Back in September, I wrote a seven-part series at The Intercept chronicling how former Wall Street trader Chris DiIorio, determined to figure out how he lost a small fortune on a penny stock, came to the conclusion that gigantic market-making firm Knight Capital, now known as KCG, repeatedly violated federal regulations meant to prevent abuse in what are known as “naked short sales.”
It was an explosive allegation. Naked short sales are when you sell a stock you don’t have. That’s illegal most of the time, for obvious reasons. DiIorio found evidence that KCG had illegally conducted nearly two billion dollars’ worth of them.
It was a bit of a mystery story, with two unanswered questions at the end: Was DiIorio right? And if so, why hadn’t any regulatory authority done anything about it?
One regulatory authority finally has, and its action would seem to confirm DiIorio’s suspicions.
The Financial Industry Regulatory Authority (Finra), a private self-regulatory organization, charged KCG on October 31 with thousands of violations over three years of Regulation SHO, which according to the Securities and Exchange Commission (SEC) “was established to address concerns regarding persistent failures to deliver and potentially abusive ‘naked’ short selling.
Finra further found that KCG “failed to establish and maintain a supervisory system” to comply with Regulation SHO going back to 2012, when the company was re-constituted through a merger.
“So Finra is admitting that KCG never had a system in place,” DiIorio said in an emailed statement.
Chris DiIlorio.
Photo: Matt Slaby for The Intercept
DiIorio’s reaction: “What a deterrent!”
Regulation SHO violations were central to DiIorio’s claims that KCG isolated and targeted penny stocks through naked short selling.
A short sale is a bet that a stock price will drop. Short sellers borrow stock shares from a broker and sell them into the market, hoping to return them to the borrower after buying the same number of shares back when the stock falls in value, profiting from the exchange.
But with a naked short sale, the trader doesn’t even borrow the stock. This creates artificial shares in a security, increasing supply and crippling the sale price.
Naked short selling is only legal for market makers like KCG, so that if there’s high demand for a stock, a market maker can fill orders even if they don’t have the shares immediately available. DiIorio, who began to investigate this after a penny stock he purchased was wiped out in 2006, concluded that KCG doesn’t engage in naked shorting to facilitate markets, but rather to make money for themselves by battering penny stocks.
Naked shorts cannot stay naked forever. SEC rules dictate that naked short sellers must eventually deliver shares to the buyer and close out the trade. Not doing so results in a “fail to deliver,” the securities version of an IOU. Under Regulation SHO, short sellers have to cough up the stock within one day of incurring the fail.
Finra staff reviewed four separate time periods from 2012 to 2015, spot-checking for errors. Most of the problems were found between June and July 2013, when Finra found 3,477 separate instances of KCG engaging in “a short sale for its own account without first borrowing the security,” a description of naked short selling, “while it had a fail-to-deliver position… that had not been closed out.” According to a footnote, these naked shorts were done “to facilitate a customer(s) long sale order on a riskless principal basis.”
This matches DiIorio’s explanations. “This is how KCG generates trading profits in penny stocks,” he said. “There is no such thing as riskless principal basis unless you’re doing something illegal.”
The customers facilitating KCG’s short sales by buying the stock long, DiIorio claimed, are typically high net-worth individuals operating through Swiss banks, using the trading activity as part of a scheme to launder money and evade taxes.
While this was particularly difficult for DiIorio to verify, a separate Finra disciplinary action completed just days ago against Swiss firm Credit Suisse faults the bank for failing to flag potential money laundering abuses based on “suspicious microcap stock transactions and sales of unregistered securities.” The trading at issue “followed patterns commonly associated with microcap fraud.”
A trader works at the Knight Capital Group Inc. booth on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Tuesday, Aug. 7, 2012.
Photo: Jin Lee/Bloomberg/Getty Images
In all, Finra identified 3,616 violations of Regulation SHO at KCG over the four-year period. The disciplinary action included “a censure,” a fine totaling $105,000, and the mandating of a written process to ensure future compliance with Regulation SHO within 60 days.
Oddly, it fell to Finra, an independent agency unrelated to the government, to enforce Regulation SHO — not the SEC, which implemented the rule and has oversight responsibility. Routine failures to deliver are supposed to lead to fines by the SEC, or even a ban from the securities markets. DiIorio has attempted to get the SEC interested in his claims for five years, to no avail. “The SEC outsourced this to Finra,” he said.
KCG did not announce the Finra settlement with a press release. Its most recent trading volume statement, for October, shows that the vast majority of its shares traded continue to be in the primary penny stock market exchanges, OTC Bulletin Board and OTC Market. Sophie Sohn, a spokesperson for KCG, said the company had no comment on the settlement.
Any Trump supporter should be very concerned by the views of Trump’s Adviser,
former SEC Commissioner Paul Atkins
http://trace.tennessee.edu/cgi/viewcontent.cgi?article=1118&context=transactions
Debra Wong Yang is leading contender for Trump’s SEC chair.
Her firm doesn’t think highly of Whisteblowers
http://www.gibsondunn.com/Publications/Pages/SECAwards1MillionDollarBounty-InsiderTradingAction.aspx
The result of Paul Atkins advising Trump?
Trump also is being advised by Blackstone’s Schwarzman
Not the right choice to lead a corrupt SEC
Interesting – – another Wall Street bailout is in the tube waiting for the derivatives to hit. . .
It will be warmly welcomed by Washington
The SEC authorized the DTCC to create a shadow clearing mechanism called the Obligation Warehouse so that participants like KCG could keep fails open and circumvent close out requirements of Rule 204. CLEARLY contrary to the Securities Act mandate to create a system of prompt and accurate settlement of securities transactions. The SEC fails data is for DTCC cleared trades ONLY. They know exactly the fails sitting in the non guaranteed OW. They just don’t disclose them. If Rule 204 was enforced consistently and for ALL participants, KCG would be out of business in a month.
A bi partisan issue
http://www.vanityfair.com/news/politics/2012/08/investigating-mitt-romney-offshore-accounts
And, Congress dropped the ball or intentionally punted when:
They Put White and Ceresney in the SEC together. They represented UBS,Credit Suisse, JP Morgan and others at Debevoise
Since 2007, After Levin introduced the Stop Tax Haven Abuse Act, it has never gone anywhere. Under both Dem and Rep controlled WH and Congress.
When the Panama Papers came out, Sen Wyden asked the NV Sec of State (WY,OR,DE also) what regulator/law enforcement has contacted them to investigate Shell (publicly traded and llc) activity. The NV Sec of State wrote back: NONE in the last 3 years. Wyden only asked for 3 years.
2 “Greek shipping stocks” with ALL of the activity detailed in my claims taking place real time are Newlead holdings and FreeSeas.
Newlead has a massive fraud lawsuit against it where the judge has called it a “slam dunk”. The CEO and “investor” were arrested on bribery/money laundering charges in Cyprus. The attorney for the Plaintiff in the Fraud case has included bank fraud and money laundering in her complaint. Hanover/Magna/Asher/AGS/LG etc have converted tens of millions of dollars in fraud notes to pay for mining assets that were never transferred to shareholders. Guess who was giving opinions to Newlead mgmt.? Debevoise. Then the reference to Debevoise involvement was expunged from filings. I have hard copies. Similar activity in FreeSeas where Credit Suisse got the ball rolling by “FORGIVING” a $15 million debt. Happens all the time, right? There, Greenberg Traurig has been facilitating tax evasion and money laundering. In the face of overwhelming AML red flags, the SEC and FINRA approve reverse split after reverse split and firms like KCG,Buckman Reid, and Dawson James continue to trade the stocks. Tax evasion, money laundering, manipulation (naked shorting) are a big business. Facilitated by corrupt regulators and law enforcement
The crooks are not about to give this extremely large and profitable business up
http://www.irishtimes.com/business/financial-services/ubs-leads-team-of-banks-on-blockchain-settlement-system-1.2766742
Key to the UBS block chain proposal:
“Eliminates need for third party verification”
The investing public can rest at ease knowing the SEC and FINRA will be regulating this blatant fraud.
In the article by you stated that it is illegal to sell naked shorts. But that’s not illegal as far as I know…it’s risky and not advised for most people.
The second point about Credit Suisse was rather weak due to the fact that it was very nonspecific regarding the company that you were talking about. Where those fines for that company or these your fines in general.?
Abusive naked shorting is manipulation according to the SEC. That is why Reg Sho was enacted. Compliance mandated on Jan 3 2005. Ammended since. The KCG FINRA Reg sho complaint cites a particular activity addressed in Rule 204 of Reg Sho. In fact, The SEC acknowledged a direct link between “locates and borrows” in its initial roll out in 2005. In a naked short, there are neither locates OR borrows. ANY naked shorting after Jan 3 2005 is a violation .
On Credit Suisse, My SEC and IRS Whistleblower claims ask the question: WHY do behemoth Swiss banks trade microcap shells to begin with? I suggest you read the Brown Brothers Harriman FINRA (not SEC) AML complaint. It links penny stocks, questionable foreign and domestic hedge funds, Swiss banks, and executing brokers like KCG (the biggest by far in the space). ALL of the entities are un named. WHY? Because this is the link I describe in my claims. Publicly traded shells are the vehicle of choice for moving hidden funds around the world. Tax evasion and money laundering facilitated (read the KCG Reg Sho complaint) by manipulation (abusive naked shorting).
I have a document showing Credit Suisse as a custodian customer of BBH. The SEC knew that when FINRA filed the BBH AML complaint. Chair White got 2 waivers to ensure there was no connection made between the BBH entities (likely including Credit Suisse, UBS,KCG, and the hedge funds detailed in my claims ). Simultaneous to all of this: The SEC was finalizing its Credit Suisse cross border complaint. White (and Ceresney) made sure Credit Suisse (and UBS,KCG, et al) BBH activity was not linked to their cross border business. When the SEC announced their Credit Suisse cross border complaint was filed, there was no link to penny stock money laundering and tax evasion. Also, simultaneous to the BBH/Credit Suisse/White waivers, I sent a letter to the SEC detailing an astronomical increase in KCG penny stock trading volumes that SHOULD have sent up red flags at the SEC. it did not. More White and Ceresney obstruction. Fast forward to the Credit Suisse AML complaint involving microcap shells. More evidence that Credit Suisse was involved in the activity detailed in the BBH complaint. Easily “verifiable” for regulators. Now, look at the revelations leaked in the Panama Papers. Credit Suisse, UBS,HSBC, and Rothschild/Coutts were the biggest creators of shells. Rothschild has a Reno office. WHY? because a shell llc is another layer of the money laundering and tax evasion. AND, many of the publicly traded shells are incorporated in NV for various reasons that make them the perfect tax evasion and money laundering vehicle. my claims are the missing link to all of it. HOW does hidden money get moved in and out of these shell llc’s? There is a brokerage and/ or bank account (Swiss) attached. Publicly traded shells with no real business or purpose are the perfect tax evasion/money laundering vehicle. And, as the KCG Reg Sho complaint verifies: all facilitated by KCG abusive naked shorting. It’s ALL part of the same scheme. NONE of this takes place without a willing executing BD like KCG (and others). The cross border businesses of UBS,Credit Suisse, HSBC, Rothschild are very much up and running. Right here in the US. I have “no fines”. Some readers are getting lost on my losses. I’m not complaining about my losses. My experience became the basis for my research. What I have uncovered is massive. With the help of Dave Dayen and others, this will be exposed. There are wealthy people on both sides of the political aisle benefitting from this illegal activity.
Are you familiar with Brad Birkenfeld? He is the UBS wealth banker who handed over 52,000 undeclared Swiss bank accounts to the DOJ and SEC. In addition, he detailed the Politically Exposed People (PEP) program at UBS. A major Obama and HRC donor/bundler is Robert Wolf. Former head of the UBS investment bank. The IRS was proceeding with a criminal case against UBS for their cross border activity when Obama sent Sec of State HRC to Switzerland to “negotiate” a criminal matter. Unheard of. HRC got just 4500 of the 52,000 accounts Birkenfeld gave the IRS and SEC. The rest were protected so the activity could continue and the DOJ/IRS dropped their criminal prosecution. Other UBS bankers implicated include Raoul Weil and Martin Liechti . The Current CEO of KCG is Dan Coleman who ran Equities at UBS during this time. Wolf, Coleman,Weil,Liechti, and Birkenfeld all worked together during this time. WHO was the ONLY UBS employee to go to jail over the cross border business: The fucking Whistleblower Birkenfeld. The corruption goes straight to the top. Then of course, after HRC got UBS off, the UBS donations to the Clinton Foundation and Bill speeches increased significantly. One of the issues that got me intrigued into investigating the links between Swiss banks, KCG manipulation, penny stock money laundering, hedge funds ,tax evasion/money laundering was this PEP program detailed by Birkenfeld. AND, what Birkenfeld exposed was just undeclared Swiss bank accounts. The HOW hidden money moves in and out of these accounts is what my claims detail. Hope that helps
A big part of my claims also details the accounting fraud as a result of the illegal naked shorting. First, my experience as an Institutional trader AND research Salesperson gave me the experience to expose all of this activity. I am not a CPA. But, you don’t need to be 1 if you understand financial statements. As a Research salesperson, I have gone through analyst models and financial statements line by line with institutional investors. I can certainly find my way around financial statements. Some on this board likely have neither experience. To say “I talked with my contacts at PWC” or “Investopedia says….” Is not the approach of someone with actual knowledge of the issues here. More likely, the approach of an attorney.
ANY forensic accountant will tell you: if you want to detect accounting fraud, go to the balance sheet. Even revenue recognition schemes leave a trail on the balance sheet. Think of some of the high profile accounting fraud cases (Refco,Enron) These schemes involved moving liabilities OFF the balance sheet at strategic times to avoid detection. Off balance sheet rules were implemented. Now, accounting fraud is about moving things AROUND and OFF the balance sheet (asset “sales”) in a form of a “shell game”. First, the effects of naked shorting on the KCG balance sheet. Yes, KCG reports fails in their receivable. The receivable is an asset. Around the time Rule 204 went into effect, KCG decided to go self clearing for its equity trades. Prior, they cleared through Broadcort a Div of Merrill Lynch. Former Knight CEO Tom Joyce ran Broadcort and was a perfect fit for Knight. He knew exactly what they were doing. In going self clear, a naked short fail by 1 of KCG’s customers OR the KCG market making desk could now be booked as a receivable. Both are considered “customers” of KCG Clearing.BUT, in a naked short, the seller has no intention of ever delivering a security. Is it really an asset? no. The effect is overstating assets.
When the SEC or FINRA approve a reverse split for a microcap stock, a change in the CUSIP takes place. It’s a new security with a new CUSIP. IF KCG has a naked short fail position when this happens, and the old CUSIP ceases to trade, KCG can NOT comply with close out requirements of Rule 204. The open naked short position in the old CUSIP becomes a structural liability that can not be closed out. This is exactly what describes the KCG “‘security sold not yet purchased liability”. A structural liability that can not be closed out. This is what brought Refco down as well. So, KCG naked shorts a stock down to .0001 “to facilitate a customer LONG sale” previously described. There may be hundreds of millions of shares naked shorted (fails). Once a stock gets to trip zeros, there are no bids below that. So HOW does KCG comply with Rule 204 to “close the open fail with securities of like kind and quantity”? The recent KCG Reg SHO complaint makes no reference to KCG EVER closing out its fails.To “cover” their naked short position in the open market would mean KCG driving the stock higher in a “short squeeze”. By facilitating the reverse split, the SEC and FINRA guarantee KCG doesn’t have to cover. From a P&L perspective, a stock that no longer trades (new CUSIP) is ZERO and KCG books their profit. AND the maximum profit it is. After the reverse split, the process starts all over again. However, there is an effect on the KCG balance sheet. Other “buckets” KCG can move structural fails around are “securities owned” (an asset). On the immediate heels of the SEC manufactured Aug 2012 “trading glitch” Knight sent 4000 worthless securities to JP Morgan as a collateral for an emergency financing. JP rejected the 4000 worthless securities. These were exactly what I describe here: naked short fails that no longer trade due to a CUSIP change. The ultimate emergency financing done by Blackstone,Gen Atlantic, Jefferies, Sandler O’Neil, Stiefel, Stephens was NOT collateral based. They all knew what a fraud the KCG balance sheet was as a result of the naked shorting. The ultimate deal was a deeply discounted convert ($1.50) when the stock had already been crushed to $3. Despite claiming to have a “highly liquid balance sheet” KCG had to raise the entire amount of the “glitch” loss.
In August 2011, I alerted the SEC that KCG was insolvent as a result of the illegal naked shorting on the balance sheet. Their response: manufacture a “trading glitch”. The SEC and FINRA have been doubling down on the fraud ever since. So that the tax evasion/money laundering/naked shorting can continue today. The SEC isn’t just corrupt. The SEC is HOPELESSLY corrupt. The SEC facilitated KCG moving $1.4 billion in fails off of its balance sheet with the “sale” (no terms. no 8k) of its FCM business to Wedbush. This is why former CFO Bisgay resigned immediately after disclosing the assets and liabilities “held for sale” in the Sep 2014 10Q with just 2 weeks left in the quarter. He did not certify the financials for the period ending Sep 30, 2014. Yes, this is extensive. Massive. But the amounts of hidden money being moved around in this scheme are MASSIVE. In the BBH AML complaint alone $850 million. Other penny stock frauds have run BILLIONS. This is far more efficient than stuffing diamonds into tubes of tooth paste (Credit Suisse).
For the lawyers on this board
http://www.cbsnews.com/news/anonymous-inc-60-minutes-steve-kroft-investigation/
Actually when a stock does a reverse stock split the old CUSIP becomes a position in the new CUSIP with the position size adjusted in accordance with the formula of the split. The old position does not just go away to be booked as profit or loss depending on your position. Anyone working back office at broker could tell you that.
A reverse split creates a new CUSIP. A new security. EXACTLY the same as trying to cover a short in GOOG with AAPL. The old CUSIP ceases to trade. You can’t cover a naked short in a security that no longer trades. You need to stop reading Investopedia. This is why JP Morgan rejected 4000 worthless (unreadable)securities Knight/KCG sent as collateral.
An example:
http://www.prnewswire.com/news-releases/credit-suisse-ag-announces-the-reverse-split-of-its-tvix-etn-300308014.html
You can’t close out a fail (naked short) in CUSIP 2539T423 with CUSIP 22539T274
It is NOT a security of “like kind”
What you’re saying: the open naked short fail becomes a cusip that didn’t exist when the naked short was executed. So, now you’re a back office “expert” too?
Not much expertise required. Seen enough reverse splits processed to know how they work. Guess you don’t. Old CUSIP shares are exchanged for shares with a new CUSIP with the qty adjusted for whatever the split factor was….it happens dozens of times a month at every clearing firm on the Street. Sometimes can get held up with OTCBB stock stocks since many of them have transfer agents that can take some days or even weeks to deliver the post-split shares.
A “FAIL”/”FAILED” trade is a trade that has not settled. You’re saying the DTCC is issuing new securities where settlement has not occurred?
DTCC is going to facilitate the CUSIP swaps for securities undergoing stock splits. The Fail status of specific trades is going to be a separate issue than the status of the whole float of a security.
Also wanted to clarify an earlier comment that sounds like it was interpreted to mean I thought the CUSIP exchange satisfied or resolved the locate issue for a potential naked short or a regular short. The CUSIP exchange merely converts the short position from 1 liability to another.
I’ll ask the question again:
Are you saying the DTCC is issuing new securities when settlement in the old security has not occurred?
AND
Where the securities did not originally exist under that authorized by the issuer ?
The key to what you’re missing: “FAIL”
Thank you for bringing up CrookdClintonObama in this. Bc this is what the 2016 election was about. Imagine the power of a Potusa who does not order,his own appointee to use secure communications for iver four years? Not knowing, no in on it and using a pseudo.
It was wellwxplained. Why SenWarren gets nowhere in talking “going after the banks crimes” when PresO and SosCrookdClinton are in charge. The us banks have no care for the us, it is just a piece of globe to profit from!
All this is orchestrated by Bill, only he has the imprimatur to organize all this.
Yea, the “open bordes would be so good” is already on place, as you describe.
CC+o are the three musketeers.
Clintonemail.com to talk to criminals.Indeed!
Any recommendations for who Trump should appoint to the SEC?
Atkins would be a disaster. He’s been consulting some of the crooks. He thinks Whistleblower rules should be amended to insiders only and internal reporting first. Ask those Wells Fargo insiders how that worked out for them: they were fired. Harry Markopolos wasn’t a Madoff insider either. Neither were the whistleblowers Dave cited in Chain of Title. I’m not a KCG or UBS insider either. Who’s going to blow the whistle on an unaccountable and corrupt FINRA or SEC? Congress? Congress put Mary Jo White in as Chair and her side kick at Debevoise (Ceresney) as Head of Enforcement. They represented the same firms at Debevoise and Congress didn’t see any potential for corruption? And, on another note, FINRA needs to be abolished. It is NOT an effective deterrent. a name? Barofsky maybe?
Amen!
It is Friday…….
Mary Jo and Andy Ceresney DO see eye to eye in more ways than 1.
Cheers!
Chatter
Ask the KCG pumpers aka Sell Side analysts
Rich Repetto Sandler O’Neil
Patrick O’Shaughnessy Raymond James
Ken Hill Barclays
how they’re modeling KCG penny stock share volumes.
They aren’t. 1 trillion shares+ and 85% of KCG equity mm share volumes omitted from Sell Side Research reports. KCG/Coleman intentionally mislead Analysts and investors. Sell Side doesn’t ask questions. Guess who gets the KCG buyback orders?
If the KCG penny stock share volumes were ever affirmatively disclosed in Sell Side research reports, there wouldn’t be a legitimate Institution owning KCG. So, KCG commits blatant fraud in omitting material facts and the Street goes along with it.
whoa.
i believe that would add up to a lot more than a $105k fine.
Maybe I’m missing something here, but unless you love capitalism, who gives a damn about all this crap? Let the capitalists eat each other as far as I’m concerned.
it’s not that simple.
KCG clients can trade in any stock on any exchange.
the fail-to-cover policy is rampid and i do not believe that other brokerages would be any more demanding of KCG than they are of their own wealthy clients who do the same thing.
Naked shorting really is a conspiratorial enterprise. Members only.
KCG team up with their #1 major investor, Jefferies Group, to beat down stocks working as a team. This is/has been happening in the Chinese Solar sector, including names like Renesola, JA Solar and Jinko Solar. All these trade on NYSE or Nasdaq.
I was told 2nd hand via Citadel (Renesola’s current NYSE DMM), that KCG + Jefferies group have been the two biggest trading houses trading Renesola stock since August 2016. In that time frame, they have wiped close to 50% off the market cap, driving the stock below $1.
The way I see them also manipulating the trade is by delibretley keeping the lit market bid illiquid, driving the stock down and then using dark pools to pass back shares (on the lows) without raising the quoted price. It’s not uncommon to see buy orders as large as 50k shares being passed back on a dark pool (NDD on the consolidated tape) without the stock budging 0.5%, and yet i’ve seen 30 shares drop the share price +3%.
They target small-cap stocks on major exchanges too, just saying.
“the two biggest trading houses trading Renesola stock since August 2016. ”
By this i mean they have been the two MOST ACTIVE trading houses trading the stock.
the trading in the markets are primarily used for price setting. Not really for trading between parties. Because once the price is set, the houses just meter the trades within a narrow range to vacuum up profits on the NAKED UNCOVERED OPTIONS – which i believe is the icing on their cake.
To recap this for the Capitalism 101 quiz at the end of the week:
For the government to set up a printing press and just run off a bunch of money and send everyone an envelope with $1000 each month would be wrong. It would destroy the crucial class distinction between rich and poor (i.e. fear) and collapse the economy.
For a private company to set up a printing press and just run off a bunch of money is a really good business strategy. It is important to offer this privilege only to the very wealthy so that the wealthy get wealthier so that there can be more clarity on who is to be protected vs. who is to be sacrificed to Huitzlopochtli. This is the fundamental basis of capitalism and it’s a great thing, but we do have laws and taxes in theory, and so the company can, every few years, be asked to pay a nominal fee, however degrading that may be for one of their high stature.
https://www.sec.gov/investor/pubs/regsho.htm
It seems that Naked Short selling wasn’t illegal when Dilorio lost his money. Although, market manipulation has always been illegal, it’s just that KCG wasn’t technically breaking a Short Selling law in 2006 because it was not in place yet.
And the finra complaint shows KCG in violation of Reg SHO AFTER it was implemented. My personal experience was the basis of my research that shows KCG and UBS were/are in violation today. Finra just confirmed that with KCG. My SEC and IRS TCR’s detail dozens of stocks with the same red flags I personally experienced. My information is “independent and first hand knowledge”. Funny you bring up the SEC claims of “no illegal naked shorting”. First, the finra complaint blows that out of the water. Second, I filed a FOIA with POGO to get fails data in dozens of stocks in my claims. The SEC response: see our website. The SEC fails data is for dtcc cleared trades ONLY. Per my claims, KCG and UBS regularly traded billions of shares of penny stocks AFTER the dtcc put a Chill or lock on the stock. Not only did this suspend dtcc service (ex clearing) KCG and UBS ignored blatant AML eed flags in continuing to trade them. They did this because they had open naked short positions. Pulling a market is easy. So is filing a SAR. They did neither because they kept trading the stocks. Suggest you research the SEC approved “Obligation Warehouse”. Just what it sounds like. Ex clearing fails sit, sit, and sit some more. Set up by the SEC as a Titanic sized circumvention of Rule 204 close out requirements. The SEC knows exactly the fails sitting in the OW. They don’t disclose them. Giving the appearance there is no abusive naked shorting
So, the point of my post was that Mr. Dayen’s opening paragraph stated you had determined your losses due to illegal behavior in violation of Naking Shorting rules.
But those rule were not in place in 2006 when your losses occurred.
This is the opening paragraph to the story:
But the rule regarding Naked Shorting was enacted in 2008. So, how did Knight Capital break a rule this rule in 2006 when your losses occurred?
This is rhetorical.
But my point is that your losses in 2006 weren’t from Naked Shorting violations of a rule broken by Knight (which didn’t exist at the time). I believe your personal losses to be from stock manipulation by Adrian Stone, his lawyer and possibly others.
Actually, Rule 203 went into effect in 2004. The SEC acknowledged the link between locate and delivery. There are no locates with a naked short. Rule 204 (close out requirements for fails) went into effect in 2008. After my personal experience. Same time the SEC created the OW and KCG went self clear. Hope that helps
My apologies: COMPLIANCE with Reg sho began on Jan 3 2005. Ammended after. Pilot prior.
So, looks like Knight possibly had two exceptions to complying with all aspects of SHO.
1. Granfather clause (eventually eliminated in 2007 after your losses) and
2. Market Maker exception. Not sure if this apply, but sounds like it might. and this was eliminated in 2008. Again, after your losses.
So, it would seem that even though SEC knew there were problems with these sorts of transactions, they (the SEC) were actually addressing these issues in these years.
Again, this is suspicion, but not proof.
I apologize for typing too fast for you.
Final release of Reg Sho. Mandatory compliance Jan 3 2005
https://www.sec.gov/rules/final/34-50103.htm
REQUIRES locates before effecting a short sale. Once again, there are no locates with a naked short. A violation of the rule
Grandfather clause and its elimination. IF a naked short was initiated after Jan 3 2005, it was a violation of the locate/borrow rules even before the grandfather clause was eliminated.
Interesting story, Mr Dayen,
I thought FINRA was an elite lobbying wing.
Your story is exponentially more effective than the cost of the fine to Knight’s daily value.
I feel better knowing it won’t likely happen again.
Won’t Mr D be able to collect some $ if the IRS goes after them for tax evasion/fraud?
When I was investigating penny stock pump & dumps at the SEC ten years ago, Knight was one of three main players enabling the promoters to carry out their blatant schemes – often hosting the trading accounts of the boiler room operators. Look into the original owners of Knight – you have convicted felons and many-times-banned stock fraudsters. The only reason Knight is in existence is that senior officials at the SEC and NASD were bribed to allow it. I would love for Knight to sue me for defamation, because the ensuing discovery process would send many of their officers and many SEC former officials to prison.
Hahah!! What a perfect post.
Classic
Good post.
yep.
the best route to being promoted on wallstreet is to do a stretch.
Great piece as usual David. Going forward you might want to indicate in parenthesis or quick definitions what a market maker is as opposed to an investor (or similar terms). You’ll make your pieces more potable or digestible to the lay person.
Just a thought.
Cheers :)
True, they didn’t disclose in their latest PR release, but they did disclose this in their last 10Q. See below.
Pg 39.
https://www.sec.gov/Archives/edgar/data/1569391/000156939116000029/kcg0930201610q.htm
And since the fine was $105,000, this wouldn’t be material enough for them to release an 8-K filing.
INGN went to SNY
now there is a family in utah, all of them with li-fraumeni
and pbs reports that they are receiving experimental treatment from some new company doing the same as INGN (defunct)
i am not able to follow thru on this but i cannot imagine that this new company is making claims that INGN could not and that SNY would not object unless they started a new sub.
it is said that SNY operatives shorted INGN into oblibion
6 Billion dollars a day in NSS on the market and finra charges less than $30 A violation.
NSS is one of, if not the. biggest f leasing of the American public on Wall Street.
If you really want to know the details you should read http://www.deepcapture.com. Lots of great stuff there
DDayen: CDelorio did not lose $1Million+ because he never had it in his possesion or paid that mich out to begin with.
CD lost $100,000 or so.
He will take a CapitalGains Loss and will deduct that so he will not pay less taxes than if he had left it in a closet shelf box.
The US taxpayer can fill in for him.
If he had walked down to his local CreditUnion or such, he would have had to settle for 2%- 1.5%/annum like the rest of us poor n;-), he would have made a out $20,000 and had to pay taxes on that income.
Then Colorado has -5% state income tax rate.
So it goes.
FYI – naked short selling not only made criminal schemesters a whole lot of money, NSS was used as a weapon to destroy upstart pharmas from competing with big pharma. It works like this.
Doctors, the public and small funds invest in say, “little phara upstart” ticker LPU. The ipo of LPU gets a couple hundred million for operations. The company works for 5 years to develop a drug – looks really good. Now they have to do drug trials – another 5 years but they have already burned thru $180M and need to raise more money. Having seen how promising the drug could be (before the trials) a big pharma co (ie ticker ABP) decides LPU is a threat to their existing drug. So ABP contracts with an organisation to crush LPU by selling selling selling selling until the stock is under $3 a share. Needing to sell shares to raise money, LPU would need to authorise more shares than it had in reserve to sell and would be forced to dilute. Worse, it’s price share would prohibit big money funds from buying in. Now ABP enters with a partnership deal for LPU. Long story short, the deal is a lien against the drug and ABP drives LPU into bankruptcy and ABP gets the drug for a pittance.
And that’s the ballgame.
Thanks for good short explanation.
sure. i forgot to include the $$$ incentive benefit. The naked shorters group cashes in when LPU files bankrutcy. The stock gets delisted and the need to cover is 0, they never have to buy shares back to cover. Worst case, they .005 per share.
Yepper$$$$
Everybody ignores the law and does the naked shorts thing.
The real scandal with Knight Capital has nothing to do with naked shorts and everything to do with the fraud that is high-frequency trading. The distortion in the markets caused by the ETF bubble and the related explosion in high-frequency trading should be the focus of your ire.
I honestly could care less that some penny stock trader got fleeced. if you dally in the open water, you can’t be surprised when you happen upon a shark that eats you lunch.
May 2005, you have $100,000 to buy $0.03/1 share = ought 3,33,333.33 shares, or 3.3million shares and not 3.7million shares.
3.7 million shares @ $0.03/1 share costs $111,000.00.
???
March 2006 ReverseMerger occurs with the BestRateTravel.
So this gives one half of 3.33 or 3.7 million shares or 1.66 or 1.85 million shares.
Price per share is around $3.50.
116.667 % profit. Nothing to spit at!
Twomonths later, May 2006, share value “plummets” to $0.06/1share.
$99,999.96 to $111,000.00 value.
Not sure how many shares.
Bc of YearLockUp delay, the value may have gone further.
If any fees charged, end value is even less.
This is ANYTHING but a vindication of Mr. Diliorio’s personal losses. The fact that KCG engaged in Naked Shorts is not conclusive in explaining his personal losses.
In fact, I have posted VAST amounts of evidence which you have completely seemed to ignore regarding specifically those companies and person involved in Mr. Dilorio’s exact transactions.
I have provided in your comments section the following directly related to Mr. Dilorio’s investment.
1. I have shown how Adrian Stone had open several bogus companies that ALL had bogus articles of incorporation at the Florida board of corporations.
2. That all of the listed addresses of these fictitious companies had physical addresses that were either the same exact virtual office (h/t Doug Salzmann), empty lots, the middle of a road or some other non-believable location.
3. The lawyers involved in those very same companies were actually tried, convicted and sent to prison for investor fraud un-related to Mr. Dilorio’s personal case, and NOT Naked Short selling.
It’s actually stunning that you seem to have not even looked at any of the other evidence presented and still continue on this line of reporting when in fact so much contradicts Dilorio’s premise of his losing his money by KCG activity and NOT be a normal, everyday swindle from a criminal like Stone.
Amazing tunnel vision you have on this.
Assuming everything you say is correct and Mr. Stones losses are unrelated to Knight Capitals trading, isn’t there still ample meat on the bone regarding confirmed/sanctioned illegal behavior by Knight Capital to suggest that the remedy of $105K w/o admission of guilt is woefully inadequate and Mr. Stone more right than wrong? Knights behavior was a direct violation of a SEC rule and should necessarily fall under the purview of the SEC and warrant an action from that agency? I found the series well researched, even-handed, as much as one can be while giving a voice to someone with an axe to grind, and the overall argument pretty darn compelling.
The article does’t give the satisfaction of Mr. Stone being vindicated regarding the exact reason for his loss, but the settlement and the violations that prompted it certainly confirm that he wasn’t just blowing smoke. He did his homework, made much more difficult w/o agency support, and shed light directly on a specific problem spot. He wasn’t just shoot’in from the hip.
I think we should applaud the Mr. Stone and David Dayen for work well done. I hope there’s now enough legal ammo – precedent from FINRA’s action – for Mr. Stone to press forward regarding restitution. Unfortunately, after seeing that slap on the wrist for Knight Capital he shouldn’t be getting his hopes up.
Oops! Caffeine must be sizzling the ‘ol synapses today.
Substitute references to Mr.Stone with ……… Mr.DiIorio
No worries….happens to all. ;)
Look, I have no problem with an investigation and identifying Naked Shorting and that led to a fine, albeit a pittance of a fine.
But this was clearly NOT the reason why Dilorio lost his money. Kudos for identifying Naked Short selling, but both missed the boat about the actual reason for the losses.
If you check my posts from the September stories, you will find all the links and evidence proving my statement above.
But I think its somewhat disingenuous for a person who calls himself an ‘investigative reporter’ to actually ignore real, identifiable and verifiable facts presented to him that call into question the very premise of the articles that were written.
Also, one of the other premises of the articles was that Knight Capital was hiding their Aged Fails and that this was necessary to conduct or a result in their illegal activity of Naked Short selling.
However, a simple reading of Knight Capital’s 10Ks filed with the SEC produced the disclosure. Knight capital had NOT attempted to hide their aged fails.
I went through every 10-K filed since the year Dilorio lost his money and found EVERY disclosure by Knight.
Here is my post.
https://theintercept.com/2016/09/25/calling-the-sec/?comments=1#comment-287370
This was also debunked by me regarding Dilorio’s claim.
Actually, rule 204 violations detailed by FINRA and not the SEC substantiate ALL of ny claims. In 2014, the SEC was “negotiating” with Wedbush to settle a market access complaint involving penny stocks. Simultaneously, KCG announced it was selling its FCM business. Knight bought this FCM business from 204 violator Penson 2 1/2 years prior for just $5 mil. KCG announced they were “selling” this business to Wedbush in 3q 2014. No terms were disclosed. No 8k. KCG booked $680 mil in assets and $680 mil in liabilities as “held for sale” related to the sale to Wedbush. Almost $1.4 billion in leverage moved off the KCG balance sheet. No terms. No 8k. This was most certainly material. And, $1.4 bil in leverage SHOULD generate material revenue. Just days after announcing this “sale” the KCG CFO abruptly resigned with 2 weeks left in the quarter. He did NOT certify those financials. These were aged fails on their balance sheet that could not be closed out. The SEC facilitated moving them to Wedbush. Fast forward to 2 quarters ago. KCG reported a sequential increase in its receivable of $660 million. More than 100% increase. Huge red flag. Somewhere in 5-7$ in book value increase. Fraud that only goes un noticed by a corrupt SEC
Thanks for your comment, Chris. With regards to the sale to Wedbush, KCG did disclose this sales in their 10Q dated September 30, 2014. Here is the brief summary.
Generally, a contract like this would have been reviewed by auditors and if found material, would actually post that contract as an exhibit under Item 10 for 8K filings and attach it to the 10Q filed.
Understandably, there is little details as you highlite, but this is not any indication of nefarious activity. I’ve written documents exactly like this for 5 years and this is typical disclosure language.
Yes, it’s not very telling, I agree. But it’s also not conclusive of illegal activity.
Here is the link.
https://www.sec.gov/Archives/edgar/data/1569391/000156939114000013/kcg2014093010-q.htm
Company’s choose various ways to disclose things. Sometimes, they bury within a document like the 10Q or 10K or sometimes in an irrelevant 8K filing that has nothing to do with any of the other items filed on that 8K.
It’s sneaky, I agree. But not illegal.
I’ll try typing slower still. Upon the commencement of marketing the FCM business, accounting rules dictate KCG identify the assets and liabilities associated with the FCM business in their Q/K. KCG did that. Upon the consummation of the actual sale, KCG is required to file an 8k IF it is a “Material” event.
No 8k was filed. So, KCG is saying that the business associated with almost $1.4 billion in leverage was NOT “material”. Now, that is interesting. ANY business with $1.4 billion in leverage SHOULD be a “material” business. Fetching a “material” selling price. UNLESS of course this leverage had nothing to do with the FCM business. FAILS. That’s why terms weren’t disclosed. That’s why there wasn’t an 8k . This “leverage” had nothing to do with an FCM business. Quite the admission. 2 separate issues. Here, KCG is admitting that the “sale” of the FCM business to Wedbush was just a vehicle to move fails.
Lol, you needn’t type slower. I understand perfectly.
1. SEC rules are defined how they are defined. In this case, the sale to FCM of $680M worth of assets was NOT material because it was not greater than 10% of KCG assets. So, stop saying it was material. What you think is material is not what companies have to report by.
2. The rule is not based on leverage. You do NOT add assets + liabilities to determine materiality. This is simple not applicable to anything with regards to financial reporting disclosures under Reg S-K or Reg S-X.
3. I gave you the exact applicable accounting rule.
4. KCG was not required to file an 8k per the SEC rule in item #1 above. $680M / $7,662M of total Q3 assets = ~9%. The rule is that simple. Because this simple threshold was not met, KCG was not required to make any further disclosures regarding this sale of assets regardless of what anyone thinks.
KCG did nothing wrong in disclosing the sale of these assets to FCM.
Moving $1.4 billion in leverage off the balance sheet is material. Even by SEC standards. You also mention “risk disclosures”. Some regulatory disclosures are boiler plate. Here’s a couple you missed:
Nowhere does KCG AFFIRMATIVELY disclose its very high concentration (85% of equity mm share volumes) in Nov 2016 of high AML risk penny stocks. Nor dles any Sell side firm even have these share volumes in their models. AND KCG doesn’t affirmatively disclose these share volumes and their AML risk in any investor presentation. WHY? Because the next question institutional investor would ask is the same thing: WHY?
KCG never AFFIRMATIVELY disclosed the Manning lawsuit. KCG, UBS et al appealed this “immaterial” lawsuit all the way to the SCOTUS and loss 8-0.
FINRA just affirmed that suit as well. KCG
I agree it’s boilerplate. But all the activity you mention in this post is from 2014-2016, correct?
If so, how does that begin to explain your 2006 losses?
It’s indicative of current bad behavior and sounds very illegal to me…in 2014-2016.
But that has absolutely nothing to do with your personal losses in 2006.
And yes, I understand that you will now say they engaged in the same activity in 2006 that led to your losses.
But where’s the proof that this activity was a direct cause of your losses?
It’s more likely that the scenario I have put forth is more probable. The evidence I have posted is more directly related to your personal losses than the speculation that has been put forth by these articles. (with respects ONLY to your losses, nothing else)
So, I just checked with my contact at PWC. The disclosure rule on divestiture of investments is this:
So, the assets disposed of for FCM were $0.7M. this is only 8% of total assets at Q3 ’14. This is why you don’t see the contract or any further disclosure. Not required.
http://www.leaprate.com/2014/12/kcg-holdings-announces-kcg-futures-its-fcm-sold-to-wedbush-securities/
From PWC
http://www.pwc.com/us/en/cfodirect/assets/pdf/dataline/dataline-2014-08-discontinued-operations.pdf
IF they listed them as held for sale which you correctly point out, then according to the same PWc,
“A shift that will have a MAJOR effect on the operations”
Yet, when it was sold, all of a sudden it’s not so “major”.
Keep up the good work
I missed this 1.
per the 3q 2014 10q you referenced, pg 18 and following
4. DISCONTINUED OPERATIONS and assets and liabilities Held for sale
the FCM business
Pwc guidance on discontinued operations and assets held for sale
http://www.pwc.com/us/en/cfodirect/assets/pdf/dataline/dataline-2014-08-discontinued-operations.pdf
Must be a major business and or shift in direction to classify as “held for sale”
Yet, when it was sold, no 8k because KCG determined the sale wasn’t “material”. This is what happens when you commit as much fraud as KCG has: you get caught in a lie. The FCM business was determined to be material enough to comply with accounting rules disclosures. But, not “material” enough to file an 8k on the sale. This is why CFO Bisgay resigned with 2 weeks left in the quarter. He wasn’t about to put his signature on these financials. CEO Coleman did.
Thanks for the guidance. I now understand the source of why you are saying they are deceptive. I see you question now as why was this transaction accounted for and presented as Held-For-Sale, but Mgt found it was not a major shift in business.
This accounting guidance was issued April, 2014 to be implemented by orgs with fiscal years ending after 12/31/15 but early adoption was allowed.
KCG did adopt early. They say as much in the Q3 10Q.
Under the new guidance, KCG was NOT required to present this transaction as discontinued operations. This guidance by the SEC created a higher threshold for companies to present as discontinued operations…ie…the SEC wanted to reduce reporting burden upon companies. So, KCG early adopted and actually did not have to disclose separately on the balance sheet as can be seen in Q3 10Q. Yet, they did.
So, they were actually more forthcoming (it seems) that what they were required to do. That is one way to look at it.
Rules are minimums, not maximums. The PWC presentation you posted also does clearly state in some sections that first year adoption would create some disconnects or reporting issues for companies who adopted early.
Another explanation as to why this disconnect may be appearing is more likely that there is another rule or an exception or other guidance that is working in conjunction with this guidance that allows for them to present the assets for sales as Held-For-Sale.
They actually gave investors MORE information that what was required of them, so I don’t really see why that is deceptive or wrong. More information to investors is always suggested by the SEC.
KCG is disclosing “MORE”, not less. That’s a good 1.
Here’s the KCG presentation to investors at JP Morgan on 11/20/2016
https://www.sec.gov/Archives/edgar/data/1569391/000119312516780209/d302562dex991.htm
Any affirmative risk disclosures in generating 85% of their equity market making share volumes from high AML risk penny stocks? If KCG is so proud of the fact they trade more than 1 TRILLION shares of publicly traded shells, why don’t they disclose that affirmatively to investors?
As for the balance sheet, yes BOTH assets and liabilities are leverage. As I detailed to the SEC and IRS, increasing LEVERAGE with no corresponding increase in revenue is a huge accounting fraud red flag. The issue with the inconsistency in the FCM disclosures is fraud. They disclosed the leverage of the FCM business when they initiated marketing the sale. But when it came to disclosing the actual sale, somehow $1.4 billion in leverage wasn’t generating a “material” revenue stream to file an 8k. The SEC facilitated KCG moving $1.4 billion in fails off its balance sheet with the “sale” of the FCM business to Wedbush. This was done to avoid discovery in the Manning case.
https://www.supremecourt.gov/opinions/15pdf/14-1132_4g15.pdf
Manning won the KCG,UBS et al appeal to the SCOTUS in an 8-0 decision.
So, if the KCG FCM futures business was in fact a “leading independent futures broker” as CEO Coleman claimed, then the selling price would have been material enough for an 8k.
Look, Chris….by definition, neither of us in full set of facts and circumstances surrounding the sale to FCM of the KCG assets, right? The contract was not disclosed. I agree, a company would never voluntarily choose to disclose ‘more’ over the option of ‘less’.
Therefore, it’s pure speculation on both of us with regards as to how and why they reported the sales under the discontinued operations accounting treatment you provided.
That being said, there are several other explanations that can, and most likely do, account for the reason as to why it was disclosed in this manner. As I previously mentioned, there is other guidance at work here. It’s not simply a matter of picking one guidance and coming to a speculative conclusion as you have done here.
Also PWC noted this as well in the literature you provided.
The assets that were sold were part of an identified segment in the segment reporting sections of their Qs and Ks. See their Global Executive Services under footnote 21.
So, even though there may not have been a “major strategic shift”, PWC may have felt that they should account for and disclose according to these rules.
Your background was identified as broker, so I’m assuming you are not an accountant, nor do you have a CPA.
I’d like to caution you on making such huge generalizations with respects to companies motives by cherry-picking out one piece of accounting guidance and determining on your own that something illegal or nefarious is going on.
The fact that KCG was sued and lost in a Supreme Court ruling proves they were guilty of Naked Shorts, but doesn’t really say anything regarding this particular sale of assets.
Companies buy and liquidate assets and part of whatever changes are going on. How you link these two events together is somewhat of a mystery although it seems highly speculative.
Please, keep your “cautionary” comments. Idle threats don’t intimidate me. This is not a “generalization” as you claim. This is specific to the fraud committed by KCG and facilitated by the corrupt SEC. But, it’s just 1 of many.
The ” industry leading FCM business” was material enough to disclose as held for sale in financials. But when it was sold, somehow the business/sale price wasn’t so material. There is more SEC /FINRA facilitated fraud taking place at KCG than can be detailed here. I welcome a lawsuit with open arms. Discovery ( in STATE court) will be a hoot.
Slow down, Champ. No one’s intimidating you.
It’s somewhat sad that you would reject reasonable advise. Merely asking someone to not jump to conclusions (especially when dealing with a subject matter not specialized in) by cherry-picking out one statement and drawing a conclusion just make good common sense.
After all, you wouldn’t read one line out of a medical journal and thereby opine on how a physician medically treated a patient, would you?
Accounting guidance is complex and much of it interacts with each other. This is why PWC and the other Big 4 auditors have a national office staffed and do nothing but spend all day researching this stuff in order to write the sort of document you posted.
So, how much credibility do you have by coming along with ZERO knowledge, training and background in accounting to tell the world that a fraud has been committed because you looked one one piece of accounting literature and one public filing of a company?
Answer: You have very little. Asking you to exercise caution is not a threat. It’s just good advise that you seem to not want or think you don’t need.
But I have been an accounting professional for over 20 years and done SEC reporting for at least 5 years putting together documents EXACTLY like the ones discussed here. And I can tell you from 20 years of accounting experience and dealing with auditors, that you cannot simply look at one piece of accounting literature and draw a conclusion like a fraud has been committed.
It’s just silly on its very face.
FYI,
The proper term for investigating a financial fraud is called ‘Forensic Accounting’. And I’m pretty sure that you didn’t do this with respects to the sale of KCG assets to FCM. So, you’re hardly in a position to declare that a fraud has occurred.
http://www.investopedia.com/terms/f/forensicaccounting.asp
“Silly” just like the kcg finra complaint. Or the credit suisse aml complaint. Or the bbh complaint. Now, “silly” on its face is the “glitch”. Accounting expert you say? For kcg? Is that why you made the knowingly false accusation that there was. No locate/ borrow. rule in 2006? What’s next? Dan Coleman didn’t run equities at ubs during the cross border hey day? Or maybe the Obligation warehouse doesn’t exist? Kcg is a criminal enterprise as defined by ny and nj rico law. That’s why they appealed manning to the scotus and lost 8-0. Finra says they weren’t closing out fails. Abusive naked shorting for their own account. Manipulation. That $1.4 bil in fcm leverage is actually fails as a result of the fails. Thats why there was no 8k. There was no selling price for the business. SEC facilitated fraud. Just like the “glitch”
“The Rule regarding naked shorting was enacted in 2008″
A sad case of stupidity. Expert you say? You definitely would make a good KCG employee. Did Investopedia get it wrong or was that just your stupidity?
Like your blatantly false statement regarding Locate/Borrow requirements, why don’t you tell everyone when the SEC charged Offill? btw, The Broncos won the Last Super Bowl. lol.
Galactus,
You and I might be alone on this, but I think Dayen got sold a bill of goods on this story. Just reading this thread where the ins and outs of Knight offloading its lame FCM to Wedbush serves proof of Dilorios penny stock allegations is weird. Any proof ANY of the sold assets/liabilities were OTCBB stocks? Factor in the wild ass ignorance of Dayen and Dilorio consistently conflating Knight’s OTCBB share volumes and revenue/% of business as being the same. Its hyperbole, but 1 trillion in penny stock shares and $4 will get you some Starbucks. The notional value of Knight’s OTCBB business is peanuts compared to its NYSE/NSDQ volumes.
Even the most recent installment of this series trumpeting Knights FINRA fine for a smattering of naked shorts and fails-to deliver is bogus. Over 4 years Knight would have done millions, 10s of millions of trades and some thousand of Reg SHO violations is a rounding error in that order flow. Instead of a handful of vioalations FINRA would have found a vast number more for the story to be real. BTW, read the FINRA finding of fact, there is no mention that any of these trades in question were in OTCBB stocks….could have very well have been NASDAQ or NYSE stocks.
It should be noted that the market making exemption to Reg SHO is only for filling customer buy orders. KCG could not use the exemption to hit the bid and lower the price. In OTCBB stocks with low floats KCG would have been filling a customer buy order as FINRA notes. BTW, customers is a misnomer since KCG’s clients are the broker-dealers like Ameritrade and Fidelity who send their customers order to Knight to be filled. One can’t actually open an account at Knight and deposit shares and money. While on the subject for someone to say a “riskless principal basis” is some made up word to conceal a criminal plot is profoundly ignorant. Its a standard industry and regulatory term.
http://www.investopedia.com/terms/r/risklessprincipal.asp
Look the OTCBB space is rich with scams, fraud, shenanigans and BS, but this series has focused on a minor sideshow.
Yup, finra files complaints all the time when there’s no violation (mm exemption). The “shenanigans” in the otc equity is the side show for the much bigger tax evasion and money laundering. That Credit Suisse aml complaint was made up too. Why do Credit Suisse and UBS trade these stocks? Read the BBH aml complaint. Not the fairy tale you claim it is.
The UBS fine and the Knight fine are for two totally separate things. UBS got fined for not having a process or adequate processs to make sure they were properly vetting the certificates customers were depositing in their accounts to sell. You are right there are tons cases of fake certs getting deposited and then sold. The banks like UBS who allow it to happen are normally the ones left holding the bag if they let the customer wire out the funds before the scam is uncovered. Its an AML issue, but a larger fraud issue. UBS is not willingly let it happen. I have been at a firm that got scammed this way and a ton of money was lost and people got fired.
Knight is accused of shorting shares for customer orders that they did not buy back or locate within allowable timeframes. What FINRA found is totally consistent with a firm whose process for complying with Reg SHO has some cracks in it..for the # of violations found as percent of orders handled Knight’s system looks pretty good. Since most Pink sheet stocks are probably scame and the asset class as a whole has a negative expected return historically Knight has probably made the decision that shorting these shares is a safe bet. They can just close out the borrow when they allow retail clients to sell their shares once these BS companies go Chilled at DTCC.
“two separate things” you say thank you Captain Obvious. But, the AML complaint referenced in the story. Not UBS. Why is a giant Suisse Bank accepting deposits of penny stock certs? Why did UBS trade billions of shares of publicly traded OTC shells? The Panama Papers leak revealed the top creators of shell entities: UBS, Credit Suisse, HSBC, Rothschild/Coutts.
Rothschild has a Reno office . For the exact reason I have claimed. btw, 3,744 instances of KCG violating Rule 204 in just over a month is a very significant sample. The SEC punted. Then FINRA bunted. classic corruption
Totally.
Check out my first post on this story. In the previous 7 installments, I provided factual evidence to support everyone of those comments.
If you go back to the original stories, you will find my links.
Suffice to say, I’m sure Knight Capital and KCG engage in all sorts of stuff, but none of it can be proven directly responsible for the losses suffered by Dilorio.
In fact, I’ve provided VAST amounts of direct, close evidence calling into question the legitimacy of the very company he invested in. The Company Dilorio invested in is NOT a real company. It’s a hoax. This person, Adrian Stone created tons of fictional companies and used them for stock manipulation and cheated Dilorio out of his money.
However, Dilorio is unwilling to accept the truth that this may be the case and is morally convinced that it was the big, bad company that stole his money and that he was not cheated by an every day con-artist with a stock scheme.
The addresses on all the businesses this guy Stone created are fictional. They are empty lots, Hotels, middle of the road, virtual offices, etc. Not real.
The lawyer involved in the company Dilorio invested in originally in 2006 was sent to prison for stock manipulation for 7 years and was just released a year or two ago. This was related to the ONLY other company he was associated with on the OTC.
Someone’s binders were made permanent years ago.
Not exactly Sherlock. The vast majority of your “evidence” took place AFTER the emtk/btvl manipulation and fraud took place. Congratulations. Btw, the Cubs won the world series. Yes, emtk/btvl was (in hindsight) a publicly traded tax evasion, money laundering, cert distribution shell. Just like the top KCG traded penny stocks since 2006. This is the OTC equity market. And as the finra reg sho complaint confirms, facilitating the activity is and always has been the core business at KCG/ Knight. The effects of which have been and still are on the kcg balance sheet. Harry Markopolos was an options trader. Do yourself a favor and stop referring to Investopedia for your “expert” accounting terms.
Says the Fool who was parted from his money.
Investopedia just called. Wondering if you need more pictures for explanation.
There’s a lot here that shows you don’t have an understanding of these issues. I’ll start with the last 1 first . What Investopedia won’t tell you. The other side of the long sale for a customer in the finra complaint IS KCG getting naked short and buying the sellers stock. However, according to the complaint, KCG never closed its fail before naked shorting more. Driving the stock down. Staying net short. This is manipulation.
2) Kcg does act as wholesaler for third parties. However, securities laws are clear: kcg can not outsource its compliance to third parties. In Credit Suisse and Bbh, kcg likely executed significant volumes as mm
3) Kcg DOES have an institutional desk. And, there are dozens of “institutions” converting fraud notes to free trading equity in the otc mkt. In fact, this accounts for the vast amount of volumes. Firms like Hanover/ magna, asher, jmj,jsj,lg,dutchess,luxor,whalehaven, alpha cap, southridge, etc etc etc.
4)you seem to acknowledge these markets are a swamp. Although you have no idea to what extent. Kcg is by far the biggest slime swimming in this swamp. WHY do they?
Finding the “other side of the trade” is the objective. Akin to a real estate agent finding a buyer for their listing. position traders/mm’s may have to commit capital on the front end to “buy an order”. Or there may be an imbalance (1 mil for sale/ 800k to buy) where a position trader/mm again will commit capital to “cross” the stock. Whenever capital is committed, there is risk. Good firms want to AVOID committing capital whenever possible because of the risk. A famous trader I knew had a sign in his office that said “Capital is no substitute for brains”. Naked shorting eliminates the risk where the risk is unlimited in a short sale. a long position has defined risk. Stocks can go to zero. In a short sale, theoretically, there is no limit to how high a stock can go. Naked shorting is riskless because you can just print more. As I said, the ONLY riskless principal trade is where there is illegal activity. Your trading knowledge is pathetic. BTW, the FINRA KCG complaint violations were KCG naked shorting and facilitating LONG SALLES. Not buys. This is the Hanover/Magnas et al of the world who convert fraud notes to equity and sell. Again, you show a clear lack of understanding the issues. stop reading Investopedia .
A summary for the so called Investopedia “experts”
ANYTIME a firm like KCG commits capital (principal) there is risk. PERIOD
A short (legal) is a trade with unlimited risk
KCG engages in manipulation (naked shorting) that totally eliminates the risks of a short sale.
KCG facilitates fraud note to equity conversions by various hedge funds by naked shorting (read the Reg Sho complaint).
KCG generates illegal trading profits from this facilitation of fraud. In fact, this is the core KCG business.
The fraud committed by these hedge funds is facilitating tax evasion and money laundering for Swiss bank (and others) cross border clients
The corrupt SEC and FINRA facilitate the activity (approved reverse splits and “trading glitches”)
The activity continues unabated today
Knights behavior was a direct violation of a SEC rule ….
i wont name names but there was a certain chairman of the SEC that looked and acted like a burned out cokehead that never made it out of rehab. That chairman promised to do something about NSS and never really did.
You think this is about “restitution”? I have a “glitch” to sell you. Along with an “industry leading fcm business” for nothing. And of course we know kcg would never naked short stocks. As a seasoned accountant, do you practice before the SEC? How does that willful ignorance defense work?
$29.04/ 1 violation.
The wallstreet criminals who rob America of homes and savings and a lot more, LOVE FINRA!
FINRA? laff your arse off. Private indeed. They are owned and operated by wallstreet.
If you have a criminal mind, worship money and are willing to burn your neighbor’s house for extra cash, apply for a job on wallstreet.
$105,000? let me check my wallet. ah yes, are thousand dollar bills good for you? or would you perfer my debit card?
Chris; You’re the sheep and you got sheared. Move on
But he’s not a sheep; he’s a human being. Human beings are not sheep to be sheared, they are citizens who deserve justice when wronged. Would you write that note to a bank that had been robbed, or would you support police who track down and punish bank robbers, even if it takes many years?
Good point, but i think that in the business Chris was in, he probably profited from a lot of shearing done .
This does not make it right or less of a crime.
The “business I was in” was executing equity trades for large Institutions. I got the best possible prices for mutual fund and Pension investors. I also made recommendations on investments in same institutions. If they didn’t work, I was penalized (cut off). I wasn’t running a prop desk. I wasn’t creating vehicles destined to fail while pitching them to the public (the other side of the trade). The entire OTC equity market is designed as a vehicle for tax evasion, money laundering, illegal trading profits. There has NEVER been any empirical evidence to the contrary. The JOBS Act was passed in a bi partisan fashion to perpetuate this fraud on the public. Since 2007, whether Democrat or Republican President/Congress can’t seem to pass the Stop Tax Haven Abuse Act in its various forms. The Panama Papers should be a target rich environment for US Regulators and Law enforcement. It is not. The Largest creators of shells in the Panama Papers: UBS,Credit Suisse, HSBC, Rothschild/Coutts. “Publicly traded shells with no real business or purpose” are the missing link to the Panama Papers. That’s why Rothschild has a Reno office. Read why Mark Pieth and Joseph Stiglitz resigned from the Panama Papers investigation and their rec’s. Start right here in Nevada. Bette yet, start right here with KCG and they can very easily reverse engineer all of it
Mr CDilorio– + mispelling your name.
Thank you for your civil reply and explanation.
I do owe you an apology in saying you profited from dishonesty, when you did not.
Think we both agree that the system is dishonest, y neglect,, by not being carefully, fully and regularly updated.
This is one of the Starvethebeast in which the government does not and cannot fully keep up.
If anything makes the gdp– all final goods and services produced– look good, even if it is dishonest or running in a circle of $1.4Billion, gets skimmed over.
This is a good example of why we need to have good regulations.
Just as tight as how our Form1040s are verified!
On another note, of deregulation to save the us government money:
the PresB allowed reducing the AirTrafficControllers from the standard two to one (before 0600hours), so Comair flight 5191 crashed 0607, on early morning takeoff August 27, 2006, only one crew member survived– if i remember correctly, have to check.
Yes, deregulation destroys and kills. Period.
My 1930Depression Relatives– if it is good to be true… wasdrilled into us, w/ these types of predatory examples.
Lesson learned, shared, and may good things be returned to you, in other ways.