Post by jcline on Oct 11, 2007 10:31:10 GMT -5
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Simple Mistake or Criminal Fraud - October 11, 2007
David Patch
This week the Securities and Exchange Commission announced yet another settlement in a case involving illegal shorting practices. These illegal trades are ones the SEC once called insignificant and illegal shorting practices the mainstream media continues to deny even exists.
On October 10, 2007 the SEC released a press statement announcing a settled enforcement action against New York hedge fund adviser Sandell Asset Management Corp. (SAM), its chief executive officer, and two other employees for engaging in improper short sales in connection with trading in the securities of Hibernia Corporation in the immediate aftermath of Hurricane Katrina.
The significance in this case is not what the SEC did but what the SEC did not do.
According to the complaint filed, SAM executed short sales totaling over 9 million shares through a variety of deceptive schemes. The SEC Release stating, "SAM personnel believed that Capital One would lower its offering price for Hibernia shares in the wake of Katrina. In an attempt to offset an anticipated loss to a client, SAM personnel began to sell short as many shares of Hibernia stock as possible, improperly marking certain sales orders as "long" or misrepresenting to the broker-dealers executing some of the trades that they had located stock to borrow."
For these actions SAM was forced to disgorge their ill-gotten gains $6.7 Million, pay $730,000 in interest, and a $650,000 civil penalty. These fines came as part of an SEC action that involved complaints of compliance violations.
In a letter to Sandell investors Thomas Sandell said the SEC had not found any "fraudulent intent," and that the investors would pay no penalties.
No fraudulent intent?
While the details are complex due to the arrangement SAM had with 9.2 Million 'risk arbitraged' restricted shares, the actions speak for themselves. It starts with the presumption of SAM Executives that hurricane Katrina would delay the merger agreement between Hibernia and Capital One.
According to the Administrative order, SAM Head Trader Richard Ecklord attempted to execute a short sale legally by seeking shares to borrow but found difficulty in locating shares in the 20 Million free trading shares. SAM executives then decided to become creative in their trading strategy and simply market the sales long using the 9.2 million shares signed over in a risk arbitrage agreement as the collateral.
Problem is the 9.2 million shares were restricted and not free trading and, SAM was not the listed beneficial holder of these shares.
The fact that SAM initially attempted to locate to borrow 9.2 Million shares implies knowledge that they had no beneficial rights to the 'risk arbitrage' shares. Any actions thereafter to work around the problem imply fraud and possibly criminal intent.
With a free trading float of 20 Million shares, SAM shorted 3.5 Million of Hibernia on August 31, 2007 and did so by mis-marking the shares long and executing these sales by flooding the bids with sales. The results would be predictable. The market dropped.
A day later SAM was able to locate shares in a borrow and engaged in legal short sales using the 1 million shares located. The fact that Ecklord continue to attempt to locate indicates knowledge that the trading the day before was not legal.
The next day, September 2, 2007 when shares were no longer located, in what the SEC administrative order states was an animated discussion, Thomas Sandell instructed the traders to continue selling. Here is where it gets amusing.
Sandell claims he did not tell the traders to sell illegally but just instructed them to continue selling. The traders had informed Sandell that shares were not available to locate prior to his instructions so they interpreted his instructions as sell short without the locate.
The Abbott and Costello routine was on and the SEC bought it hook line and sinker. It was just a simple misunderstanding according to SAM who, through this misunderstanding happened to avoid a possible $6.5 Million loss.
Ironically, in cases such as these the NASD has routinely barred individuals for such brazen acts of fraud. The SEC barely imposes a slap on the wrist to the $7 Billion Hedge Fund and their founder who orchestrated the fraudulent acts.
The SEC highlights this case as a case of naked short selling. The Chairman of the SEC has stated that naked short selling is a practice that can drive down a stock's price, hurting investor confidence and a company's ability to attract capital.
In this case, the naked short sales merely drove the market in Hibernia down and created excess investors (9.5 million shares worth) that took a loss on SAM's gains. A market with 20 million free floating shares is diluted with 9.5 million shorts (8.5 million illegally) and the SEC doesn't even recognize what impact that had on the market.
Isn't the illegal manipulation of a stock fraud?
So here lies the crux of the problem.
The Commission staff and SEC director of Enforcement Linda Thomsen are imposters. These comedic actors come out and make public the appearance that they are taking necessary steps to clean up fraud on Wall Street and protect the public in the process but the evidence points us in a different direction. The staff talks a tough game and puts out great public sound bites but rarely do their actions fit their tough talk.
Case in point, the enforcement case against SAM is not an anomaly it is the norm. Wall Street's biggest players will generally cut corners and risk compliance when profits are at risk. While penny stock grifters are barred from future executive positions for fraud committed against the public the SEC staff lets the most abusive walk with mere compliance violations.
Personally, I think the SEC needs to dust off those books on market manipulation and begin to analyze the trading impacts of cases such as this and begin prosecuting at the higher-level charges of fraud and market manipulation and cease with the dog and pony compliance crap we witness regularly. Compliance violations are simply window dressings that will never alter the risk v. reward potentials of the next SAM.
Closing thought: If Wall Street took seriously SEC Rule 15c6-1, and all contracts for trades must include 3-day settlement, where were the Buy Side Broker Dealers calling in the massive fails created by SAM. This fraud would never have existed if Wall Street's prime brokers took seriously the requirement of trade settlement. My understanding is that the SEC has once again given them a free pass despite the losses their clients incurred due to the negligence.
I suggest it is time the Federal Authorities take a higher role in financial market enforcement. Clearly, any individual above a pre-school intelligence level can see that what Sandell did was calculated and was an act of fraud. The schemes engaged in prove that without question. This was not just simple fraud either, this borders on criminal fraud as the actions of Sandell became criminal theft and stock manipulation.
An online newspaper reporting the issues of Securities Fraud
Simple Mistake or Criminal Fraud - October 11, 2007
David Patch
This week the Securities and Exchange Commission announced yet another settlement in a case involving illegal shorting practices. These illegal trades are ones the SEC once called insignificant and illegal shorting practices the mainstream media continues to deny even exists.
On October 10, 2007 the SEC released a press statement announcing a settled enforcement action against New York hedge fund adviser Sandell Asset Management Corp. (SAM), its chief executive officer, and two other employees for engaging in improper short sales in connection with trading in the securities of Hibernia Corporation in the immediate aftermath of Hurricane Katrina.
The significance in this case is not what the SEC did but what the SEC did not do.
According to the complaint filed, SAM executed short sales totaling over 9 million shares through a variety of deceptive schemes. The SEC Release stating, "SAM personnel believed that Capital One would lower its offering price for Hibernia shares in the wake of Katrina. In an attempt to offset an anticipated loss to a client, SAM personnel began to sell short as many shares of Hibernia stock as possible, improperly marking certain sales orders as "long" or misrepresenting to the broker-dealers executing some of the trades that they had located stock to borrow."
For these actions SAM was forced to disgorge their ill-gotten gains $6.7 Million, pay $730,000 in interest, and a $650,000 civil penalty. These fines came as part of an SEC action that involved complaints of compliance violations.
In a letter to Sandell investors Thomas Sandell said the SEC had not found any "fraudulent intent," and that the investors would pay no penalties.
No fraudulent intent?
While the details are complex due to the arrangement SAM had with 9.2 Million 'risk arbitraged' restricted shares, the actions speak for themselves. It starts with the presumption of SAM Executives that hurricane Katrina would delay the merger agreement between Hibernia and Capital One.
According to the Administrative order, SAM Head Trader Richard Ecklord attempted to execute a short sale legally by seeking shares to borrow but found difficulty in locating shares in the 20 Million free trading shares. SAM executives then decided to become creative in their trading strategy and simply market the sales long using the 9.2 million shares signed over in a risk arbitrage agreement as the collateral.
Problem is the 9.2 million shares were restricted and not free trading and, SAM was not the listed beneficial holder of these shares.
The fact that SAM initially attempted to locate to borrow 9.2 Million shares implies knowledge that they had no beneficial rights to the 'risk arbitrage' shares. Any actions thereafter to work around the problem imply fraud and possibly criminal intent.
With a free trading float of 20 Million shares, SAM shorted 3.5 Million of Hibernia on August 31, 2007 and did so by mis-marking the shares long and executing these sales by flooding the bids with sales. The results would be predictable. The market dropped.
A day later SAM was able to locate shares in a borrow and engaged in legal short sales using the 1 million shares located. The fact that Ecklord continue to attempt to locate indicates knowledge that the trading the day before was not legal.
The next day, September 2, 2007 when shares were no longer located, in what the SEC administrative order states was an animated discussion, Thomas Sandell instructed the traders to continue selling. Here is where it gets amusing.
Sandell claims he did not tell the traders to sell illegally but just instructed them to continue selling. The traders had informed Sandell that shares were not available to locate prior to his instructions so they interpreted his instructions as sell short without the locate.
The Abbott and Costello routine was on and the SEC bought it hook line and sinker. It was just a simple misunderstanding according to SAM who, through this misunderstanding happened to avoid a possible $6.5 Million loss.
Ironically, in cases such as these the NASD has routinely barred individuals for such brazen acts of fraud. The SEC barely imposes a slap on the wrist to the $7 Billion Hedge Fund and their founder who orchestrated the fraudulent acts.
The SEC highlights this case as a case of naked short selling. The Chairman of the SEC has stated that naked short selling is a practice that can drive down a stock's price, hurting investor confidence and a company's ability to attract capital.
In this case, the naked short sales merely drove the market in Hibernia down and created excess investors (9.5 million shares worth) that took a loss on SAM's gains. A market with 20 million free floating shares is diluted with 9.5 million shorts (8.5 million illegally) and the SEC doesn't even recognize what impact that had on the market.
Isn't the illegal manipulation of a stock fraud?
So here lies the crux of the problem.
The Commission staff and SEC director of Enforcement Linda Thomsen are imposters. These comedic actors come out and make public the appearance that they are taking necessary steps to clean up fraud on Wall Street and protect the public in the process but the evidence points us in a different direction. The staff talks a tough game and puts out great public sound bites but rarely do their actions fit their tough talk.
Case in point, the enforcement case against SAM is not an anomaly it is the norm. Wall Street's biggest players will generally cut corners and risk compliance when profits are at risk. While penny stock grifters are barred from future executive positions for fraud committed against the public the SEC staff lets the most abusive walk with mere compliance violations.
Personally, I think the SEC needs to dust off those books on market manipulation and begin to analyze the trading impacts of cases such as this and begin prosecuting at the higher-level charges of fraud and market manipulation and cease with the dog and pony compliance crap we witness regularly. Compliance violations are simply window dressings that will never alter the risk v. reward potentials of the next SAM.
Closing thought: If Wall Street took seriously SEC Rule 15c6-1, and all contracts for trades must include 3-day settlement, where were the Buy Side Broker Dealers calling in the massive fails created by SAM. This fraud would never have existed if Wall Street's prime brokers took seriously the requirement of trade settlement. My understanding is that the SEC has once again given them a free pass despite the losses their clients incurred due to the negligence.
I suggest it is time the Federal Authorities take a higher role in financial market enforcement. Clearly, any individual above a pre-school intelligence level can see that what Sandell did was calculated and was an act of fraud. The schemes engaged in prove that without question. This was not just simple fraud either, this borders on criminal fraud as the actions of Sandell became criminal theft and stock manipulation.