paid back for these favors by the brokerage business coming his way from those he is scouting for. Manipulations at this Step 1 level are relatively rare but do occur especially when the broker receiving the call works in a Canadian Brokerage Firm where the naked short selling rules are more lax. Step 2 level manipulations are fairly common and they involve the broker receiving the phone call writing up this buy order and setting it on his firms trading desk. The trader processing this buy order has 3 main mechanisms to utilize in order to avail either himself or a colleague of his to this wonderful opportunity to naked short sell into this buy order for shares of this future bankruptcy. The first modality involves the trader picking up the phone to his personal broker at a Canadian firm and having him feed in a naked short sell order for a matching amount of shares at an opportune time. He can also naked short sell into the order right at his trading desk, a process called desking, which places the naked short position into a proprietary account of his own firm. This practice is almost universally done to all international buy orders. Desking is very commonplace. A third option would be to act as a scout for colleagues that would like to avail themselves of this wonderful opportunity and give them a heads up to the fact that a buy order is about to enter the system. Step 3 involves a heretofore unmanipulated buy order being sent to a buying market maker from the trading desk of the firm receiving the buy order. There is an intrinsic reality in this relationship between the market maker and its client, the buying brokerage firm, that is critical to understand. The buying market makers need the order flow from the buying brokerage firms. It is their lifeblood. When presented with a buy order, the buying market maker often has to naked short sell into the order just to keep his client brokerage firm happy with his services. The buying brokerage firm wants rapid execution of the buy order in order to get their hands on the commission. Since the stock of these companies is usually very thinly traded, oftentimes there are no sellers around to satisfy the demand for shares. The market maker is expected by his client to perform, which means to continuously naked short sell into buy orders presented by that client. It is incredibly common for even the most ethical of market makers, due to this pressure to keep their clients happy, to run up immense naked short positions just in the course of their business. Their job is to provide liquidity to these illiquid markets. Where the crimes are often committed at this Step 3 level is in how the market maker handles this predicament he has gotten himself into. On the other hand, there are certain market makers that blindly naked short sell into each buy order on these trading venues that crosses their desk. Market makers have literally dozens of ways to cause harm to these corporations that they accidentally ran up an immense naked short position against. These vary from continuing to naked short sell into every buy order that appears, effectively neutralizing these buy orders, to contacting naked short selling consortia to lend them a hand in killing the company. There is an endless list of market manipulative techniques to employ. These Step 3 manipulations are the single biggest component of the overall naked short selling campaigns. Market makers are incredibly powerful in these campaigns in that they are legally allowed to naked short sell while acting in the capacity of a bona fide market maker. Not only this but they dont have to reveal the size of their naked short positions to anybody. The Short Sale Rule, Rule 10 (a)-1, does not apply to the OTCBB and Pink Sheets. Step 3 manipulations involving these buying market makers are collectively known as The Wall. Very few buy orders make it over this wall and find a real seller. Step 4 manipulations presuppose that the buying market maker behaved himself and went into the market and filled that buy order by approaching the market maker with the lowest offer price or a different market maker that was willing to match that lowest offer. The Semi-ethical buying market makers are in need of a quick print. They want to run the order and grab a quick markup. They know only too well which brokerage firms and other market makers to approach in order to get the buy order quickly naked shorted to them. Many of these public corporations shares are Piggy-back Qualified, this allows any firm to put on a Market maker hat and legally naked short sell without having to file a Form 15(c)2-11. The same games are played with these selling market makers, but the height of the wall is a little less. Ethical selling market makers may or may not have a real sell order in hand. Oftentimes they will naked short sell into a buy order and then go on the bid to attempt to level out this now naked short position. If they accidentally dug themselves into a hole while servicing clients then they may sit on the offer all day and naked short sell into every buy order that appears. The lack of visibility that these markets provide to investors allows extremely manipulative techniques to go undetected. Step 5 presupposes that both the buying and selling broker/dealers are not self-clearing. The clearing firms are in a unique position to orchestrate these manipulations behind the backs of their client brokerage firms. Step 6 manipulations occur in and around the DTCC. The back office policies at the DTCC have long been ascribed the role as the problem here. Activities at the Lending Pool, both of the Canadian Depositary Service and the DTCC also provide opportunities to both add yet another layer of manipulations as well as cover up earlier manipulations. All of the input into the DTCC is, of course, from the brokerage community. When attempting to drain this lending pool of its contents, careful attention must be paid to those shares held in Canadian Brokerage Firms because the level of chicanery here is alleged to be extremely high. One can now get an appreciation for the nearly limitless opportunities available to attack one of these corporations during a bear raid. A very small percentage of buy orders actually meet up with a real seller selling real shares. There is just too much money to be made taking on naked short positions and then killing companies. From a risk/reward point of view the chance of detection is infinitesimally low and the rewards are abundant. The ability to sell nonexistent shares in an undetected manner provides for a self-fulfilling prophecy of sorts. The victim companies find it necessary to finance their burn rate at artificially low levels, which leads to massive dilution. If the company were fortunate enough to actually have earnings at some point, they would be diluted so badly that it wouldnt even matter. Of all of the varieties of securities fraud in existence, and there are many, naked short selling campaigns are usually thought of as the manipulation of choice providing the most favorable risk/reward ratio. Since the model buy order that executed all 6 steps results in an exchange at the DTCC of cash for shares between the buying and selling firms, any short circuiting at any step would prevent this exchange from happening. In order to exchange cash for shares you need shares There arent any when it comes to naked short selling. There never were any. The purchaser paid hard-earned cash for air. That monthly statement is a lie. His brokerage firm never did receive good delivery of a share certificate, there never was one. In fact, in the case of a Step 1 or 2 manipulation, the broker/dealer first damaged the company by artificially diluting it, and then he sold this damaged bill of goods to his client. One might ask, Well then where is the buyers money? The buyers money is in the hands of his own brokerage firm. The same people he just paid a commission to and that have a fiduciary responsibility to him. Since there was no good delivery of shares made to the buying brokerage firm in exchange for payment, (Delivery versus payment), the check never left the coffers of the buying brokerage firm. There never was a real seller into whose pocket the cash should have gone. In Wall Street parlance, the buying brokerage firm has a Failure to receive on their books. All of the intermediate brokerage firms have both a failure to deliver and a failure to receive on their books except for the manipulating party itself, he would just have a Failure to Deliver on his books. The IOUs just travel through cyberspace and never get addressed. Everybody owes everybody else and as long as nobody puts their foot down and demands delivery then this will be the status quo. So why dont all of those firms with all of these Failures on their books rectify matters and level up their positions. The Customer Protection Rule (Rule 15 3-3), clearly states that the buying brokerage firm is mandated by law to go into the open market and buy-in that Failure to deliver within 10 business days of settlement. But in the case of a Step 1 or 2 manipulation, it is the buying brokerage firm itself that is the crook. How can you buy yourself in? The sobering reality is that all of the brokerage firms in their various roles in this buy transaction will make a ton of money if NOBODY forces anybody to deliver. That would wreck this whole wonderful low risk/high reward game, and nobody wants to do that. The question now becomes, What is that entry in my monthly statement all about if there never were any shares purchased? We refer to these entries as BEEs or Bogus Electronic Entries. Their purpose is to give the buyer a certain comfort level so that he never suspects any fraud. It also serves to cover up the fact that the buyers money is actually in the coffers of his own brokerage firm, and being lent out or invested by them. The investor who bought nonexistent shares from his brokerage firm or whomever, was the victim of a Double Whammy. Not only did he not get the 1% ownership that he thought he was buying, he actually got a much lesser percentage of a company that he might not even recognize, one that perhaps he would have never bought the shares of if he had known the truth. This company might have 100 million real shares issued and outstanding according to its Transfer Agent, but it may also have 500 million bogus electronic entries in existence. The bad news here is that all 600 million shares of this company can be sold tomorrow. An interesting phenomenon occurs when this investor holding the bogus electronic entry decides to sell his shares. After all his broker cant hardly tell him that he cant sell his Bogus Electronic Entry because we failed to get Good Delivery as mandated by law. When you want to sell, your broker is going to sell this Bogus Electronic Entry or air to some unsuspecting investor, who in no way shape or form can ever get Good Delivery. The seller had no idea that he bought and sold nonexistent shares, and this process will go on and on and on. As long as nobody suspects anything and those monthly statements keep coming, then this little secret will never be revealed. The stock itself will trade like a big overweight whale, and buy orders of a significant size will not nudge the price one iota because of all of those extra shares that can be sold at any time. Should bad news be released a market massacre might ensue. Typically the financiers of the company will fatigue and stop cutting checks, deeming that any more checks cut may be good money after bad. They will assume that all of that selling must be coming from somewhere and the only people that own that much stock is management, so this whole thing must have been some kind of a Pump and dump from the get go. Then it will be time to turn out the lights and nobody will ever know the reality of what was going on. The transaction that this investor took part in actually created out of thin air a new million shares of stock. These shares can be bought and sold at will. They will never be detected by anybody as being fake, because of the lack of a Day of reckoning. The company in question will show 100 million shares being owned at the DTCC by various firms if everybody leaves them in Street Form. If you, however, stack up all of the monthly statements of all of the shareholders for a given date, and add them up, you will come to the total of 600 million shares being owned, not 100 million. The absolute size of naked short positions actually have a tendency to increase in an almost geometric fashion because the larger the naked short position, the larger the potential losses to the naked short sellers should something go awry. This increases the incentive level to kill this corporation. Long-lived Bear raids are very scary to naked short sellers and demand special weapons and tactics. The brokerage firms that perpetrate this fraud cover it up by breaking yet more laws. By law the purchase confirmation mailed to the buyer of the shares was to indicate to the buyer the capacity within which his broker acted. Typically the brokerage firm will act as an agent/broker and charge a commission. In Step 1 and 2 naked short selling, however, the brokerage firm actually acted as a principal/dealer and actually charged what is known as a markup. If the brokerage firm were to indicate this capacity under which it actually acted, then the investor might question what this principal/dealer business is all about. Since the brokerage firm does not want the investor to know that they naked short sold him this air and that they were sitting on his money, they will just lie on the confirmation slip as to the capacity in which they acted. The question is often asked as to when the day of reckoning occurs wherein these bogus entries must be made good upon. The law lists three different days of reckoning. The Customer Protection Rule, Rule 15(c)3-3, mandates that the Failure to receive certificated shares that were purchased in a transaction, are to be bought in by the purchasing brokerage firm on the 10th business day past the settlement date (T plus 3). The law also states that the selling firm in this transaction is to buy-in their client doing the selling if he hasnt produced the certificate within 30 days of settlement. The law further mandates that brokerage firms buy-in failures to receive and deliver within 45 days of filing quarterly reports that noted these Fails. With the absence of Rule 10 (a)-1, The Short Sale Rule, having any application to the OTCBB and Pink Sheets, the Customer Protection Rule is the only line of defense left against this fraud but it is ignored almost 100% of the time. There is just too much money to be made while ignoring it to turn down. Investors becoming educated as to the nature of naked short selling and demanding the registration and home delivery of their shares has to be the cornerstone of the effort to end the perpetration of this fraud. Since all 6 steps need to be completed in the Model buy order in order to match up a real buyer with a real seller, all of these manipulations at the various steps along the way result in the creation of new shares which exist in the form of a bogus electronic entry. These cause massive dilution of a corporations share capital, which has a depressant effect on the share price. Since all financings of these corporations are tied to these artificially depressed prices, the dilution problem is further exacerbated. All corporations have to cover their monthly burn rate just to keep the lights on. This accelerated dilution rate is a constant source of discontent with shareholders. They not only see the price per share evaporating, but their percentage ownership of the corporation is also dwindling due to the artificially high dilution levels. The resultant loss in shareholder morale throws yet more fuel on the fire of this companys problems. Again there is a bit of a geometric progression in the companys problems as opposed to a more linear arithmetic progression. Due to the inherent nature of this animal called naked short selling, the playing field becomes so tipped in favor of the racketeers that one wonders how any corporation could survive. SELL SIDE NAKED SHORT SELLING The same games can be played in the absence of a buy order from the sell side of the equation. Sophisticated naked short sellers typically work out of offshore corporations located in tax havens around the world. Banking secrecy laws in these havens help to prevent detection of the identity of the actual perpetrator of the fraud. If one is going to break 20 or 30 securities laws then one might as well do it in an anonymous fashion. The modus operandi usually has an offshore corporation A setting up a margin account in a non-U.S.brokerage firm. This corporation A will have one shareholder and one director namely Corporation B from a different tax haven with different banking secrecy laws. Corporation B in turn will have one director and one shareholder being Corporation C in yet another tax haven. For the victim company to attempt to identify Corporation Cs owner would now cost a fortune and take a great deal of time. These victim companies have neither. During this past February, non-U.S.regulators discovered the existence of 13,00 of these offshore corporate accounts amongst non-U.S.broker/dealers. Corporation A will now start selling massive amounts of the victim companys stock. Corporation A will often be set up as a Hedge Fund. The non-U.S.Brokerage Firm taking the sell order knows darn well that this offshore corporation doesnt own any shares, but they can always play dumb later on should something go awry. Besides theres some big commission money to be made. The non-U.S.Brokerage Firm will typically insist on a 150% to 200% margin maintenance requirement. The naked short selling of penny stocks is inherently dangerous and the broker/dealer needs to be protected. It is extremely easy to Scuttle an offshore corporation should the plan backfire and the non-U.S.firm knows this. As far as the role of the non-U.S.Broker/dealer utilizing the lax non-U.S. laws regarding naked short selling, they have three main incentives to break the law and take the order. The first is the commissions generated. The second is the use of all of that money placed for margin maintenance requirements, and the third is the visibility of large sell orders providing opportunities for front running. One technique the non-U.S.Brokerage Firms utilize is known as the Hot Potato technique. Firms are often allowed to keep a naked short position on the books for only a 10-day period after which fines may be levied. After 9 days a firm carrying a large naked short position can hand that position off to a Buddy brokerage firm like a hot potato. After another 9 days it may go to a 3rd firm or back to the original firm. If it gets too burdensome then its off to a friendly hedge fund for long term storage. Non-U.S.OFFSHORE ACCOUNTS Who are the typical holders of these non-U.S.margin accounts used for perpetrating this fraud? Offshore hedge funds are the most powerful of these groups. Hedge funds with less than 100 participants do not need to follow the rules and regulations dictated by The Investment Company Act of 1940. This provides both anonymity and lack of liability for the participants. Hedge funds typically contain the money of deep-pocketed players not averse to risk. Large market making firms as well as other Wall Street entities own significant positions in these hedge funds and can count on them when caught in a pinch. Hedge funds account for a very large percent of this naked short selling activity. The Senate Finance Committee is currently investigating the relationship between hedge funds and naked short selling. Various naked short selling consortia are in existence around the world. They pride themselves on their due diligence capacities and they really are very impressive in that regard, but not infallible, which leads to significant opportunities when they do make errors. Some of these groups have their own websites and aid their disciples on the choice of non-U.S. Brokerage Firm to set up a relationship with. Usually a firm with a Head Compliance Officer that is willing to turn his head the other way a lot. These groups will typically have their head guru with good investigative connections as well as street smarts. Recently weve seen a lot of activity out of Europe. Shares of OTCBB and Pink Sheet stocks actually trade on subdivisions of various markets over there, totally unbeknownst to management. Not unexpectedly 99% of the trades are sells. One aspect of this business that has recently been revealed is how these various naked short selling groups communicate and collude with each other. If one group is having a tough time killing a company and their intent is becoming very obvious, then they will hand the baton on to their co-conspirators to help polish off the corporation. This is a very scary thought. These people are incredibly deep-pocketed in the first place. PILING ON/FRONT RUNNING/TRADE PADDING An interesting phenomenon often occurs when the non-U.S.broker/dealer first gets visibility of a large sell order. Lets assume that it is a 20-million share sell order of nonexistent stock at market to be executed in two weeks time. The typical source of a sell order like this might be a market maker with a hedge fund connection that accidentally got into a large naked short position while servicing a valued client. Knowing that this sell order is going to severely depress the victim companys share price, the non-U.S.broker/dealer will often put in their own sell order of maybe 10 million shares and process it before processing the 20 million share sell order. The offshore corporation cant exactly point an accusing finger should they detect the front running since they are breaking the law themselves. Now the non-U.S.broker will hand a 30-million share sell order to a market maker. When the market maker sees this now gigantic sell order they will often front run this 30 million share sell order with a 10 million share sell order of their own making. They know all too well what a 30 million share sell order will do to one of these thinly traded securities. Thus a sell order of 20 million nonexistent shares has now grown to 40 million nonexistent shares. This elucidates the Self fulfilling prophecy aspect of naked short selling. Unsuspecting shareholders will pay real money for all 40 million of those shares and not suspect any hanky-panky at all. How could a monthly statement from one of these prestigious Wall Street firms be telling a lie? Thus naked short selling can work from left to right through the various steps involved in the processing of a buy order, in essence neutralizing the up ticking effect on share prices caused by buy orders, or from right to left with the introduction of massive sell orders of nonexistent shares. DEATH SPIRAL FINANCINGS/TOXIC FINANCINGS/FLOORLESS CONVERTIBLES A close cousin of naked short selling involves a form of predatory financing called Death Spirals. Companies in dire need of financings are often forced, by necessity, to trust that financiers will not pre-sell their equity financings in an effort to clobber the market and then convert for a very large number of shares at artificially low prices. These financings are based on fixed dollar amounts of conversions and not a fixed number of shares. A riskier form of death spirals involves potential financiers dumping tons of shares before even cutting a deal for a financing. Conventional death spirals are actually a form of temporarily naked short selling because the shares are forthcoming but usually restricted by Rule 144. RECENT DEVELOPMENTS WITHIN THIS INDUSTRY WITHIN AN INDUSTRY Within the past two years the world of naked short selling has been changed forever. Four separate events have rocked the world of the naked short sellers. Since the secrecy of the modus operandi is so important to these people, the headlines caused by these Four events is not welcome at all by the perpetrators. The first event was the arrest of Anthony Elgindy and the exposure of his methodologies of naked short selling utilizing the services of two allegedly corrupt FBI agents. Elgindy and his huge following have allegedly been one of the pillars in the naked short selling community. The second event was the sudden bankruptcy of the non-U.S. Brokerage Firm which has been the alleged headquarters for naked short selling worldwide. The third event was the arrest of the CEO of this firm for attempting to naked short sell $30 million worth of three companies shares to an undercover FBI agent. The fourth event was Operation Uptick, revealing the incestuous linages between organized crime and reputable brokerages in the U.S. The Winds of Change do seem to be blowing a bit, and it wouldnt take much of a breeze to knock down this House of cards the naked short sellers have built. The significance of these events is not just getting these individuals and institutions out of commission. The real importance is the education that the public needs to receive in regards to naked short selling as these trials and bankruptcies go forward. Again the secrecy factor is the key to naked short selling. If the investing public knew what was going on behind the scenes on the OTCBB and Pink Sheets, then the uproar caused could mushroom into a total lack of confidence in this system, which is already on its knees after the Enron and Anderson debacles. If this knowledge did become commonplace, then at least one of the main two prerequisites, that of not registering and demanding delivery of shares, might be eradicated. Several non-U.S.Brokerage Firms were recently sued by clients for not delivering the share certificates that he had demanded the delivery of. He had obviously been naked shorted the shares by both firms. In their statement of defense, the attorneys for the firms claimed that it was the actual client of theirs doing the naked short selling that owed the share certificate to the client/buyer and not the firm. The Customer Protection Rule would obviously beg to differ. This is a typical example of the mentality of the non-U.S.Brokerage Firms. The non-U.S.Regulators have lowered the boom on the behemoth BMO Nesbitt in regards to Serious Know your client deficiencies and Failure to supervise brokers. Many of those 13,000 offshore corporate accounts have tens or even hundreds of millions of dollars playing the naked short side of the market. A broker managing these accounts is supposed to look into the sources of these funds to rule out any illicit activity like money laundering. In the U.S. the Patriot Act demands that brokers scrutinize these funds and file SARs (Suspicious Activity Reports) when illicit behavior is suggested. This was implemented mainly as an anti-terrorist funding measure, but hopefully will spill over into keeping in check naked short selling. The dynamics of bringing to the publics attention this insidious disease of naked short selling, has never been more exciting than at the present. The public is being immersed in learning the mechanisms of action of the Elgindys, the Valentines, the Thomson Kernaghans, these 13,000 offshore corporate accounts, money laundering, tax evasion aspects, etc. LONG TERM SURVIVORS An important aspect of these naked short selling wars is the length of time that the victim company has been under attack. When these naked short selling gurus that can smell a scam from 40 miles away guess right and beat up a scam company, the company doesnt have a chance because of the vicious nature of naked short selling. The lack of assets of the company will be exposed and announced from the mountaintops. What are interesting are the battles that ensue when these gurus misdiagnose a real company with real assets as a scam. The naked short sellers will still be able to knock the market cap down by 99%, but often it becomes tough to Kill the company. Investors that know that the company has the goods can sit back and buy shares at a tiny fraction of book value and thereby average down their previous purchases. Since the size of the naked short position is of a cumulative nature, increasing with the age of the battle, a point is reached wherein the naked short sellers cannot afford to cover this massive naked short position without driving the share price to the moon. This is when the games get really dirty because hundreds of millions of dollars are now up for grabs, winner take all. THE DAMAGES One has to wonder how many young micro cap corporations with great promise have been snuffed out while in this incubator of the OTCBB and Pink Sheets. Have we missed out on any potential cures for cancer or high tech breakthroughs? What happened to the dreams of all of those entrepreneurs who put every penny they had into their private companies in preparation for going public, and then getting massacred once public? RECORD KEEPING AT THE DTCC For an annual fee of $1,850, a corporation can receive from the DTCC a weekly update as to the number of shares that each of the brokerage firms on Wall Street have for a given corporation in their Shares account. Keep in mind they all have cash accounts also. The problem with these lists are two-fold. They only reflect the number of shares for which Good Delivery was attained. They also dont address whether or not that brokerage firm owes any shares to a common pool of shares there available to any broker/dealer in need of quick shares. If for example the weekly DTCC Summary states that a broker/dealer has 1 million shares of a given corporations stock in their account, this must be compared to the sum of all shares being reflected as owned in the monthly statements of that firm as mailed out to their client/shareholders. Lets assume this total is 4 million shares. The difference between these two figures can be characterized in several ways. The difference represents: 1) The naked short position of that firm, 2) The number of shares bought by that firm for which Good delivery did not occur, 3) The number of Bogus electronic entries that firm has on its books and that gets mailed out every month. Wall Street can camouflage very well the number of shares represented by the sum of all shares being reflected as owned in monthly statements. An indication of this number can be attained by a corporation receiving its NOBO list or list of non-objecting beneficial owners. To this number must be added the number of shares owned by OBOs or objecting beneficial owners. When a person signs up for a brokerage account he is asked to check a box denoting whether or not the company in which he owns shares of has the right to know of his shareholdings. If he does not object to this, then he is a NOBO. The NOBO lists are available from ADP Brokerage Services Group at 1-888-237-1900. When a person adds the total shares held of a given corporation at the DTCC to the number of shares held by Registered shareholders in safe deposit boxes, the sum will equal the issued and outstanding number of shares of that corporation exactly. So at first glance, all seems to be in order until you realize that the DTCC list only represents Good deliveries which on these trading venues is the exception and not the rule. And so the fraud is perpetrated on and on and on. In regards to the Pool of shares held at the DTCC that is available in the case of an emergency, this was allowed by Addendum C- (1) of the NSCCs (National Securities Clearing Corp.) rules and regs. They were taken over by the DTC several years ago, the amalgamation of which formed the DTCC. The Lending Departments of a firm monitor things here and are one of the biggest profit centers in any firm. From a practical point of view, until this pool is 100% empty of shares, dont expect any upward pressure on share prices due to the borrowing ability provided by the pool. Once it is empty, however, each further demand for the registration and delivery of shares should theoretically cause a forced buy-in of shares under a Guaranteed Delivery basis. It is relatively easy to empty out the pool at the DTCC. If a company has 70 million shares at the DTCC and a naked short position of 500 million shares, then all the company has to do is create a situation that withdraws 70 of 570 million shares available to be withdrawn. As was stated earlier, all of the brokerage firms represented along the chain of events of one buy order are HIGHLY incentivised not to demand the correction of those Failures to receive and deliver. In order for this to occur, the shareholder and the issuer must be educated as to how this game is played.
I apologise for the length of this letter, but this is not a simple problem problem. I am not complaining about losing money on a "bad investment". I am complaining about a system that does not respect the law. The system appears to be similar to a "check kiting scheme". We have laws in place that are not being enforced. This lack of enforcement is forcing small publicly traded companies to take unusual and drastic measures to attempt to find Justice. In this case, the CEO is filing suit against the shareholders who obviously never had access to any of the aforementioned tools. It is a desperate ploy, but after more than a year of attempting to work with the system, one can hardly blame them. Those that do have access to the aforementioned tools act with impunity while the shareholders and the companies continue to suffer.
Bulletin No. 3531 — Discipline — Discipline Penalties Imposed on Union Securities Ltd. and John P. Thompson; Violation of By-law 29.1. (April 18, 2006)
Contact: Paul Smith Enforcement Counsel (604) 331-4764 or Lorne Herlin Enforcement Counsel (604) 331-4752 For distribution to relevant parties within your firm
BULLETIN #3531 April 18, 2006
Discipline Penalties Imposed on Union Securities Ltd. and John P. Thompson; Violation of By-law 29.1.
Person Disciplined A Hearing Panel of the Investment Dealers Association of Canada (the Association) appointed pursuant to Association By-law 20 has imposed discipline penalties on Union Securities Ltd. (Union), a Member of the Association, and Union’s Ultimate Designated Person (UDP) John P. Thompson (Thompson).
By-laws, Regulations, Policies Violated After a Settlement Hearing on April 18, 2006 in Vancouver, British Columbia, a Hearing Panel considered, reviewed, and accepted a Settlement Agreement negotiated between Union, Thompson, and Staff of the Enforcement Department of the Association (Staff). Pursuant to the Settlement Agreement, Union and Thompson (the Respondents) admitted that they failed to develop and implement adequate compliance systems to ensure effective supervision of activity at the firm to the required standards of the Association, and thereby acted contrary to Association By-law 29.1.
Penalty Assessed The penalties imposed against the Respondents are as follows:
a) Union will pay a global fine inclusive of costs in the amount of one million dollars ($1,000,000);
b) Thompson is permanently prohibited from acting as UDP for Union or any other Member firm; and
The Respondents are also bound by the following undertakings provided to Staff:
a) over the next three year period, Union will retain the services of a qualified external compliance consultant acceptable to Staff to review and test its compliance systems and policies;
b) Union will add at least one external independent Director to its Board of Directors;
c) Union will refrain from operating any accounts for corporations for which the purpose of incorporation is to circumvent registration requirements; and
d) Union will ensure that it creates and maintains an audit trail including documentation of its “locate” of securities for any short sales and acknowledges that the threshold limits set out in Regulation SHO under the Securities Exchange Act of 1934 (SHO) apply to it and will ensure that all such short sales are not in violation of the threshold rules referred to in SHO.
Staff and the Respondents acknowledged and agreed that the penalty would have been significantly higher except for the following mitigating factors:
a) the Respondents fully cooperated with the Compliance Monitor which was appointed by an Association Hearing Panel on July 25, 2005 and consented to the extension of the Compliance Monitor’s term;
b) by agreeing to an early resolution of these matters, the Respondents enabled Staff to devote resources to other matters;
c) with the exception of the failure to provide the Preserved Records (paragraphs 53-57 of the Settlement Agreement), the Respondents fully cooperated with Staff in their investigation of the matters giving rise to the Settlement Agreement;
d) in total Union has and/or will spend $500,000 for the services of the Compliance Monitor and for the services of the external compliance consultant that it has undertaken to retain for the next three years pursuant to paragraph 80(c)(i) of the Settlement Agreement; and
e) Thompson has no prior disciplinary history.
Summary of Facts Factual Background
Union was founded in 1963 and has been a Member of the Association since February 28, 1997. Union’s head office is in Vancouver, British Columbia.
Thompson is the chief executive officer of Union. He has been registered in a number of capacities from 1983 to the present. From July 2001 to February 2005 he was Union’s Chief Compliance Officer and since January 2002 he has been Union’s UDP.
The Settlement Agreement resolved all outstanding enforcement matters during the relevant period. These enforcement matters resulted from the Respondents’ failure to develop and implement compliance systems to the required standards of the Association.
Examples of these failures are set out under the headings that follow.
Sales Compliance Reviews
The Association’s draft 2005 Sales Compliance Review (SCR) report described in detail instances of problems in many areas of the sales compliance function at Union. Many of the adverse findings in the draft report, including many characterized as “significant” and/or “repeat items”, had also been cited in previous SCR reports.
In particular, the draft 2005 SCR report described instances of problems in the following subject areas:
a) deficiencies related to supervision of client account activity to the required standards of the Association;
b) deficiencies related to supervision of branch offices to the required standards of the Association;
c) deficient internal controls to detect or restrict certain registrant or account activities;
d) inadequate account documentation;
e) operating accounts in the United States (US) without registration or applicable exemptions from registration requirements;
f) inadequate account verification procedures;
g) deficiencies related to supervision of futures trading; and
h) a failure to update Union’s compliance manual to reflect regulatory changes implemented by the Association since the previous SCR.
The failure by the Respondents to prevent or correct the sales compliance shortcomings noted in the SCRs was detrimental to the public interest, and was therefore a contravention of By-Law 29.1.
Accounts For US Residents Through Yukon Holding Companies
In 2001, the Association released Member Regulation Notice 114 (MR 114) which warned Member firms that if they were not registered in the US jurisdiction where a client resided and were not eligible for exemption with that jurisdiction they must close the account by March 1, 2002.
After the release of MR 114 Union closed accounts held by US residents and, as a result of client inquiries, sought and received an opinion from US counsel that US residents could operate accounts at Union through Yukon holding corporations without Union being registered in the state in which the US resident lived, provided the corporation was organized under Yukon law and the principal place of business was the Yukon. At the time Yukon was unique in that there was no residency requirement for the directors of a Yukon corporation.
With this opinion, Union advised its Registered Representatives (RRs) who in turn advised their US resident clients that if the client chose to establish Yukon holding companies, Union would open an account for the Yukon holding company. Union RRs referred most of the US resident clients to the same Yukon law firm to transact all of the required corporate paper work
Some US resident clients chose to incorporate a Yukon corporation in order to open an account at Union. The US residents had no connection to the Yukon. Yukon was simply a Canadian jurisdiction that allowed sole non-resident directors to incorporate a company.
None of the US residents had any personal or business connection with Yukon. The purpose of most of the Yukon holding companies was to operate investment accounts at Union. The same US resident was the beneficial owner and was contacted at the same telephone number in the US. All investment decisions were made by the US resident in the US. Three different RRs at Union estimated that their commission revenue derived from Yukon holding companies represented over 50% of their gross commissions in 2002, 2003, and 2004.
By informing and allowing US residents to open these accounts Union acted contrary to By-law 29.1.
Short Selling US Securities
“Naked” short selling generally refers to selling short without having borrowed the securities to make delivery. As a result, the seller fails to deliver securities to the buyer when delivery is due. This is known as a “failure to deliver" or a "fail."
On December 2, 2004, the Association published Member Regulation Notice MR0320 which advised Member firms that the US Securities and Exchange Commission (SEC) had adopted SHO. Members trading directly or indirectly on US markets were advised to adjust their trading practices to comply with this rule and that failure to comply with this rule may be considered to be a violation of IDA By-law 29.1.
One of the goals of SHO was to establish uniform "locate" and "close-out" requirements in order to address problems associated with fails, including potentially abusive "naked" short selling, such as purposely driving down the price of a security.
After reviewing fail data for threshold securities from January 10, 2005 through to June 30, 2005 (the Short Selling Period), Staff identified a number of securities at Union that were not properly located by Union and consequently the firm was not able to deliver. In certain stocks, the failures by Union to “locate” were continuous.
During the Short Selling Period, Union executed short sales for certain OTCBB companies without proper locate procedures being done. In each instance Union relied on the US market maker to perform the “locate” and relied on the US market maker to document the locate. By relying on the US market maker, Union failed to properly perform and document the “locate”. In certain instances Union continued to short threshold securities with fails outstanding for a period of 13 or more consecutive settlement days without pre-borrowing.
Although Union obtained advice from US counsel that market makers could perform and document the locate function on Union’s behalf, Union acknowledged that it failed to adequately implement proper controls and procedures with respect to short selling US stocks in accordance to SHO and Association MR0320 and therefore violated Association By-law 29.1. Union acknowledged it is responsible for having evidence that the “locate” has been done; and for compliance with the threshold requirements set out in SHO.
Supervision Of F
F is a RR who commenced working at Union’s Toronto branch office in August 2001. Since October 1999 F has been under strict supervision due to the fact that garnishee orders have been obtained against him and prior to joining Union he had been named as a defendant in a number of civil litigation matters.
Between August 2001 and January 2002, F executed transactions in the D Account on instructions provided by D’s brother-in-law, who did not have trading authority on the account. Further, without D’s authorization F gave cheques that were issued to D, to D’s brother in law.
By virtue of F being under strict supervision, Union was required to approve and document each trade ticket that F completed. While most trade tickets were approved and documented as required, on certain trade tickets there is no evidence of pre-approval.
These failures of supervision were detrimental to the public interest, and therefore collectively constituted a violation of Association By-Law 29.1.
Failure To Cooperate
On October 14, 2004, Staff wrote to Union and to F to inform each of them of Staff’s investigation into F’s conduct and into Union’s supervision of F’s activities. On November 3, 2004, Staff wrote to Union to, among other things, request unfettered access to F’s computers for the investigation.
Discussions ensued between Staff and counsel for Union. As a result, the computer hard-drives were preserved, secured and held by counsel for Union (the Preserved Records). Much relevant information was provided to the Staff. However, Union refused to provide Staff with free access to the Preserved Records. Union contended that some of the information in the Preserved Records was personal to F and was, therefore, irrelevant. Union also took the position that some of the material was covered by solicitor-client privilege claimed by F.
On June 6, 2005, a Hearing Panel found that Union failed to comply with By-law 19.6 when it failed to provide free access to the Preserved Records, other than those over which solicitor-client privilege was claimed.
Union requested a hearing and review of the decision of the Hearing Panel. In the Settlement Agreement, Union withdrew its request for a hearing and review of the decision and agreed to fully comply with the decision of the Hearing Panel.
Supervision Of L
L was a RR and a Registered Options Representative (ROR) in the Calgary branch office of Union.
While still under the mandatory 90 day close supervision period for a newly registered RR, L commenced a trading strategy in the accounts of two clients which primarily involved the trading of S&P Index options and options in technology companies. Neither client had any past experience with options. As a result of this trading strategy, both clients suffered significant losses.
The Respondents failed to take steps early enough to effectively prevent the activity in the accounts of the two clients. These failures of supervision were detrimental to the public interest, and therefore collectively constituted a violation of Association By-law 29.1.
Appointment Of A Monitor
Due to a number of matters, including those set out above, on July 22, 2005 without notice to Union, Staff made an application to a Hearing Panel for the appointment of a Monitor (the Compliance Monitor) for Union.
On July 25, 2005 the Hearing Panel granted Staff’s application and appointed a Compliance Monitor for a 90 day term.
On August 10, 2005 Union indicated that it intended to request a review of that decision. In the Settlement Agreement, Union withdrew its request for a review.
STOCK STRATEGIES Going Dark: The Harsh Reality of Voluntary Deregistration By John Deysher
Investors weren’t the only ones fleeing the stock market last year. Companies also headed for the exits. And a growing number of investors are taking the hit as hundreds of small companies “go dark” or voluntarily deregister their shares. The result is often a falling share price and investors left in the dark about the firm’s finances and prospects.
What does it all mean?
When a firm “goes dark” it deregisters with the Securities and Exchange Commission (SEC) and delists its shares. Deregistered firms are no longer required to make SEC filings such as annual reports, proxies, 10-Ks, 10-Qs and other important documents. And they’re no longer required to have annual meetings or elect outside directors.
To deregister, a firm files Form 15-12G (Securities Registration Termination) with the SEC stating its intent to deregister, usually by a certain date. Once that date arrives, the stock exchange or NASDAQ prohibits future trading in the shares. The firm’s shares are then relegated to the pink sheets, where liquidity is usually much lower. Although the actual process takes some time, the firm’s share price typically will decline immediately after the “going dark” announcement, since many institutions are prohibited from owning shares of firms that don’t file with the SEC or trade on the exchanges or NASDAQ.
Unfortunately, the going dark process does not require shareholder approval. As long as a firm has less than 300 shareholders of record, the board of directors can make the decision.
Although you may think even small firms would have more than 300 shareholders, the key phrase is “shareholders of record”—meaning the number of shareholders the firm has on its books. Often times this vastly understates the number of true owners. For example, Acme Widget may have 299 shareholders of record. But the shareholders of record may include firms like Merrill Lynch, AG Edwards and Morgan Stanley who hold shares on behalf of thousands of customers who chose to hold their securities in “street name” instead of taking physical delivery. In other words, a brokerage firm owning a million shares on behalf of thousands of individual customer-shareowners is actually treated as one shareholder of record, the same as an individual owning a thousand shares.
A better measure of the actual number of shareholders is “beneficial owners,” which includes all shareholders—including those holding shares in street name. Using this measure, many firms that delist would be prohibited from doing so because the number of beneficial owners exceeded 300.
Some institutional investors have petitioned the SEC to close the loophole, arguing that the definition of “shareholders of record” is obsolete. When the law was originally written in 1965, most investors took physical delivery of their shares. Nowadays, most investors hold their shares in street name, so “shareholders of record” probably understates the number of actual owners in many cases. The SEC is now holding public hearings on this and will analyze their findings in due course.
Dark and Darker
As shown in Table 1, the “going dark” phenomenon has gathered steam in recent years.
Table 1. The Rising Trend of Voluntary Delistings Year Number of Delistings 1998 28 1999 30 2000 14 2001 43 2002 67 2003 198 2004 114 2005 138 (thru Dec. 15) Source: The SEC EDGAR archives (2004-2005); Wharton School study, Nov. 2004 (1998-2003). Many financial professionals believe the increase is a consequence of the passage of Sarbanes-Oxley legislation in the Fall of 2002, which in turn was in response to numerous corporate financial scandals.
Sarbanes-Oxley—or SOX, as it’s known in the trade—imposed new and significant reporting requirements on public companies that can be quite costly. Public firms must now report in greater detail not only their financials but also their methods for compiling and verifying them. It’s not unusual for small firms to pay an additional $500,000 to $1 million per year in SOX compliance costs, such as accounting, legal and consulting fees. To many small company managers, this is real money that may be spent in better ways, such as growing the business or paying down debt. This is especially true if the firm does not avail itself of the primary benefits of being public—the ability to sell shares to the general public or use them to make acquisitions.
Paradoxically, the SOX legislation that was supposed to foster additional transparency and protect shareholders interests now appears to be having the opposite effect. Many small firms are delisting to avoid compliance, which leaves shareholders in the dark. For these firms, the burdens of operating as a registered company now outweigh the benefits.
As might be expected, the SEC is dismayed with firms that deregister in order to avoid SOX compliance. Hence, the public hearings mentioned earlier and the possibility of more accurate shareholder counts that would prevent deregistration for many firms.
But what should an investor do who becomes a “victim” of deregistration?
As an investment firm that traffics in the shares of small, thinly traded companies, we have some experience in this area. In early 2004, we were monitoring the prospects of Southern Energy Homes (SEHI), a small, well-run manufactured home producer that was bumping along the bottom of the manufactured housing cycle. Warren Buffett had just purchased two key industry players—Oakwood Homes and Clayton Homes. SEHI had traded as high as $15 in late 1996 and was now muddling along at $2 on NASDAQ. The balance sheet was intact, management was rationalizing operations and owned a big stake. In short, we liked what we saw.
In January 2004, SEHI announced their plans to deregister to reduce costs. Immediately the shares fell by 30% as shareholders ran for the exits, not wanting the uncertainty of owning a non-filing company.
At this point we called management with four questions about whether SEHI would continue to:
Make news announcements of important events such as earnings releases, etc.? Answer: Yes, they would issue press releases on important events.
Make quarterly and yearly financial statements available on a timely basis? Answer: Yes, they would post financial statements and notes on their Web site.
Hold annual meetings including election of outside directors? Answer: Yes, they would have yearly elections of directors including independents.
Have annual results audited by a reputable CPA firm? Answer: Yes, they would have annual results audited to high standards. Basically, SEHI told us they would continue to act as a public company without the regulatory costs of being one. Disclosure would approximate SEC requirements. Liking what we heard as well as the fundamentals we built a position in quick order. Over the next 18 months, SEHI’s results and share price improved substantially. We also got lucky. SEHI has several plants within hours of some of the areas hardest hit by Hurricane Katrina. FEMA placed a significant home order with SEHI. Shares that we purchased for $2.20 after the delisting were sold at $7.10 about 18 months later.
Shareholder Action Plan
The lessons here are several:
If a company you own announces plans to deregister, don’t panic. If the fundamentals are intact, the shares are probably worth owning. Even in the less liquid pink sheets, shares of firms with improving fundamentals will appreciate. However, you should call the firm immediately to assess their plans for ongoing communication with outside shareholders. Ask the same questions we did of Southern Energy Homes—which gave the right answers. If you receive answers that indicate communication will be lessened, there may be some governance issues relating to the treatment of outside shareholders. For example, we would find it difficult to own shares of a company that provided only an annual report and had no annual meetings or election of directors. Make sure the fundamentals are intact. Use the deregistration announcement as an opportunity to perform a thorough review of company prospects. Often a firm will deregister to help hide a deteriorating financial condition, bad accounting or other ailments
Fortune favors the bold. To be a successful investor you must have the courage of your convictions. That means if you’ve done your homework, don’t be afraid to step up to the plate, especially in the face of consensus opinion that’s going the other way. Southern Energy Homes was a good investment for us. We did the due diligence, liked what we saw and bought shares at low prices when they were being given away. It doesn’t always work this way, of course, but you’ll improve your odds if you investigate before you invest and then act on your findings.
John E. Deysher is president and portfolio manager of the Pinnacle Value Fund, a diversified, SEC-registered open-end mutual fund specializing in the securities of small and micro-cap companies. Mr. Deysher is a Chartered Financial Analyst (CFA) and has been managing equity portfolios for over 20 years. He lives in New York City and may be reached at deysher*pinnaclevaluefund.com.
The Securities and Exchange Commission (SEC) is the federal agency primarily responsible for administering and enforcing federal securities laws. The SEC strives to protect investors by ensuring that the securities markets are honest and fair. When necessary, the SEC enforces securities laws through a variety of means, including fines, referral for criminal prosecution, revocation or suspension of licenses, and injunctions.
Headquartered in Washington, D.C., the Commission itself is comprised of five members appointed by the president; one position expires each year. No more than three members may be from one political party. With more than nine hundred employees, the agency has five regional and six district offices throughout the country and enjoys a generally favorable reputation.
Before the October 29, 1929, stock market crash on Wall Street, a company could issue stock without disclosing its financial status. Many bogus or severely undercapitalized corporations sold stock, eventually leading to the disastrous plunge in the market and an ensuing panic. From the havoc wreaked by the crash came the first major piece of federal securities legislation, the Securities Act of 1933 (15 U.S.C.A. § 77a et seq.). The act regulates the primary, or new issue, market. The following year, Congress provided for the creation of the Securities and Exchange Commission when it enacted far-reaching securities legislation in the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a et seq.). These two laws, along with the Trust Indenture Act of 1939 (15a U.S.C.A. §§ 77aaa-77bbbb), the Investment Company Act of 1940 (15 U.S.C.A. §§ 80-1-80a-64), the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1-80b-21), and the Public Utility Holding Company Act of 1935 (15 U.S.C.A. §§ 79a-79z-6) make up the bulk of federal securities laws under the jurisdiction of the SEC.
In addition to federal statutory authority, the SEC has broad rule-making authority. It has used this power to fashion procedural and technical rules, define terms used in the laws, and make substantive rules implementing the laws. The SEC also devises forms that must be used to fulfill various requirements in the statutes and rules. Moreover, the SEC engages in a significant amount of informal lawmaking through the distribution of SEC releases containing its opinions on questions of current concern. These releases are disseminated to the press, companies and firms registered with the SEC, and other interested persons. In addition to these general public statements of policy, the SEC also responds to individual private inquiries.
Securities Act of 1933
The Securities Act of 1933 regulates the public offering of new issues. All public offerings of securities in interstate commerce or through the mails must be registered with the SEC before they can be offered and sold, subject to exemptions for specifically enumerated types of securities, such as government securities, nonpublic offerings, offerings below a certain dollar amount, and intrastate offerings. The registration provisions apply to issuers of securities or others acting on their behalf. Issuers must file a registration statement with the SEC containing financial and other pertinent data about the issuer and the securities that are being offered. The Securities Act of 1933 also prohibits fraudulent or deceptive practices in the offer or sale of securities, whether or not the securities are required to be registered.
A major part of the SEC's work is to review the registration documents required by the 1933 Act and determine when registration is required. Registration with the SEC is intended to allow potential investors to make an informed evaluation regarding the worth of securities. Registration does not mean that the commission approves of the issue or that the disclosures in the registration are accurate, nor does it insure an investor against loss in the purchase.
Registration requires extensive disclosure on behalf of a corporation. For example, full disclosure includes management's aims and goals; the number of shares the company is selling; what the issuer intends to do with the money; the company's tax status; contingent plans if problems arise; legal standing, such as pending lawsuits; income and expenses; and inherent risks of the enterprise. Registration consists of two parts: a prospectus, which must be furnished to every purchaser of the security, and other information and attachments that need not be furnished to purchasers but are available in SEC files for public inspection. A registration statement is generally effective twenty days after filing, but the SEC has the power to delay or suspend the effectiveness of the registration statement. When a disclosure or registration statement becomes effective, it is called a prospectus and is used to solicit orders for the security.
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 transferred responsibility for administration of the 1933 Act from the Federal Trade Commission to the newly created SEC. The 1934 Act also provided for federal regulation of trading in already issued and outstanding securities. Other provisions include disclosure requirements for publicly held corporations; prohibitions on various manipulative or deceptive devices or contrivances; SEC registration and regulation of brokers and dealers; and registration, oversight, and regulation of national securities exchanges, associations, clearing agencies, transfer agents, and securities information processors.
The SEC has broad oversight responsibilities for the self-regulatory organizations within the securities industry. For approximately 140 years prior to 1934, stock exchanges regulated their own members. Self-regulation is still an important component of the industry, but now the SEC provides additional regulation, including authority to review disciplinary actions taken by a self-regulatory organization. The 1934 Act also established the Municipal Securities Rulemaking Board and conferred oversight power upon the commission. The Municipal Securities Rulemaking Board formulates rules for the municipal securities industry. The commission has the authority to approve or disapprove most proposed rules of the board.
The 1934 Act seeks to provide the public with adequate information about companies with publicly traded securities. Subject to certain exemptions, disclosure requirements apply not only to companies with securities listed on national securities exchanges but to all companies with more than five hundred shareholders and more than $5,000,000 in assets. Companies must file detailed statements with the SEC when first registering under the 1934 Act and must provide periodic reports as prescribed by the commission.
Under the 1934 Act, the SEC also regulates the solicitation of proxies. Proxies are voting solicitations allowing stockholders to participate in the annual or special meetings of shareholders without actually attending the meeting; the proxy empowers someone else to vote on behalf of the shareholder. Detailed SEC regulations delineate the form of proxies and the information that must be furnished to stockholders. A registered company must furnish each shareholder, before every stockholder meeting, a proxy statement and a proxy form on which she can indicate approval or disapproval of each proposal expected to be introduced at the meeting. Companies must file with the commission copies of the proxy statement and the proxy form. The SEC may comment on the proxy statement and insist on changes before it is mailed to security holders.
The Williams Act of 1968 (Pub. L. No. 90-439, 82 Stat. 454) amended the 1934 Act to address recurring problems arising in tender offers and corporate takeovers. A tender offer is a formal request that stockholders sell their shares in response to a large purchase bid; the buyer reserves the right to accept all, none, or a certain number of shares tendered for sale. A takeover occurs when a corporation assumes control of another corporation through an acquisition or merger. Pursuant to the law as amended, any person or group that takes ownership of more than five percent of any class of specific registered securities must file a statement within ten days with the issuer of the security and with the SEC. This statement provides the background of the purchaser, the source of funds used in the purchase, the purpose of the purchase, the number of shares owned, and any relevant contracts, arrangements, or understandings. In addition, no person may make a tender offer unless he has first filed with the SEC and provided certain specific information to each offeree. A tender offer must remain open for a minimum of twenty days and at least ten days after any change in the terms of the offer.
The Securities Act of 1934 also requires any person who beneficially owns, whether directly or indirectly, more than 10 percent of a class of certain registered securities and every officer or director of every company with specific registered securities to report to the SEC. Reports must be filed at the time the status is acquired and at the end of any month in which such a person acquires or disposes of any equity securities of that company. This provision is designed to discourage short-term trading by preventing corporate insiders from unfairly using nonpublic information.
Investment Company Act of 1940
Pursuant to the Investment Company Act of 1940, investment companies must register with the SEC. Investment companies are companies engaged primarily in the business of investing, reinvesting, or trading in securities. They may also be companies with more than 40 percent of their assets consisting of investment securities, that is, securities other than those of majority-owned subsidiaries and government securities. Among other types of companies, this act covers "open-end companies," commonly known as mutual funds. The SEC regulatory responsibilities under this act encompass sales load, management contracts, the composition of boards of directors, capital structure of investment companies, approval of adviser contracts, and changes in investment policy. In addition, a 1970 amendment imposed restrictions on management compensation and sales charges.
The act prohibits various transactions by investment companies, unless the commission has first made a determination that the transaction is fair. Moreover, the act permits the SEC to bring a court action to enjoin the execution of mergers and other reorganization plans of investment companies if the plans are unfair to security holders. The SEC also has the power to impose sanctions pursuant to administrative proceedings for violation of this act and may file suit to enjoin the acts of management officials involving breaches of fiduciary duties or personal misconduct and may bar such officials from office.
Investment Advisers Act of 1940
This act provides for SEC regulation and registration of investment advisers. The act is comparable to provisions of the 1934 Act with respect to broker-dealers but is not as comprehensive. Generally speaking, an investment adviser is a person who engages in the business of advising others with respect to securities and does so for compensation. Certain fee arrangements are prohibited; adverse personal interests in a transaction must be disclosed. Moreover, the SEC may define and prohibit certain fraudulent and deceptive practices.
Other Securities Laws
The Trust Indenture Act of 1939 applies to public issues of debt securities in excess of a certain amount. This law prescribes requirements to ensure the independence of indenture trustees. It also requires the exclusion of certain types of exculpatory clauses and the inclusion of certain protective clauses in indentures. In addition, the Public Utility Holding Company Act of 1935 (15 U.S.C.A. §§ 79a-79z-6) was enacted to correct abuses in the financing and operation of electric and gas public utility holding companies; the SEC's functions under these provisions were substantially completed by the 1950s.
SEC Enforcement Authority
The commission enforces the myriad laws and regulations under its jurisdiction in a number of ways. The SEC may seek a court injunction against acts and practices that deceive investors or otherwise violate securities laws; suspend or revoke the registration of brokers, dealers, investment companies, and advisers who have violated securities laws; refer persons to the Department of Justice for criminal prosecution in situations involving criminal fraud or other willful violation of securities laws; and bar attorneys, accountants, and other professionals from practicing before the commission.
The SEC may conduct investigations to determine whether a violation of federal securities laws has occurred. The SEC has the power to subpoena witnesses, administer oaths, and compel the production of records anywhere in the United States. Generally, the SEC initially conducts an informal inquiry, including interviewing witnesses. This stage does not usually involve sworn statements or compulsory testimony. If it appears that a violation has occurred, SEC staff members request an order from the commission delineating the scope of a formal inquiry.
Witnesses may be subpoenaed in a formal investigation. A witness compelled to testify or produce evidence is entitled to see a copy of the order of investigation and be accompanied, represented, and advised by counsel. A witness also has the absolute right to inspect the transcript of her testimony. Typically the same privileges one could assert in a judicial proceeding, such as the Fourth Amendment to the U.S. Constitution's prohibition against unreasonable searches and seizures and the Fifth Amendment's privilege against self-incrimination, apply in an SEC investigation. Proceedings are usually conducted privately to protect all parties involved, but the commission may publish information regarding violations uncovered in the investigation. In a private investigation, a targeted person has no right to appear to rebut charges. In a public investigation, however, a person must be afforded a reasonable opportunity to cross-examine witnesses and to produce rebuttal testimony or evidence, if the record contains implications of wrongdoing.
When an SEC investigation unearths evidence of wrongdoing, the commission may order an administrative hearing to determine responsibility for the violation and impose sanctions. Administrative proceedings are only brought against a person or firm registered with the SEC, or with respect to a security registered with the commission. Offers of settlement are common. In these cases the commission often insists upon publishing its findings regarding violations.
An administrative hearing is held before an administrative law judge, who is actually an independent SEC employee. The hearing is similar to that of a nonjury trial and may be either public or private. After the hearing the judge makes an initial written decision containing findings of fact and conclusions of law. If either party requests, or if the commission itself chooses, the commission may review the decision. The SEC must review cases involving a suspension, denial, or revocation of registration. The commission may request oral argument, will study briefs, and may modify the decision, including increasing the sanctions imposed. Possible sanctions in administrative proceedings include censure, limitations on the registrant's activities, or revocation of registration. In 1990 the SEC's powers were expanded to include the authority to impose civil penalties of up to $500,000, to order disgorgement of profits, and to issue cease and desist orders against persons violating or about to violate securities laws, whether or not the persons are registered with the SEC.
The U.S. Court of Appeals for the District of Columbia or another applicable circuit court of appeals has jurisdiction to review most final orders from an SEC administrative proceeding. Certain actions by the commission are not reviewable.
The SEC may request an injunction from a federal district court if future securities law violations are likely or if a person poses a continuing menace to the public. An injunction may include a provision that any future violation of law constitutes contempt of court.
The SEC may request further relief, such as turning over profits or making an offer to rescind the profits gained from an insider trading transaction. In cases of pervasive corporate mismanagement, the SEC may obtain appointment of a receiver or of independent directors and special counsel to pursue claims on behalf of the corporation.
Willful violations may be punished by fines and imprisonment. The SEC refers such cases to the Department of Justice for criminal prosecution. Willfulness means only that the defendant intended the act, not that he knew that it was a violation of securities laws.
See: Administrative Law and Procedure; Bonds; Mergers and Acquisitions.