SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

arrived, they might borrow real shares and deliver them, and then sell another block of phantom stock, which would
hammer prices for another three to thirteen days.
Or, rather than borrow real shares, the hedge fund might buy stock (the price having been knocked down during 13 days
of diluted supply) from a friendly broker. Often, the brokers did not have any stock to sell the hedge fund, but they pushed
the sale button anyway. The hedge funds then used the broker’s phantom stock to settle its initial sale of phantom stock,
and when the broker’s deadline came, he bought an equal quantity of phantom stock from another broker, and so on.
A lot of journalists have portrayed this naked short selling as “legal.” In fact, it is grossly illegal assuming the goal is to
manipulate markets. But the SEC until recently shied away from making that assumption. So long as the hedge funds met
the delivery deadlines, they could distort and destroy at will.
Another result of the short-seller lobby’s intervention is that a company does not appear on the SEC’s “threshold” list
unless there are failures to deliver of more than 10,000 of the company’s shares (and at least 0.5% of its total shares
outstanding) for five consecutive days. So long as there are no failures on day six, there are no flashing red lights at the
SEC. That is, threshold (excessive) levels of phantom shares can float around the system for a total of eight days (three
days before they are registered as “failures to deliver,” plus five more) without a company being designated a victim of
naked short selling.
An eight-day blast (or even just a one day blast) of, say, a couple-hundred thousand phantom shares can knock down a
stock’s price very nicely. Blasts of a million-plus shares, which are common, can do even more damage.
If a company has weaknesses that can be blown out of proportion with help from the media, and if hedge funds blast the
company with phantom stock, then pause, then blast again, then pause, then blast again — over and over — for a couple
of months, then the company’s share price can soon be in the single digits. – without ever having appeared on the SEC’s
threshold list.
Unsurprisingly, the data through June shows this blast-pause-blast pattern in the stocks of nearly ever major financial
institution that has been wiped off the map, and quite a few that were in death spirals before the SEC temporarily banned
short-selling. Very often, huge failures to deliver have occurred in stretches of precisely five days – just long enough to
keep a stock off the threshold list.
The attack on Bear Stearns, for example, began on January 9, when hedge funds naked shorted more than 1.1 million
shares. The shares “failed to deliver” at the end of Friday, January 11 (the three-day deadline). For the next four days,
beginning Monday, January 14, there were massive failures to deliver, peaking at 1 million shares on January 17. That is,
the attack lasted a total of eight days, with failures to deliver lasting precisely five days. On day six, there were few failures
to deliver, so Bear did not appear on the threshold list.
Over the next few weeks, there were several more blasts – with failures to deliver ranging from 200,000 to 500,000
shares. Those were threshold levels, but the failures lasted less than five consecutive days, so no flashing red light at the
SEC.
On February 28, 800,000 shares of Bear Stearns failed to deliver. For the next five business days, anywhere from
100,000 to 350,000 shares failed to deliver. On day six, there was a pause — few failures to deliver. So no threshold list –
no flashing red light at the SEC.
A week later, just before CNBC’s David Faber reported the false information (given to him by a hedge fund “friend” whom
he had “known for twenty years”) that Goldman Sachs had cut off Bear’s credit, somebody naked shorted more than a
million shares of Bear’s stock.. Over the course of the next couple of weeks, there was a sustained effort to drive the
stock to zero, with massive failures to deliver every day — peaking at 13 million shares.
This attack lasted long enough to put Bear Stearns on the threshold list, but by then, it was too late. The bank’s mangled
remains had been swallowed by JP Morgan. Ultimately, at least 11 million shares of Bear Stearns were sold and never
delivered.
Meanwhile, the naked short sellers began their attack on Lehman Brothers. On March 18, Lehman’s stock had begun to
increase sharply, so somebody unleashed more than 1.5 million phantom shares. Those failed to deliver on March 20.
For the next three days, there were failures to deliver of between 400.000 and 800.000 shares — far exceeding the daily
“threshold.” That helped the share price to fall sharply, but on day five, there were no failures, so Lehman didn’t appear on
the threshold list of companies victimized by naked short selling.
On April 1, another round of naked short selling commenced, coinciding with a wave of false rumors about Lehman’s
liquidity. That continued until April 3, when SEC Chairman Christopher Cox, for the first time, told a Senate committee
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