'Naked shorting is like terrorism' complaint lands on SEC's desk
26 June 2013 Waco, Texas
Image: Shutterstock
An illegal short-selling complaint has been made to the US 麻豆传媒 and Exchange Commission (SEC) by Life Partners Holdings鈥� CEO Brian Pardo.
Following independent investigation by former SEC senior counsel Gary Aguirre, Pardo announced that evidence was found of: 鈥渃oordinated market manipulation" and naked short selling of Life Partners's stock in and around 26 September 2012.
Life Partners Holdings鈥檚 primary operating subsidiary Life Partners Inc operates in the secondary market for life insurance. As a financial services company, it earns fees from providing life settlement purchasing agent services to both individual and institutional clients.
It also acts as a policy provider to funds purchasing life settlement policies and buys policies for its own investment.
As a result of this investigation, Pardo has filed a whistleblower complaint on Life Partners's behalf with the SEC against a number of persons and entities suspected of illegal short-selling activities.
Gary Aguirre has had extensive history with the SEC. Previously an enforcement lawyer for the agency, he was paid a $755,000 settlement in 2010 in a wrongful-termination suit.
Aguirre was fired for 鈥渋nsubordination鈥� after he accused the firm of botching a probe into the prominent hedge fund Pequot Capital Management, stating that it had refused to interview Morgan Stanley's then chief executive John Mack as part of the Pequot probe due to his "political clout".
In his complaint, Pardo describes Life Partners as a microcap stock with 18.4 million issued shares. Pardo holds more of than half of these shares, which are unavailable for trading.
Accordingly, Life Partners has less than 9.2 million shares available for trading and usually less than one million shares are available for borrowing. In the 12-month period before September 2012, Life Partners's stock had an average daily trading volume of 112,000 shares.
The complaint attempts to demonstrate that market participants, identifiable through blue sheets, manipulated the price of Life Partners' stock on 26 to 27 September 2012, through massive naked short selling in violation of the SEC's Regulation SHO.
鈥淎 public announcement of highly favourable news after the market close on September 25, 2012鈥擫ife Partners success in a legal action鈥攇enerated strong upward pressure on the stock price when the market opened on 26 September,鈥� said a statement on the firm鈥檚 website.
鈥淥ver the next two days, approximately 15.2 million shares traded. The upside pressure was resisted by aggressive short selling at the bid from the market's opening on 26 September and continued unabated until a price reversal on 27 September.鈥�
鈥淥ver these two days, at least 2.16 million shares were shorted at the bid, a type of trade that fits within no exception to the legal borrow requirements. Altogether, a staggering 6.96 million shares were sold short over the two days. At the time, there were at most 1 million shares available for borrowing and perhaps none. Major violations of Reg SHO were a virtual certainty.鈥�
FINRA settlements with UBS and Credit Suisse speak to the enormous magnitude of naked short selling, said Pardo in his complaint. He also pointed to the recent SEC settlement with the Chicago Board Options Exchange as showing: 鈥淗ow an self-regulatory organisation was compromised by those who engage in naked short selling.鈥�
The exchange recently agreed to pay a $6 million penalty and implement major remedial measures to settle the SEC's charges, which were that the firm suffered systemic breakdowns in its regulatory and compliance functions, including a failure to enforce or even fully comprehend rules to prevent abusive short selling.
Pardo鈥檚 complaint contained accusations of other violations, such as the requirement that short sellers must deliver by the settlement date. If 6.96 million shares were properly borrowed, they would have resulted in an increase of shares on loan.
But by 3 October 2012, the day after the settlement date for the trades on 27 September, the shares on loan had only increased by 27,600 shares, said the statement. 鈥淚f the shorts were not covered by the settlement date, they were naked and in violation of Reg SHO.鈥�
Pardo said: "It is a tragedy to realise that there are well-known financial entities that intentionally try to destroy companies with these abusive tactics, without any regard for the lives of the workers and the investors they ruin."
"The original purpose of our financial markets was to bring capital to companies so they could grow and, in turn, contribute to the growth of our whole economy. This small group has hijacked our financial markets for their own gain. I just hope that the SEC will use the clear evidence we have provided to them to bring those who are working against our economy to justice. In my view, naked short selling is a form of financial terrorism."
Following independent investigation by former SEC senior counsel Gary Aguirre, Pardo announced that evidence was found of: 鈥渃oordinated market manipulation" and naked short selling of Life Partners's stock in and around 26 September 2012.
Life Partners Holdings鈥檚 primary operating subsidiary Life Partners Inc operates in the secondary market for life insurance. As a financial services company, it earns fees from providing life settlement purchasing agent services to both individual and institutional clients.
It also acts as a policy provider to funds purchasing life settlement policies and buys policies for its own investment.
As a result of this investigation, Pardo has filed a whistleblower complaint on Life Partners's behalf with the SEC against a number of persons and entities suspected of illegal short-selling activities.
Gary Aguirre has had extensive history with the SEC. Previously an enforcement lawyer for the agency, he was paid a $755,000 settlement in 2010 in a wrongful-termination suit.
Aguirre was fired for 鈥渋nsubordination鈥� after he accused the firm of botching a probe into the prominent hedge fund Pequot Capital Management, stating that it had refused to interview Morgan Stanley's then chief executive John Mack as part of the Pequot probe due to his "political clout".
In his complaint, Pardo describes Life Partners as a microcap stock with 18.4 million issued shares. Pardo holds more of than half of these shares, which are unavailable for trading.
Accordingly, Life Partners has less than 9.2 million shares available for trading and usually less than one million shares are available for borrowing. In the 12-month period before September 2012, Life Partners's stock had an average daily trading volume of 112,000 shares.
The complaint attempts to demonstrate that market participants, identifiable through blue sheets, manipulated the price of Life Partners' stock on 26 to 27 September 2012, through massive naked short selling in violation of the SEC's Regulation SHO.
鈥淎 public announcement of highly favourable news after the market close on September 25, 2012鈥擫ife Partners success in a legal action鈥攇enerated strong upward pressure on the stock price when the market opened on 26 September,鈥� said a statement on the firm鈥檚 website.
鈥淥ver the next two days, approximately 15.2 million shares traded. The upside pressure was resisted by aggressive short selling at the bid from the market's opening on 26 September and continued unabated until a price reversal on 27 September.鈥�
鈥淥ver these two days, at least 2.16 million shares were shorted at the bid, a type of trade that fits within no exception to the legal borrow requirements. Altogether, a staggering 6.96 million shares were sold short over the two days. At the time, there were at most 1 million shares available for borrowing and perhaps none. Major violations of Reg SHO were a virtual certainty.鈥�
FINRA settlements with UBS and Credit Suisse speak to the enormous magnitude of naked short selling, said Pardo in his complaint. He also pointed to the recent SEC settlement with the Chicago Board Options Exchange as showing: 鈥淗ow an self-regulatory organisation was compromised by those who engage in naked short selling.鈥�
The exchange recently agreed to pay a $6 million penalty and implement major remedial measures to settle the SEC's charges, which were that the firm suffered systemic breakdowns in its regulatory and compliance functions, including a failure to enforce or even fully comprehend rules to prevent abusive short selling.
Pardo鈥檚 complaint contained accusations of other violations, such as the requirement that short sellers must deliver by the settlement date. If 6.96 million shares were properly borrowed, they would have resulted in an increase of shares on loan.
But by 3 October 2012, the day after the settlement date for the trades on 27 September, the shares on loan had only increased by 27,600 shares, said the statement. 鈥淚f the shorts were not covered by the settlement date, they were naked and in violation of Reg SHO.鈥�
Pardo said: "It is a tragedy to realise that there are well-known financial entities that intentionally try to destroy companies with these abusive tactics, without any regard for the lives of the workers and the investors they ruin."
"The original purpose of our financial markets was to bring capital to companies so they could grow and, in turn, contribute to the growth of our whole economy. This small group has hijacked our financial markets for their own gain. I just hope that the SEC will use the clear evidence we have provided to them to bring those who are working against our economy to justice. In my view, naked short selling is a form of financial terrorism."
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