By Lucy Komisar
This is my interview of Wes Christian, the Houston attorney who has been in the forefront of bringing naked short selling cases for twenty years. The link.
June 2, 2021
Among the key points:
Overstock a victim of negative stories
Wes Christian handled a case for Overstock, which complained that Gadient and Camelback stock analysts were being paid to put out negative stories on the company, to bring down the share price and benefit short sellers.
He said it was a “perfect storm. They sell shares they don’t deliver and analysts print bad things about you.” The SEC started an investigation, but pressure from media “influencers” killed it.
Lending fake shares
The next big case was Taser, the stun gun company.
He explained short sellers’ brokers are supposed to borrow shares before shorting, but that’s “not how big boys” do it. He said, “Their mission is to use every share to cover up the crime.”
Stock that was being lent to cover shorts didn’t exist.
He said “bad guys” were going into the market, doing “reverse conversions,” buying puts [options to sell] and calls [options to buy] to combine into synthetic shares. “The options contracts were torn up two days before consummation.” And, “Fails were hidden in subsidiaries.”
Or, he said, “Locates were given on shares multiple time when there was one share. Or many locates where shares didn’t exist.”
Christian said the brokers were lending cash account shares, which were not leveraged with borrowed funds, were required to be segregated from margin accounts and under SEC rules “can’t be touched, but they are being used.”
How to protect against that. He said, “Get a lock up agreement from your broker.”
He said prime brokers’ biggest money makers are proprietary trading and stock lending.
He said Merrill Lynch fined multi millions of dollars for using cash accounts of world-wide customers for their own trades.
Marking shorts as long
Christian said, “In 2005, in effect, there were thousands of companies” whose stocks were shorted. “Now very few. They are marking lot of [short] tickets long. I can circumvent RegSho: mark it long. It doesn’t go in short interest [count]. It means the reported short interest is garbage in many cases. Shares are marked long but fails [to deliver] not reported.”
He judged that 50 to 150 percent of short interest does not appear in the biweekly reports put out by the SEC. He said it amounted to over $500 million.
One trick, he said, is, “They are bifurcating sale from delivery. One will sell shares. An affiliate in London or Hong Kong or Canada will deliver. It doesn’t show up on such ex-clearing transactions.” Ex-clearing means not going through the U.S. clearing house, the DTCC. “There are two sets of books. One goes through the NSCC [the clearing subsidiary of the DTCC] and leaves an audit trail. “I believe lot of that ex-clearing goes broker to broker outside the DTCC.”
He said, “The ex-clearing has gotten to be much more prevalent than it used to be. It eliminates the audit trail. [Other trades have] to be dealt with by auditors. They have to sign off on it. Having transparency of those fails is critical. Broker to broker is easier to conceal.”
He said dark pools did cross border trades and that, “every security that trades on the Toronto exchange affects the US.”
He noted, “I believe lot is going through the [DTCC] obligation warehouse.” It is billed as an “automated service of the NSCC that facilitates the matching of broker-to-broker ex-clearing trades and provides Members with the ability to track, manage and resolve their failed obligations in real-time.” The first part is true, but the “resolve” part is ignored by naked short sellers.
Christian called “in-house fails the stock graveyard.” He said, “The number of fails there is growing.”
He said, “The bona fide market maker exemption still exists in RegSHO,” allowing them extra days to cover shorts. But he said, “A lot of market makers are not bona fide, they are shorting funds.”
Market makers are supposed to offer to buy from and sell to all clients. And they post sale prices. Christian said, “We believe market makers use the tool for spoofing. They post a series of block offers throughout the day, but 3 minutes before close, they pull them down.”
He said, “This did not start till the late 90s, early 2000s. The DTC bought the NSCC whose sole purpose was to lend stock.” He said it sent things “haywire.”
He said, “Electronic delivery was a ripe environment for fraud.”
He said the SEC “needs to eliminate dark pools, high speed trading. Not allow shares to be lent more than once. Maybe do blockchain. Overstock has preferred shares [sold on] blockchain.”
The Justice Department doesn’t do its job
Christian said, “There are criminal statutes, rules of the SEC, that should force [naked shorting] to not exist. You shouldn’t be able to sell something you don’t own and don’t deliver.”
“We worked on Operation Bermuda short that helped convict Mark Valentine.” That investigation targeted organized crime mobsters.
“We worked with the Justice Department on chasing Thomas Badian and Andreas Badian.” They were Austrian fraudsters that cheated small companies through “death spiral financing” and lent them money to be converted into shares equal to the loan, and did naked shorting to batter the share prices.
He said, “Because that involved Refco, a huge options securities firm that went public and blew up because of connections with Bawag Bank [in Austria] allegedly connected with the mob. But the Justice Department has not prosecuted what needed to be prosecuted. A slap on the wrist.”
He said, “The prime brokers have enormous amounts of money doing a lot on their own account, not just hedge funds. They make it when you buy the stock, then they short against you with the stock you bought and lend it to others.
Synthetic shares and failures
He said, “What I’m seeing is creation of future instruments, rehypothecation instruments, putting put and call together, reverse conversion, many fancy names, ultimately culminates in dissemination of false information. They will show it to the Compliance Department.”
He said, “They create puts [options to sell] and calls [options to buy]. Or get someone to sell shares that are short but they marked them long. That nets out naked shorts to zero. Or a futures contract that never gets consummated.”
He said, “Legitimate hedging is acceptable.” Then he explained, “But subsidiaries are different stories,” He explained, “I don’t think it includes fails overseas. They show up on balance sheet of an entity in the UK.” He wondered, “How long have these fails been there? Sometimes years.”
Data that could reveal this is kept secret
Christian said, “Every issuer contracts with the DTC [the stock vault] to get services, including the daily position report of each broker. Imagine all stock of GME that Merrill Lynch holds sent to the DTC, which puts that in Cde & Co street name under their number. Deposited and redeposited every day. Having that daily position report is real important. They should be able to share that with shareholders. Let’s you compare that with what’s trading in market place.”
He said one could do that with cooperation of the stock issuer:, “In several cases in Georgia brought under the state civil racketeering RICO statute, we could figure that out with public data.”
He said, “Many times, over half of 60 or 70 companies had more votes at annual meeting than shares were issued and outstanding. That doesn’t count people who take the proxy and throw it in trash. Or naked short sellers who are not voting their shares.” He said it the result of counterfeit synthetic phantom shares the corporation did not authorize.
He said, “It’s a bigger issue today. It disturbs corporate governance.” The board owes a fiduciary duty to shareholders. But, “It gets zeroed out.”
He said, the company should do what Overstock and Taser did, figure out who is responsible and sue them. In most states, if a corporation won’t do it, shareholders can derivatively do it. They have been damaged by the dilution of their shares.
About his lawsuits
“We’ve done due diligence on over 70 companies, taken 20 companies’ cases.” He said, “We take cases on a contingency basis. It costs even at our level $7 million to prosecute a case. We need a high damage model. Typically, we represent the company and its largest shareholders.” He explained, “We need a damage model of at least $100 million. The issuer has the largest damages.”
“We have systems to identify who perpetrators are. You have to do it day by day to see distorted supply/demand curve.”
Some of his early cases were dismissed. He said, “When you’re dealing with judges, you’re dealing with people. Generally, it’s tougher for judges in New York to give us discovery than other places. State judges take more keen interest in it than federal judges. Some federal judges are exceptions, better than state judges.
He said his later cases were never tried. He said, “You have to be as strong as 8 acres of garlic in Texas. Two or three of us against 10, 20 40 lawyers. They represent a client that’s a crook.” But, he said, “The facts are so nasty they settle.
“We need to stop the rigging of the system by prime brokers.”
“It will take a massive effort by the investing public to rise up, keep their shares in cash accounts, make sure they are not lent. Make sure the big pension funds see that lending stock deteriorates their portfolio, their asset base goes down.”
Here is the video.