SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

friendly relations with its short-selling paramours – but it was something. During the three weeks that the emergency order
was enforced, Lehman’s stock price increased by around 50 percent. The other companies that had been under attack
enjoyed similar rebounds.
The short-sellers, of course, fumed. Some of those fumes wafted to The Wall Street Journal and other prestigious
publications, which lambasted the SEC for issuing the emergency order. They published all manner of mumbo-jumbo
about the emergency order wrecking “market efficiency” – though the only evidence of this was an utterly dubious report
circulated by the short seller lobby (see here for the details), and it was hard to comprehend what could possibly have
been “efficient” about a market getting smothered with false information and fake supply.
Of course, the SEC, captured by the short-sellers, and ever mindful of the media, decided to let its emergency order
expire, and announced no new initiatives to stop naked short selling..
The day after the emergency order expired, Lehman’s stock nosedived. So did a lot of other stocks that had enjoyed a
temporary reprieve.
Mark my words, the data for August and September will show that soon after the order was lifted, rampant naked short
selling began anew.
It will show a sustained attack on Fannie Mae and Freddie Mac, with failures to deliver exceeding one million shares, until
the day the two companies were nationalized. It will show Lehman getting hammered (blast-pause-blast) until its stock
was so low that there was no way it could raise capital. And it will show that in Lehman’s final days, hedge funds sold
unprecedented amounts of phantom stock, knowing that the stock would never, ever have to be delivered.
Two days after Lehman was vaporized, AIG watched its stock fall to as low as one dollar. The data through June shows
that AIG was repeatedly blasted with phantom stock, often in stretches of eight days (three + five), with peak failures to
deliver reaching 2 million shares. It’s a safe bet that the data will show that these attacks continued, and grew in
magnitude, until a price of one buck per share resulted in paralysis, and AIG had to be nationalized. But the company
never appeared on the SEC’s threshold list.
After AIG, the rumor was that Citigroup would go down next. The data through June shows that Citigroup was bombarded
– blast, pause, blast – with massive amounts of phantom stock. Failures to deliver peaked at 8 million shares. No doubt,
the blasts continued and grew in magnitude in the days leading up to September 16, when Citigroup’s stock went into a
death spiral.
On September 17, the SEC rushed out new rules governing naked short selling. The new rules seemed a lot like the old
rules. Hedge funds would not have to actually possess stock before selling it. Instead, they would merely have to “locate”
the stock. The SEC would have no way of knowing whether hedge funds had “located” stock, but if they lied and told their
broker, “Yeah, I located the stock, I got it somewhere, push the sell button,” then that would be “fraud.” Presumably, the
brokers, who depend on the hedge funds for most of their income, and are complicit in their naked short selling, would
line up to inform the SEC that their clients were telling them lies.
Meanwhile, the hedge funds would still have three days to deliver stock, with no strong penalties for failing to do so, and
no mechanism for determining whether a hedge fund had delivered real stock, as opposed to new phantom stock that it
had received from a friendly broker. As for the “threshold” of five consecutive days before a company could get on the list
that sets off the flashing red lights that the SEC ignores – that would remain the same.
When these rules were announced, the short-seller lobby cheered loudly. The media transcribed the lobby’s cheerful
press releases, and then the naked short sellers eliminated Merrill Lynch. After that, they turned on Goldman Sachs and
Morgan Stanley, at which point both stocks went into death spirals and the companies’ CEOs treated us to the spectacle
of calling the SEC to complain that Morgan and Goldman (i.e., the companies that housed the brokerages that invented
and profited the most from naked short selling) were now getting mauled by their own monstrous creations.
A week later, the Wall Street Journal stated in an editorial that there was “no evidence” of naked short selling or market
manipulation during this financial crisis.
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From: Overdahl, James
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