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Commentary - Mar 19, 2004 - Printable Version
- Is Canada Robbing America Blind?
Terrorism North of the Border
by Mark Faulk
This is the faulking truth: Canada has for years been systematically defrauding the US of money by allowing investors using Canadian brokerage firms to practice the act of "naked short selling" American securities. Up to now, the SEC has largely ignored (and most likely even condoned) the problems with the market, especially the OTCs (over-the-counter, or penny stocks). Naked short selling is unethical, and should be illegal. Plus, I'll go a step further: Allowing Canada to play by their own rules (there aren't any in regards to naked shorting) is giving them the power to move investors' money from America to Canada legally, in effect robbing our country of wealth, and giving it to those north of the border. Unless we change our rules to force shortsellers to find shares to physically cover their positions (which the NASD tried to do a few years ago, before the SEC stripped the regulations of their real power before enacting them), and force foreign countries (in particular Canada) to play by the same rules that American investors are required to follow, then our country's citizens will continue to be robbed of our wealth, and small, struggling public companies will be continually forced to the verge of bankruptcy or worse.
The NASD surprised virtually everyone by finally establishing regulations (by amending Rule 3370) to require that, "prior to accepting a short sale order from a non-member broker/dealer, a member make an affirmative determination that the member will receive delivery of the security from the non-member broker/dealer or that the member can borrow the security on behalf of the non-member broker/dealer for delivery by the settlement date." In other words, any American broker who accepts a short selling order from a foreign broker is responsible for making the foreign broker abide by our rules. These regulations were scheduled to go into effect on February 20th of this year, which caused an immediate jump in the share price of many OTC stocks while short sellers scrambled to cover their positions. It appeared to be a sweet revenge for the years of damage done to shareholders of OTC companies.
Then, the NASD surprised everyone again by postponing the new regulations just two days before they were to go into effect, claiming that "some members need to make significant technological changes to their systems to comply with the new requirements; therefore, NASD is extending the effective date to provide members with additional time to make such changes." Let me get this straight: after years of electronically buying and selling billions of shares of stocks, these brokers have to upgrade their systems just to cover their illegal short positions? That's the lamest excuse for leaving the fox in the henhouse so he can kill off the last few chickens I have ever heard. And of course, the OTC stocks tanked again, as the Canadian "foxes" and their cohorts devoured a few more "chickens" on their way out the door. The new scheduled date is April 1st. I'll believe it when I see it.
Even if the NASD finally enacts their new regulations, and the SEC follows suit with similar requirements, the regulations are too little, too late, in this writer's opinion. I have no problem with Canadians buying and selling American stocks if they follow the same rules we do. To me, allowing them to naked short stocks, even to the point of shorting more stock than actually exists in the entire float (yes, that is legal in Canada), is like letting them produce their own counterfeit stock and sell it here. Several Canadian brokerage firms have already been shut down for conspiring with offshore hedge funds (many of whom are the source of the same death-spiral finance schemes that investors complain about) to short smaller companies into oblivion, which then allows those same "funding companies" to convert their shares at next to nothing, then cover their short positions (using the same shares they just got from the very companies they were busy destroying), and sell their stock into the float, driving the price down again, and on and on. It's criminal here, but foreign investors are allowed to play by their rules, not ours. And Canada is the worst offender when it comes to allowing (and even promoting) naked short selling. As of the middle of last year, joint U.S.-Canadian investigations had already produced dozens of indictments of U.S. and Canadian offshore brokers and hedge fund managers.
And what has Canada done about it? As of now, they still haven't enacted their own laws to prevent naked short selling. And why should they? Every time a hedge fund in Canada is allowed to drive the price of a stock down through massive naked shorting, they take money out of American investors' pockets and move it to Canada.
The obvious solution is simple: if foreign countries want to buy U.S. securities, then they need to follow our rules, and our rules need to be far more stringent against naked short selling (and short selling in general) as well. End of story.
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