STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Securities Market Contracts; Broken Promises – May 5, 2005
David Patch
Question: When is a promise a lie? Answer: When the promiser never intended to perform the promise.
Every day trades are being executed in the markets whereby contracts are being entered into. Broker/Dealers are required by law to enter into these contracts and do so several times in the course of a single trade transaction. These contracts fall under the guidelines of Rules 15c6-1 and 15c3-3 of the SEC Securities Code.
There is the contract between an investing client and broker/dealer [B/D A] where the client pays the broker a commission to seek out and execute a trade at an agreed upon price.
There is the contract B/D A then enters into with the sell-side broker/dealer [B/D B] stating that they will settle the trade, including the transfer of funds and the transfer of share title, within 3-business days.
B/D B will have also entered into yet another contract agreement with their client on the client responsibility of delivery of the shares to make good on the sell-side obligations of the contract between B/D A and B/D B. In all, a minimum of 3 contracts are executed.
So what happens when the contracts are then broken?
From the buy-side, B/D A is obligated to meet the terms of the contract between themselves and their client to the best of their ability. Those obligations are contractual obligations the instant the money was debited from the clients account and used for the execution of a trade. If B/D A accrued revenue booking of their commission they have an obligation to fulfill the contract terms.
Recognizing that events happen that would justify a failure in meeting a 3-day settlement on all executed trades, the onus remains on B/D A to do everything possible to meet the terms of the contract. They promised Client A such service when they debited your account and took the commission. It thus becomes a matter of “good faith” effort to meet the terms of the contract. Rule 15c3-3 requires B/D A to seek out prompt transfer of share title once full-payment is made.
Based on the daily publication of the Regulation SHO “threshold list” and based on the Securities and Exchange Commission verifying that naked shorting not only exists but at times, settlement failures will exceed the entire public float of a company, it is clear that contracts are being broken. Promises [Contract] between B/D’s and Clients are not being kept. Ultimately it is proof that security laws are being broken.
“Good Faith” effort to resolve a settlement failure is a relatively simple process. To conduct a “good faith” effort and to satisfy B/D responsibilities to the terms of the contract, B/D A is only required to initiate a buy-in to the failing B/D [B/D B] after the initial 3-day settlement fail. A buy-in is in the best interest of Client A and it is in line with normal expectations of performance. Reasonableness to the terms of B/D B in meeting a buy-in notice shall be provided but under no uncertain terms should the terms remain open ended. Leaving a buy-in open ended is ultimately not initiating a buy-in at all and would not constitute a “good faith” effort to resolve.
The Depository Trust Clearing Corporation, the national clearance and settlement system created under Congressional mandate to maintain efficiency and integrity to the settlement process, also has the role of maintaining the records of the settlement failures by issuer. A spokesman for the DTCC, Steve Letzler, has claimed that while settlement failures represent greater than 1% of the daily trade volume in the securities markets, and represent over $1 Billion daily in fails, Industry Buy-Ins by members against other members are a “rare event”. So rare, companies have been listed on the Regulation SHO threshold list for 81 consecutive trade days with settlement failures exceeding 0.5% of their shares outstanding, and yet nothing is being done about it.
Ultimately, the promise made under contract between Client A and B/D A is broken. While B/D A had intent on taking the capital out of your account and booking the revenue from the trade commission, B/D A had no intent on meeting the settlement side of the contract terms. Their contracted promise to you.
Under a California Civil Code [Section 1710(4)], a promise made without any intent to perform constitutes deceit. In the securities industries that promise is the contract to purchase a security for the value quoted and at the time stated. Every state contains similar type contract laws. Contracts without intent is a breach of contract liable for losses plus damages.
The deceit by B/D A in a naked short trade executed by B/D B and their client is represented by the trade settlement statements provided to the client by B/D A and the journal entry of shares into the client account. The B/D making a false and misleading appearance of contract execution without following the “good faith” diligence necessary to fulfill the Securities Law standards for trade settlement execution [3-days]. The B/D then illegally collects a commission for their efforts prior to actually executing their responsibility to the contract. The B/D also books this commission as revenues while the trade is still unsettled and listed as a liability.
Today the laws discussed in this memo are Rules 15c3-3 and 15c6-1 promulgated from the Securities Act of 1934. These are SEC rules that are enforceable at the SEC and SRO levels. These are also rules that no securities regulator has taken responsibility to enforce. According to SEC spokesman John Heine “The SEC does not enforce Contract Law.” It is thus left up to B/D’s in collusion with each other to enforce the contracts. Unfortunately it is the B/D’s who have colluded to forgive these breaches for personal gain.
Who is protecting the rights of the Investors in these breaches? Nobody! The B/D’s reap the benefits of additional trade liquidity and commission revenues, which is the cause for their willingness to ignore contract breaches.
When is a Promise a lie? When the SEC promises to protect the rights of the investors but instead witnesses the fleecing of innocent people through fraudulent trade statement mailings and illegal contract executions.
Regulation SHO is plenty proof that B/D’s are in blatant violation of SEC rules 15c6-1 and 15c3-3 and instead of enforcing the laws the SEC went over to the dark side and pardoned the fraudulent and illegal acts. They grandfathered in all past settlement failures [illegal trades].
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005
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