train wreck

The SEC's Campaign Against Naked Shorting: Misguided or Right On?

"the fact that not only have we never naked shorted -- our prime broker I'm sure wouldn't allow it"

This is extremely wrong. If the prime brokers do not allow it, that who exactly is creating the aggregate $8 Billion daily fails to deliver in the system today?

I ask Mr. Tilson to respond to this simple question before he makes such inaccurate and deceiving comments. Two types of trading scenarios will be described. How is Tilson's fund treated?

Trade I.

Hedge Fund XYZ enters an order to purchase $500,000 in stock in company ABC. By the third day that fund is expected to put up capital to support the payment for securities purchased. If after 3-days such capital is not provided the broker dealer will:

A.) Sell out the position as much necessary to cover the expenses including, if necessary, selling out additional positions to cover the fees.
B.) Contact the fund and provide them limited relief on payment.
C.) Contact the fund and notify them of the error and provide them indefinite time to make good on payment.

I believe by law the only answer acceptable is A.)

Trade II.

Hedge Fund XYX enters order to short $500,000 of securities in Company ABC. The hedge fund has either provided the locate or relies on the BD to do the locate. After 3-days the trade fails settlement because no shares have been borrowed to settle. The broker-dealer will:

A.) Go to the market and purchase shares under guaranteed delivery to cover the fail?
B.) Go into the market and attempt a buy-in (no guaranteed delivery) looking for available shares at the market price. If the market does not have shares available that will settle buy-in terminated.
C.) Let the trade fail indefinitely because an original locate was made so why bother to settle unless called upon by the receiving client.?

The only acceptable answer to parity Trade I response would be A.) In both cases the Broker Dealer would have committed to the contract executed. What Tilson would have you believe is that answers B & C are acceptable answers and they are not. No private investor or institution investing for proprietary accounts has the right to effectively use the market making exemption from settlement. It has been the abuse at this level that has allowed fraud and manipulation to take place.

So Whitney, are you immediately bought in under guaranteed delivery when the locate you provided failed to result in a borrowed stock and delivery or did somehow your prime broker keep the trade active and hold the failed trade liability? If not, you have engaged in Naked Shorting and I am sure that your traders are fully aware of a trade in which they have had a bad locate.