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Thread: hedge funds about to lose a powerful market manipulation tool ?

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    Banned Melonie's Avatar
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    Default hedge funds about to lose a powerful market manipulation tool ?

    (snip)"Short selling is a legal practice in which a brokerages allows investors to borrow a company's stock on the hope its price will drop, so they can buy shares back later at a lower price. Once the shares are purchased, they are returned to the brokerage.

    Naked short selling, which is illegal, takes place when a brokerage allows a investor to sell stock without first borrowing it. In market parlance the seller is "naked." The outcome of naked short selling is that it creates an artificially high volume of shares that are for sale, and that can drive down a company's share price.

    With naked short selling, the transaction is never truly completed because
    the short seller doesn't really possess the stock that was sold. And that means they cannot deliver the shares to buyers - which in market parlance is called a "failure to deliver," or FTD.

    Stock brokers argue that such failures to deliver can occur for a number of reasons and actually represent only a tiny fraction of the trades that take place on any given day in the stock market. And they maintain the problem corrects itself over time.

    Utah Gov. Jon Huntsman Jr. signed the naked short selling bill into law in May after a special session of the Utah Legislature. At the time he said it would make Utah a more attractive place for small and midsize companies that could be vulnerable to the predatory trading practice"(snip)"

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    Default Re: hedge funds about to lose a powerful market manipulation tool ?

    ok. i dont get it. why is this significant? its already illegal, this is just a requirement on reporting it. i would tend to doubt mainstream or large hedge funds would engage in transactions that they could not fulfill or were illegal.

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    Banned Melonie's Avatar
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    Default Re: hedge funds about to lose a powerful market manipulation tool ?

    i would tend to doubt mainstream or large hedge funds would engage in transactions that they could not fulfill or were illegal.
    knock, knock ... reality check ...



    (snip)"In all three lawsuits against the prime brokers, the accusers say Wall Street firms intentionally and routinely allowed these failures-to-deliver and engaged in a conspiracy to do so. Novastar shares are down 50% from the beginning of 2005, and last year, fails-to-deliver represented 6.5% of its outstanding shares, the investors said in the lawsuit.

    "Prime brokers are motivated to intentionally fail to deliver stocks, because this removes a core cost from their securities-lending business," the Novastar suit contends, "thus allowing them to earn more money through the charging of fees, commissions and/or interest through phantom securities transactions."

    Novastar's stock regularly shows up on daily lists maintained by the major stock exchanges, NYSE Group and Nasdaq, that tell the market which stocks have high numbers of fails-to-deliver. In fact, Novastar has been on these Reg SHO lists since they began being published in January 2005.

    Other stocks that routinely show up on the SHO lists include Martha Stewart Living Omnimedia (nyse: MSO - news - people ), NetFlix (nasdaq: NFLX - news - people ), and Overstock.com. And Fairfax.

    In its suit, Fairfax says it's looking for $6 billion in compensatory damages as well as punitive and treble damages for the defendants' "egregious misconduct."(snip)



    (snip)"But small companies are especially vulnerable because even modest trading can move the stock. Naked short selling "has got to push the price down," says James Angel, associate professor of finance at Georgetown University. He says the rate of short selling has nearly doubled in the past five years, to 36% of all trades. In the same period, assets held in hedge funds, which are active short sellers, more than doubled, to more than $1 trillion.

    Illegal naked short selling, according to Robert Shapiro, a former Under Secretary of Commerce, has cost investors $100 billion and driven 1,000 companies into the ground. Shapiro is on O'Quinn's legal team, which has brought 16 cases against hedge funds and other traders. For their part, the hedge funds say that they have done nothing illegal, that the stocks they sell short ultimately drop because the companies are not doing well.

    Papers filed in the Sedona case offer a rare glimpse into the cut-throat nature of naked short selling. Federal prosecutors, in a case that remains open against Thomas Badian but has been dropped against his brother Andreas, charge in the complaint that Andreas ordered brokers to sell Sedona shares short with "unbridled levels of aggression." After the stock had "collapsed," according to the complaint, he congratulated the brokers on a "good job" and instructed them to be "merciless" in selling the stock a day later."(snip)
    Last edited by Melonie; 08-12-2006 at 04:34 PM.

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    Default Re: hedge funds about to lose a powerful market manipulation tool ?

    i stand corrected.

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    Default Re: hedge funds about to lose a powerful market manipulation tool ?

    Another reason to never take one's company public.

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