-  f’ . 
Red ‘of,  root/ y amd Zlaw,  jaa/ eedsbor‘ sellers jJrey on snzárll
com/ Jarry smc/ es.  But are tbezr uzctzins, ...
ing to find shares to horrow,  you could short to your
heartïs content.  . -

ln the following few ‘years,  o-t-c stocks w...


ln ‘ïi rttenl Laser poll llfipllliüíl ill Illia.  lu

firmo.   lOl lll) ol lllt‘ oxixl ...
Irving Pollaek,  a foriner erusading SEC etininiissitsner, 
conducted a study tin short-selling for the NASD,  How ditl
how this worl-rs- I

imagine XYZ Co.  Tha.  tnarkctiriakers are quoting lO hid, 
Il offered.  Let's say G lder,  Gagnon be...
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Exhibit 24

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Anexos declaración de Greg Manning ante el Congreso de Estados Unidos, por los ataques contra la española Afinsa y su filial norteamericana en el NASDAQ, Escala (24)

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Exhibit 24

  1. 1. - f’ . Red ‘of, root/ y amd Zlaw, jaa/ eedsbor‘ sellers jJrey on snzárll com/ Jarry smc/ es. But are tbezr uzctzins, all ¿‘bat ínnocem? Naked came, the ashort-isell ANY ovt ¡“(hit-C tunter stocks wcrc weak even helore the Oct. l‘) crasl‘ Sartre losing as much as 80% and 90 "of their market values during i987. Last year provided a “h harvcst lor a ltandftrl ol short- sellers, many of ther ked shorts. Naked shorts-É It's Street iargon. ln ordinary short- selling, real shares chafip: hands. Thus: lack sclls short 100 shares of IBM, and ¡arte buys the stock. ln order to deliver the shares lo lane, iaekïs broker must horrow stock Irom a third party. So ¡iotual shares change hands-mr at least the appropriate hitos are made on eon-ipttter tapes. llul in ¡naked shorr-s-zfllírtg, the second stcpnthe horrow- l‘ SM SMA 590252 -PEALER AND ‘NAF-ED"¿5HOIZT-5ELLEIZ it- ’ I‘ . - '€voí __ l‘ l, ¿w265 OF rió/ z ¿a2? SHORT ¿ ¿ ' h "" filma-m Iu- (‘an- ¡mw-m FORBLS, FEBRUARY l, 198i! By Pbyllis Berman with limit AM1: l I l ing of stock-is eliminated illus- a naked rather thana traditional short salerllrt Ïtheuryu- although rarely m pjaeticen-the short positiofirn a stock could actually excced the floating supply. ‘l, How can people get away with naked shorting? No: only can they, but it's pcrlcctly legal for hroker-dcalerj, though nor lor the investiog public. Here's how it work, ‘t The huyerïs broker simply doesn't demand ddlívcb’ of the shares from ‘the sellers broker. if the ahoveiexarhplc were a thinlv rradetl o-tvc stock rather than a llig liuard stock. I-IIIWSihmküf-Itiighl he temptetl tu credit her-ac o i l, IZPÏEAES WHO Luces xv‘: catan/ s i wz? AT 51o? I-‘i-‘s o BUY l,0‘00 '0N MA ImIinrI). The short-seller i; selling . '__ stock that doesn't existEHe is making
  2. 2. ing to find shares to horrow, you could short to your heartïs content. . - ln the following few ‘years, o-t-c stocks were pretty cheap and tiíferetl ícw targets for short-sellers, hut then came the IQHOs and the en at htill rriarket. Small stocks ent hot again and new issues prolilcrated, offering targets lor short-sellers. it's a nasty business, [Likcd shorting. And ghoulish. The name of the game n. ro destroy market value, cause other people losscs so wir earr-reap gzrins. Only a few people practice it, hut someof th ise who do have reaped substanv tml fortunes. Ruputecl le-itlers of this small woll pack are the Feshhaeli lainily of Palo Alto, Calif. The Feshhaclis are relative newconucrs to stock trading, Until 198} none of them yvas in the investment business. Kurt Fcshhach, then 28,- the cldcst of the three brothers, was a diamond hrokenlvlatthew, 27, a high school drop- out, was running a tenh school and a small store SClllflE tennis rackcts and tenn lthCS in Mcnln Park. His twin brother, lUe. who dropp . out of Utah State UHIVCISII)’, had become a iull-time yolunteer minister for the mia- mous Church of Seicntnlnny (Forums, (¡cl J“. room. Their father, Bernard Feshhiieh, ran a small business touring oil and gas stocks; and providing public relations services to small compnics. The clan simply stumhled into the short-selling business. ln i981 the brothers iniractl Datl’s business, On : i visit to : i potential client, loe Feshhach was startlcd: Here was a company with a market mpitalization of S45 million- market price times numlzer of shares outstanding——-and yet 1 viwiT-“Hztve T0 BOEEOW ¡THE STGCK it had insigmlicant sales and a dcficit in its workin eapttal account. How could this operation actually he w rth S45 million? The brothers ghorted the stock and made movies" This was easy ‘l his was iuii Much hetter (han pr tltlliiii; lLlllli‘. shoes or touring stocks. The three sans ser up a bïükcfïllie iirm, Stoekhridge Partners. Now they could trade lor nth ers who liked their ideas, and thus earn eommi _ ¡una m. well as trading prolits. "’ A scan: six yearsdater the Feshhaehs are kinds ot the small-stock ‘shorts. lointly. they UPCIHLC the htokeraizr: tirm antl .1 S20!) million investment imrtnersliip, Vvlilíjli was recently short sume 7!) stocks. "We are lar antl away the hcst in this business, " proclaims JJ-yetirvold lóe. ‘Fht-y are diligent researchers, «searching out situation‘; where there are yet-to-he-"revealed disasters and where the stock is in weak hands. They hire private detectives. Ïhc son; use the puhlic relations skills they learned from their rather, putiint; out the had news in(L‘J(l nt the ermil wliisperini: into enlurnnists’ ¡ind reparten’ cars The FcshhJCh repiitatuvir and power has heenme awr; some They are the ¡{nn/ rn/ x‘ NIIILUN/ (‘Ñ ol the stock market. Let the word get out that the Feshhaehs are short a stock. and a good many otherwise hullish investors will dump it. They are a kind ol Srgll-fulfilling prtrphecy. That's especial ly true with fledglingïznterprises that aren't yet widely covered hy Wall Street analysts. ln these cases the virtues of the company are little known, and there are-n, lnts oí institutions willing to buy the smck on a dip. 1.’ e o-t-c shorts irperate in a less-than-perlcet market, l AND, we KEEP ; ¿ THE, =MONEY unirte, HE DELIVEIZS. "L7 ¿tie? » P9‘! zm: ui ¡”Mi
  3. 3. “Recommended Wholeheartedly” Hill ln ‘ïi rttenl Laser poll llfipllliüíl ill Illia. lu firmo. lOl lll) ol lllt‘ oxixl ‘:4. l il i lmlll‘ ïllllllt‘ i‘ ‘illlil llllt'lÍt’Ílt’¿'1l‘lt‘(Ífl I"t‘t‘(. ?ll¡i'I1t‘l1(ffxlllllllfifllï i lllllt‘ That lzintl ol " ¡iiutitlsiig itlialill; pie ltllit l. » rail sin rte. i Hill that's nui snrpiin hen juin ttlnsídlrr that Umnilï ‘- . l ¿ind >e1"; - ilvfitl ll} lili: tlnll’ l" ititli lll) tu. Í . . x Tvhlillíij-¿llïl h L<: >i'¡_ll>i'; itilïlii. Fl n‘ ml lll‘ íillïirmatinn and a deiiionstratirïlrz, tail toll free 1-800-221-8330. ciMNiFASÏt Omnia mulklanllwnlrs-«lrnthtiVKCuiii ist’. lHlrn l> uilr, TEl-llllilk lEE THE WONDERI OE EUROPE THEN BRINC ONE or THEM HOME. Their victima have made quite a feast for the Feshbach family. ïfhe brothers brag about their results, dven though they arp reluctant to docu- ment them. They say that they made 248% on their capital in i984 Last yïezir looked tougli. With the market _ chuggini; relentlcssly upward, they were caughfin a costlysqueeze when - they shorted Reebok. But even ailter swallowing a few such losses, they claimed an 8% retum_ through ¡the = _ lirst nine months of i987. For them, y October and November were marina , lrom heaven, giving them an overall annual return of 60%. r Even if these claims are exaggcrat- ed, the family must be doing some"- ihing right. Smart tiperzitors like Rob- ert Wilson, the centimillionaire stock trader, and Howard Stein’s Dreyfus Corp, have put money with the Fesh- haehs. Gilder, Cagnon ¿st Co. , the se crctive Manhattan money manage- ment Íirm, does lots of deals with the boys. The legendary money manager (Jeorge Soros teportedly put S25 mil- ‘llñnxwith them but pulled it out after apsaxïahble over fees. ' ile October brought bad news to Amos: investors, the Feshbachs proba- hly increased their net assets by a third by covering positions in stocks like Drexler Technology, Vl/ orlds of llVÜllLlCÍ and Allettheny international. How much naked shorting do the Feshbaehs do? vWhcn FORBES ‘first asked them, they denied—amplifying ' their pdint with four-letter words-H ‘ that they dd any at all. One ol loc ; Feshbach's ilder dcnials: ”Tbát ¡si such bullshit that l can't cveni del , scribe it. " ‘ But later Inc admittcd the bruilhcrs had naked shorted a stock called Sun- ' rise Savings Li Loan. But he added, ”That was four years ano, when we only had S‘) million or Slll million under management. " Ftikncs asked for. clarification. Feshbach abruptly_; iltered Ftiitiics reporters out of his ‘t; (Hice. The Ioizical inferenee: Many - -shbaeh short positions are essen- ti lly naked. There are many other, less visible players in the same game. (Iene Finn, chief economist for the NASL), re- ¡’xirts that some 80% to H5". tlf all ‘ Combine your next European trip ‘ when you arrive. And when your with the purchase of Scorpio, the trip ends, just return Scorpio to German sedan named Car of the one ‘of 19 locations iii 8 countries. Year when it debuted in Europe. It will be shipped directly lo The Scorpio European Delivery your dealer, Scorpio. lmported Program makes it easy. Your car lrom Germany for select . is licensed and fully documented Lincoln-Mercury dealers. "'¡"""? ""”l‘ W“ °""" - prove l! --Kl'líll a lot of J C O . R ¡P N O broker-dcalers take nav .4 ' ' . _ ked speeulative short ‘tutti/ z ul. Java-Irma wc- Lar: Savellivqs tincotrwsncum nlvlsiou ® _ ppsltíonï « l shorting is done by broker-dealefs for ' their nwn accounts. Ccrtainly, some nl this shnrtmg is the "technical" slinrting that hroker-tlealers have to (lo in the course of making a market. lltit it is etimmiin gos- FORBES, FEBRUARY ll. 19H? !
  4. 4. Irving Pollaek, a foriner erusading SEC etininiissitsner, conducted a study tin short-selling for the NASD, How ditl he identify naked short-s lingi’ By looking for situatitins where short positions eteeed lt')0,000 shares and where lállls-¡(Pdljllïcí also cxeettd 100,000 shares. (Nasdaq short pttsltlitlls are reporte-il itivnthly’ in the rtewspapers, Data tin fzlllü-tw «irliver are not pi hltely disclosed hy the National settirities (Ilearing (Zonal His study, tznverine the spring of 1986, found there were s10 companies in which those two cireumstanees oct iirred simultaneotisly, Among them was ‘¡tinrise Savings, a llnynttin Beach, Flan. ehain of sav» ttigs . ¡itd loans, 65% of’ HS short tntt. changed hands htit was itever delivered This stock was une ot the l-eshlsaehs’ earlygtiiiiititilis (Ian tirdinziry investiirs ¡ilay this ¡game ot naked short- intt? Until recently they could, - heir hrtikerx eonniv- ance. lsut iii October 1986 the S ightly etirtailed naked shortitig in response tri eomplaints from o-t-c companies. _'l'he NAS! ) requires its h ii» i-dealers to mark their order iiekeis long or short. l‘ . i s-i revitiires the broker tri deter- l'll. '.‘. ‘whether or iiot . '| s‘ti". ‘l'. is titirmurahlt- hCfUfC shortini; tv-t . l Lltkltttnul’ Him ver, that lelt a gi; nt lnophnle: ltrtiker-tlealers are stiÍl Hu: to short Íor their viwn accounts, whether or noi any horrtitsuihli: stock exe-ts. lp short, they hanned naked shortini: hy individual investors but not by broker-dealers. The Feshbachs arc brokcr-tlealers-cvcn though invest- ing customers‘ money ‘Itrotigh their partner- ship, Feshbaeh Bros, is their real busi- ness. As Anatoli: France once ' said of ¿French law: est reptirtedly - "The law, in its trimestre equality, forbidta the rich ¿Ls wcli as the poor tri sleep under hridgcs, to heg in the streets and to steal hread, " _ At any ra e, nakedjshtirtíng is now a game strictly ftir the pri-rs. Gildcr, Cíagiion is closcly associated with short’ sellers, itieltitlint: the l-eshhaehs, who don't (lo their nwn traditig. The leshhachs mostly’ use (Jilder, Lagnnn, Vilhtisl: o-t-e trader, Dick Banakus, is a close httsiiie-‘¿s sissociaitt- Gtlder, Cagnonïs Richard Cilder IS a sticialfy well-ctm neeted Yale graduate who scrves as a memher of New ¡"lrirk Mayor Edward Koch""Central Park (Íonserï/ aney etimmit tee, charged with ralsing money for that park. (¡ilder refusetl to talk with Ftiitists, htit it's common kI14iVlE(l_L'J, that his tirni isa hijié short trader tiir its 015W] ZICUIUIH Sources tell hiitiizs that trequently when (older, (Zar; - nnn “pops tip on the box” which in trader iargciti mean; becomes a marketmaker in a SlHCkw-¡l large short position often follows. ’ Besides having NASDK hlessing, there are other atlvan‘ ta es for a broker-dealer in the hiisimrss of shtirting and tested shnrtttig Any marketniaktrr quote-s lzrith si httf and ask prtee on the stocks it makes markets in, By periodieal» ly quottni; the lowest hid and ask prices» compared with the rest of thtrmarltetmakers in ¡l stntzk- a shnrt-inelined marketmaker ean exert downwartl pressure on the ‘Rock. That, nf course, ser ' -' the intereses of the shorts. ' There's yet a _ __ her paytiff for the marketmnker. Shtirting stoeksftir ir. own account-u remember. any broker-deal - is free todo this without hor- rowtng stock—earns a spread on the transaction. Here's '»—. *--'-. --—'---_f-" j
  5. 5. how this worl-rs- I imagine XYZ Co. Tha. tnarkctiriakers are quoting lO hid, Il offered. Let's say G lder, Gagnon becomes a market- maker in XYZ and qtititvzs a price of l0 fhidl, i036. tofferl. ll ir then shorts the stoct. it sells at its own offer price, instead of lhivlng tu sell at atiother marketniakcrk hnl Cildgr thus gets a better price on the short sale than a non marki: rin. ikt-r could get Nui surprisiiiizly‘, naked shorting and tiiassive hear taitls have sparketl a iiasty’ glrlïaltli. Small strugeling companies elaiin that naked short-selling, can destroy them ‘The price ol their stock shps initially under the pressure ol tiaked selling, which creates margin calls that force some liolders to sell, which then causes other investors to lose conll- dence. The shorts loosen a stone and an avalanchc ensucs. A promising company is snuflcd out. The short-sellers reply that thi ' ‘ nsense. Take Sun- rise Savings. lts assets ¡en-w from st nothing tn 51.2 hillilin in four years. The stock rose frorn 3 to 26. lnt-esttirs were stieked in h). is story tilgmivuth, htit the Feshbaehs found out is hat l. l‘ hehind the groivth. Sun- HM‘ was tiiaikiiii: i009?) loans to ¡la rclvhcrs who put no money clown on land‘ptir- Chase-d at itiflated pwces Forint». .'«-/ > _" Pasan. nn a 3'11 ‘mm a mortgage hatiker, they hired a real estate con- sultant to investigan: _sitcs supposedly under develop- ment by Sunrise Savéngs’ loan customers. The situa- tion Itioltetl riperaiid r per. ln 1924.: the ïesliliaichs shoried the stnek at an average price nl ll. Shortmi: nakedl": and v ‘lh ‘WISC, the Feshhaehs li- s nally covered ¡ll 37 ceiits a share. They made millions. Sunrise went into receiver- ship-as it well deservee. Sunrise Savings was doomed; it was raping its shareholders. v Of course, not all the cases are so clear-cut, which makes it douhly difficult tti rendera íudgmcnt on this kiïíd of short-selling. Some companies have tried to fight back. TSO Financial, for example, which offers financial ser- vices to individuals. ezlai-ms to be suffering an attack by naked shorts and has asked the NASD to investigate. The NASlTs report is ten wtcks overdue, and "its sptikesman refused to comment. So the argument alarm: the rcctitude or evil ol short- st-llini; goes on and has its iournalistic reflection. Alan Ahelsun, the ctirmudgetinly editor of Hui-mus; has lriiiit delightetl iii printitii: tieyative news un smallish, tivcrin- tlated n-t-c stock» a ¡ali ol his sharp pen has puncturetl many an Investment balltitin. To some Ahelstin is Dracula, to tithers Rubin Hoodjfiurne til his victtms charge that he is carirying water for short-sellers. Replies Ahelstin: "l don't remember a single se where an attack [by shortsl has taken place where tn sume fashion the company uu-isnfr susceptible Few-nf them hatl those essentials: .-i prnduut, a profit ur a rcrflprtispect. " Robert l-laherty, edxtiír of the small but lively ult. ¡(t-r mu. quarrels with those shorts who hend and break the rules. Flaherty says tha; heavy short-selling ncIlVlly-v- naked and ulhCrWIsc--—C: IIl sink strugglim; companies tha-t might well have grown ¡vito healthy ¡oli provider: and good investments. ‘ ' . ‘¡Ire I-tevlilxrelt ibm" oficina ui I '(lÍrI ¡ll/ u ‘the toman: mutantes of the market. Where lies the truth? ls. naked short-selling .1 sin against free enterprise? . -_ One ncedn't admite the Feshbachsmthcy are not easy people to likewtouiiderstand that they do help make the market more efficicntly priced. lt would he difficult to ‘1L'Cl( . i flnljk unless that stock were llnccflnnmlfiflll)’ pfHZCtl and pmhahly doomed anyhow. Unless it was sell- In}; nn hope or liype rather than on hard numbers. Yet the answer is not as clear-cut as it might seem. Many of the Feshhach targets ale. less-than-innticcnt victims, way over- priced to begin with and ready to collapsc anyhow. Several companies they have shorted have ended up in various stageshf hankruptcy, including Worlds of Wonder, Sunrise Savings and ZZZZ Best, a notorious fraud. But there is a gray area between (ivcrinflated stocks and companies that are so strong they cannot suffcr damage from a short attack. These may be simply struggling small companies where alot of stock is held on margin. Margin is to shorts what carrion is to vultures. Margined stock can he easily forccd out on the market, thus reinlorcine the initial decime. With its Stock in ruins, thefirm is unahlc to do further finaneing. In such cases investors get hurt along with the companies. Has this actually happened? It's diffi- eult to say. One reason there are so any short-selling targets ' montt smaller Nasdaq ‘stocks goes back to funda- mentals. lt has a lot to do with the ivay companies go public. ln a not untypical ex- ample. the principals ‘will put up almost no money and keep 70% or 80% of the stock. The public puts up 95'72. of the money and gets 20% or 30'95. of the stock. lf _ the company survives but doesn't proÉper, the" principals are in fairly good shape, but the public loscs money. _ When wc last spokc with the Feshbachs, they reported that they were 70% in cash. Why! Because with the markets down a third and with many o-t-c stocks almost ihlitcrated, ;thcy apparently can't’ find enough "har- lflS"—LJVl: rpl‘lLL'. l small stocks-Mi sell short. So, when 1-» v. ..- y u get doutlñ to it; many short-sellers are really funda- _ entalists. ¡[there are no overprieed stocks, shorts will l ek fnr targets. l What is the lesson ll this? Essentially that small investors-the puhlicg relatively unprtitected in the over-the-enunter market oih from predatory shorts and from greetly hrnkers ami corporate maiiaxeittctits. le tiiight help il the NASl) were to ask tiuestititis about broker- dealer lailstti-deliver- that remain open for more than a month. Maybe the question of permittiiiit margin on thin stocks is also worth reexamining. lf these stocks are st) vulnerable to downsitle and tipsitle manipulatinn, should they he marziiiahlel’ Margm buying puts small investors at trxira risk ui extraortlinarily vulatile stocks. Until Oct. l‘) hit its, a lung, titiiiiterrtiptetl hiill market made most people forget that it's a itiiigle out there. With visihly hltiotly claws, the I-‘eshhaiclis anti lriends serve tri remintl us_ that markets are dangerous. ls it worse ¡f naiye Investors lose money to naked shorts instead ol to hype- sters? ln the argument between shorts and longs, there are few true mnocents. A plague on both their houses. I FORBES. FEIIRUARY 19m4