Naked shorting

[admin]

Intersting to follow this..

Deep Capture Files Major Lawsuit Against the SEC

Posted on 10 June 2014 by Mark Mitchell

I have filed a  lawsuit against the Securities and Exchange Commission (SEC), which previously failed to respond adequately to my Freedom of Information Act (FOIA) requests seeking SEC documents related to the SEC’s various investigations (and failure to perform adequate investigations) of naked short selling crimes that undermined the stability of the American financial system.

This is the first lawsuit against the SEC ever filed by a journalist seeking information about the SEC’s failure to regulate naked short selling, one of the most serious crimes affecting the American markets. I have filed the lawsuit with help from Gary Aguirre, a former senior enforcement official with the SEC, famous for having blown the whistle on the protection that top SEC officials were providing to hedge fund Pequot Capital and Morgan Stanley CEO John Mack.

Aguirre made headlines in 2006 by reporting in Congressional testimony that he had been improperly fired by the SEC after complaining that top SEC officials had derailed an investigation into an insider trading scheme perpetrated by Pequot Capital, and that the investigation had likely been derailed because the Aguirre had also been investigating Mack in connection with the insider trading, while Aguirre’s supervisor at the SEC was preparing to take a job with Mack’s law firm.

What did not make the headlines was the fact that Aguirre reported in that same Congressional testimony that when he was improperly fired, he had been investigating not only insider trading, but also naked short selling. “The investigation was two-pronged,” Aguirre reported to Congress. One prong concerned “insider trading.” However, the second, and far more important prong, concerned “market manipulation” and, more specifically, “two suspected violations: wash sales and naked shorts.”

“My colleagues,” Aguirre reported to Congress, “believed [the naked short selling] held a greater potential to severely injure the financial markets.” Indeed, Aguirre reported to Congress that naked short selling had the potential to deliver a market crash similar to the crash of 1929, from which followed the Great Depression.

Two years later, in 2008, that prediction proved correct when naked short selling contributed to a meltdown just as severe as the great crash of 1929. At that time in 2008, the CEOs of multiple Wall Street investment banks (long among the perpetrators of naked short selling) complained that naked short selling was contributing to the death spirals in their stock prices, and the SEC responded by issuing an unprecedented “Emergency Order” that temporarily banned all short selling of stock in more than 900 companies in the financial industry.

In that Emergency Order, the SEC effectively admitted that naked short sellers were contributing to the worse financial crisis since the Great Depression, and the SEC subsequently enacted new rules that supposedly made it more difficult for traders to engage in naked short selling, but those new rules were not sufficient, and to this day, the SEC has not sanctioned even one trader for perpetrating the naked short selling that (according to the SEC) contributed to the great meltdown of 2008, and nor has the SEC released any documents concerning its supposed investigation into that naked short selling—one of the great unsolved crimes of the century.

One purpose of my lawsuit is to force the SEC to hand over documents related to its investigation, or failure to investigate, the naked short selling that contributed to the great meltdown of 2008, but that is not all. There is massive amount of other information my lawsuit seeks to extract from the SEC, and I encourage you to read the lawsuit in its entirety because it is a gory chronicle indeed of the crimes that naked short sellers have perpetrated against the markets, and an even more shocking tale of how the SEC has failed to enforce the law while actually providing cover for the perpetrators of a crime that, at the present moment, is still undermining the stability of the global financial markets.

The lawsuit is posted in its entirety below:

United States District Court

FOR THE NORTHERN District of ILLINOIS

Eastern division

MARK MITCHELL

Plaintiff,

v.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Defendant.

Case No. ____________________

 

COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF

1. This is an action under the Freedom of Information Act (“FOIA&rdquo, 5 U.S.C. § 552, as amended, to compel Defendant United States Securities and Exchange Commission (“SEC&rdquo to produce, provide access to, and make available certain records specified below that were requested by Plaintiff Mark Mitchell.
2. As specifically alleged below, Plaintiff seeks records under FOIA from the SEC relating to:
   
   1. the opening of matters of inquiry (MUIs), the opening of investigations, and the filing of any enforcement proceedings by the SEC in relation to individuals or institutions who may have violated SEC Regulation SHO (“Reg SHO&rdquo and/or engaged in the naked short selling of the stock of public companies, or
   2. the opening of MUIs, opening of investigations, or the filing of any enforcement proceedings involving specific public companies whose stock was the subject of possible violations of Reg SHO and/or naked short selling.

JURISDICTION

1. This Court has jurisdiction over this action pursuant to 5 U.S.C. § 552(a)(4)(B).

PARTIES

1. Plaintiff is a citizen of the United States, a resident of Cook County, and a journalist.
2. Defendant is an agency of the United States Government and has possession and control of the records that are the subject of this action.

RELEASE OF THE RECORDS SOUGHT TO PLAINTIFF WOULD SERVE THE HIGHEST PUBLIC INTEREST

1. The release and disclosure of the information sought by Plaintiff’s FOIA requests as alleged in this complaint would serve the highest public interest because Plaintiff would utilize the released information to contribute significantly to the public’s understanding of the following:
   
   1.  the inherent flaws in regulations created by the SEC to stop naked short selling;
   2. the lack of transparency in the regulatory system relating to the processing of short sale trades;
   3. the SEC’s lax enforcement of the securities acts and related rules, including Reg SHO, against those who engage in naked short selling, and, most importantly;
   4. how these factors combine to create a dangerously high and unacceptable level of risk to the integrity of the nation’s and the world’s capital markets.

The records should be furnished without any charge in that the information is in the public interest because it is likely to contribute significantly to the public understanding of the operations or activities of the SEC and is not primarily in the commercial interest of the requester.

1. Federal regulations describe how the SEC has been entrusted with powers and duties of “great social and economic significance to the American people,” the prevention of abuses that would undermine the integrity of the nation’s economic institutions. Section 200.53 of Title 17 of the United States Code of Federal Regulations spells out that trust:

Members of the Securities and Exchange Commission are entrusted by various enactments of the Congress with powers and duties of great social and economic significance to the American people. It is their task to regulate varied aspects of the American economy, within the limits prescribed by Congress, to insure that our private enterprise system serves the welfare of all citizens. Their success in this endeavor is a bulwark against possible abuses and injustice which, if left unchecked, might jeopardize the strength of our economic institutions.

1. As more specifically alleged below, naked short selling by broker-dealers in their own accounts and on behalf of other market participants is exactly the type of abuse that could “jeopardize the strength of our economic institutions.” The SEC has not merely failed to stop this form of market abuse. It has created a regulatory system which conceals naked short selling, prevents the public (including investors and other victims of naked short selling) from investigating the naked short sales, rewards those who engage in it, and also rewards securities exchanges, which have a duty to enforce the law, for closing their eyes to the unlawful practices consummated through them.
2. As specifically alleged below, the SEC has sponsored, supervises, and presides over a regulatory system that has allowed and in fact encouraged broker-dealers and other market participants to create billions of shares of counterfeit stock in hundreds of millions of trades which collectively put the integrity of the capital markets at risk. The counterfeit stock has been and continues to be created through a practice commonly referred to as “naked short selling.”  Naked short sales share no properties in common with lawful short sales, except both involve a purported sale of stock.
3. In a lawful short sale, the seller borrows the stock from a third party and makes real delivery of the borrowed stock to the buyer.  In a naked short sale, the market participant neither owns nor has borrowed the stock, but nevertheless purports to sell genuine stock of the public company to the buyer.  In substance, a market participant who engages in a naked short sale delivers counterfeit stock to the buyer.
4. Once the counterfeit stock is sold through a naked short sale, it continues in circulation in the securities markets much like counterfeit bank notes continue in circulation after they are introduced into the monetary system. It has the effect of increasing the supply of stock available on the market for sale, which generally has a depressing effect on the price of the genuine stock of the public company whose name the counterfeit stock bares. The naked short sales of counterfeit stock harm investors holding genuine stock, investors who receive the counterfeit stock, and the public company whose stock is diluted with counterfeit stock.  The aggregate creation of counterfeit stock creates high and unacceptable risks to the integrity of the nation’s and the world’s capital markets.
5. Plaintiff is a reporter for DeepCapture.com, an online financial news service.  He previously worked as editorial page writer for The Wall Street Journal in Europe, chief business correspondent for Time magazine’s Asia edition, and as assistant managing editor responsible for the Columbia Journalism Review’s online critique of business journalism. He holds an MBA from the Kellogg Graduate School of Management at Northwestern University.
6. Plaintiff gathers information from numerous sources often overlooked by the mainstream financial media, uses his editorial skills to turn this raw information into narratives regarding the financial industry, and regularly publishes that information on an internet website known as DeepCapture at no cost to the public.[1]
7. Deep Capture also publishes news stories by other authors whose stories meet DeepCapture’s scope of interest and editorial standards.
8. The website is called DeepCapture because it focuses on objectively presenting in-depth news coverage of events and actions that demonstrate that the independence of a federal agencies have been compromised by regulatory capture. Regulatory capture occurs when a regulatory agency, such as the SEC, which was created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating. These agencies are called “captured agencies.”
9. The DeepCapture website, for which Plaintiff writes, has received awards, such as Business Insider’s award for best investigative journalism and the Webby award for best business reporting. The DeepCapture website has also been discussed by mainstream news organizations, e.g., CNBC and Wired magazine.
10. Plaintiff has also written numerous articles on the DeepCapture website about how the SEC is not only a captured agency but is part of a larger group of institutions that have been captured by the financial industry in this country.
11. Plaintiff has published numerous articles on the DeepCapture website describing how financial institutions and individuals have engaged in naked short selling in the stock of public companies. These violations were rarely reported by the mainstream or financial media. To the extent that naked short selling was reported in the financial media, some mainstream news organizations, including Bloomberg News,[2] reported that naked short selling was a serious problem, but these reports were few in number, and other journalists often expressed skepticism that naked short selling was even occurring, thereby giving false comfort to the public regarding the risks naked short selling posed to the nation’s capital markets.
12. Plaintiff is one of the few journalists, perhaps the only one, who regularly writes about naked short selling. Plaintiff believes it is vitally important for the American public to be aware that the SEC is failing to contain market participants such as large investment banks, market-makers, and multibillion dollar hedge funds from engaging in naked short selling. It is as if the Department of the Treasury were aware of massive printing of US currency by counterfeiters and yet declined to take any action to stop them.
    
    1. The following examples illustrate the depth and uniqueness of news stories published on the DeepCapture website relating to naked short selling:
       
       1. In relation to the settlement between FINRA and UBS in October 2011,  Plaintiff was one of two media sources that reported that FINRA had found and UBS had admitted committing “tens of millions” of violations of Reg SHO and that those violations put at risk the integrity of the capital markets.[3] In the light of FINRA’s finding and UBS’s admissions, the FINRA enforcement proceeding against UBS was unquestionably the single most significant regulatory case brought by the government or a Self-Regulating Organization (“SRO&rdquo relating to naked short selling since Reg SHO became operative on January 1, 2004. In contrast, neither the financial nor the mainstream media reported that UBS had committed “tens of millions” of violations of Reg SHO and that the cumulative effect was to create a significant risk to the integrity of the capital markets.[4]
       2. In a story written by another reporter, DeepCapture was one of two media sources that reported on the investigation conducted by the SEC’s Office of the Inspector General (“OIG&rdquo which resulted in a finding by the OIG in Case No. 512 (Unauthorized Disclosure of Non-Public Information) that two SEC attorneys had passed along nonpublic information through a corrupt FBI agent to a cabal engaged in naked short selling.[5] Through the reporter’s own exhaustive research and investigation, he identified the two SEC employees and published an article in DeepCapture, Moral Hazard at the SEC, which described in detail how the two SEC investigators had communicated the nonpublic information through a corrupt FBI agent to the naked short selling cabal.[6]The financial and mainstream media did not cover the story.
13. As specifically alleged below, the magnitude and scope of naked short selling creates major risks to the stability of the nation’s capital markets. Equally disturbing, as alleged below, the SEC, a captured agency, is not protecting the nation’s investors or the capital markets from this form of market abuse.
    
    1. Plaintiff seeks the records described in this complaint to use in articles he and other guest authors will write and publish on the DeepCapture website informing the public of the risks naked short selling poses to the integrity of the nation’s capital markets and the SEC’s complicity in creating a regulatory system that does not deter naked short selling. All of the information from the SEC is vitally needed because, as alleged below, the system created by the SEC relating to the short sale trades of public companies has little if any transparency. Plaintiff intends to make avaiable to the public all records obtained through this proceeding.