We learned about the short-selling con from our mob connection, a man with close matrimonial ties to our mother, who was a saint, but what about everybody else? How do you know it’s a big fat swindle? Well, lets go back and look at what’s been covered so far, checking this stuff out like an auditor would. Maybe it’s the best our readers should be expected to do.
By definition, a deception is designed to fool. In auditing, this often means you’re given a misleading view, told it’s something else, and never shown the true picture, which can’t be seen from the vantage point deliberately set up for you.
If, somewhere along the way, something just doesn‘t smell right, you have to grab onto that. There’s nothing else. The perps have made sure of it.
From there, you dig into things as best you can, tracking down the stench, or trying to. If that awful odor never goes away, you keep at it. Eventually, the auditor can get to a point where he has to inform someone they’ve got an odor on their hands. The message can sound that silly. So you pass along what amounts to suspicions to a comptroller, a board of directors, or even the police.
Sometimes law enforcement is implicated, and then you’ve got a dilly of a deception on your hands.
Anyway, all you can do is give the appropriate party what you’ve got. May not be much, but the nature of deception means you go with it anyway. But who on earth do you tell when the authorities are involved?
Which brings us to short-selling. Financial Crime Maggots try to tell us that once in a while short sellers “borrow” the shares they sell. As in sometimes they do and sometimes they don’t. Otherwise, we’re told, short-sellers “locate” shares, but not always. Lastly, you read some short-sellers do neither, and that’s called “naked” short-selling. On top of that, there’s a whole industry of securities “lenders” operating in the dark which would seem to exist only to give credibility to the “borrowing” alibi. When its even used, that is.
Last time we checked short-selling at wikipedia.com, the piece pretty much read like the above.
Stinky. Real stinky. Face it, we’ve got a smell test to apply with this one.
For starters, three explanations is two explanations too many. Regrettably, all of them come from Securities and Exchange Commission (SEC) spokespersons as well as various perps. One too many would appear odiferous. We’ve got two, and law enforcement bandying all three about.
Basically, nothing smells right. Disappointed in the human race, we look at the transactions themselves.
1) “Borrowing” shares: Here, start with, say, 100 shares, all owned by the “lender“. But after all is said and done, there are 200 shares left. The “lender” gets his 100 shares “returned” to him, and the owner of the shares sold short in the marketplace now holds 100 shares too. What kind of loan is this? Where did the new 100 come from, and what in the world are they? Why does anybody need a loan if he‘s creating brand new shares for nothing and getting paid to sell them? Most important, how is this not a public offering, with the proceeds going to the short-seller instead of the company, making the so-called loan explanation a total lie?
2) “Locating” shares: Short-sellers calling up to see if a broker holds as many shares as the short-seller wants to sell and selling short if there are enough sounds like “borrowing” where somebody neglected to actually borrow and got caught and came up with a “my dog ate my homework” excuse, particularly when preceded by a regulatory apology regretting that not everybody is “borrowing” after they said they would. How is “locating” even relevant to a transaction? You might as well add a memo entry showing what you ate for breakfast that morning. Maybe it tasted really good and we haven’t tried any yet, so the breakfast entry would at least pertain to something.
3) Naked short-selling: This is a paper swindle. The short-seller simply issues himself bogus shares and sells them to a buyer who thinks they’re real, meaning, as any reasonable party would conclude, the short-seller makes his side of whole transaction up. Here we start with zero shares, create, say, 100 phony, and sell them to a buyer deceived into believing they’re real. All shares are put in the same bin at the brokerage house handling his account, mixing the 100 phony in with all their real. Eventually the short-seller buys back his 100 phony from someone selling 100 real, conning a second sucker, so over time the real share count gets netted out between the two people he duped, meaning the phony shares only exist while the short-seller’s position is open. You have no idea how difficult it is to explain that to normal people. We just hope it’s intelligible now.
Here at the MacDougal Post, we never use the term, naked short-selling. It’s part of the deception. All short-sales are paper swindles. Buyers are sold phony transactions, not securities. The purported securities never exist so you can‘t make a distinction between “borrowed“, “located“, and “naked“ shares. They’re one and the same actual transaction. A crook issuing shares to himself, dumping them on marks believing them to be real, then retiring his phony shares when he buys himself out.
Next our smell test turns to valuations, and that means earnings per share (EPS). If these are bogus shares, and we aren’t informed about them, then EPS is less than we’re told. Investors base their market decisions on EPS, making this a clear case of securities fraud.
If the SEC is misinforming us about short-selling, it’s involved. The regulatory hotshots are charged with prosecuting securities fraud, not committing it.
That’s what we’ve got, a real stinker of a smell test, at least 97.9% on the sniff-o-meter. So who do we tell? Congress? The White House? We already tried, and that’s a total joke. Bribes from Financial Crime Maggots, a.k.a. campaign contributions, finance politics in Washington. And the media is owned by corporate America, so forget them. The New York Times editorial staff gave America this opinion of stock option crime some years ago: people who complain only do so because they aren’t in on it, (like they are).
So we tell you.
And hope our valued readers pass the knowledge along to a million of their closest friends at cocktail parties, which actually gives us a shot in a couple of cases.
Oh yeah, that securities lending to short-sellers thing. Guy at a union pension fund says banks extort institutional investors into whatever that is by charging higher fees if they don’t lend. Internet sources say the business is run by huge banks and appears to be fairly recent. Sounds like somebody found a way to charge more fees. The lending part is just a sham, as it always has been. What intrigues us most is the cloak of darkness here. We’d love to see what they’re hiding, and hope it all comes out some day.
