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Terrific Short Documentary Video on Naked Short Selling


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Guest ericopoly

Not to defend naked short selling... but let's say it was eliminated entirely...

 

Isn't there still a problem with phantom voting rights?

 

Scenario:

1)  I purchase a share in my margin account

2)  My broker loans it to Sanjeev who shorts it (Al buys it).

3) It is delivered to Al in his brokerage account.

4)  Al's broker loans it to Satayana who sells it short (Viking buys it)

5)  Vikings broker loans it to somebody else who shorts it

6)  etc... etc... etc...

 

There are now more than three people who think they own that share (in our margin accounts) and we all get proxy material and vote -- despite only one share.

 

How can we all hold voting rights to that single share?  Something seems wrong here.

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I've never held a margin account, but does anyone know for sure if all of those account holders would get the proxy materials?  Even if just two did, that would be an issue, but I'm just wondering if several of them would get the documents.  Cheers!

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Guest ericopoly

You may lose shareholder proxy voting rights if your shares are lent out by the firm during a voting period.

When you maintain a margin account debit balance at a brokerage firm, the securities used as collateral for the margin loan may be lent by the brokerage firm to other brokerage firms or institutions for various reasons. If your shares are lent out, the right for you to vote on the shares is granted to the borrower of the shares. As a result, you may not be able to vote on shares held as collateral in your margin account.

 

http://www.rwbaird.com/bolimages/Media/PDF/FI/Your-Financial-Goals/Margin-Risk-Disclosure.pdf

 

As I said, something seems wrong here  :D

 

Me!

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A Bloomberg article explaining the proxy problem.

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4OuCsU8r2Yg

 

 

Kind of makes you wonder how much better off investors are protected since the Securities and Exchange Acts of 1933/34, after the Great Depression. It almost seems as though the goal of the SEC is to create trust in the markets through perception (going after little fish like AIG bonuses & Martha Stewart), then create trust through proper regulation of the most important rules. I have no idea why problems like the ones mentioned in this thread are not discussed more.

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Guest ericopoly

Eric,

 

Bob Drummond wrote a fantastic article sometime ago for bloomberg called "Corporate Voting Charade".

 

Read it.

 

http://www.rgm.com/articles/FalseProxies.pdf

 

<IV

 

 

Thanks, looks like my imagination wasn't far off after all.

 

 

If a broker gets

10 percent more votes than the number of shares held by clients

after stock loans, for example, the yes and no totals may each be

reduced by 10 percent.

 

 

Nice job guys!  So if the issue was to be defeated with 55 voting NO and 45 voting yes, but 10 rogue votes were put in the yes pile, you've reduced the new faulty 55/55 vote to a 50/50 tie.  I thought Florida was inept, this is great.

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You may lose shareholder proxy voting rights if your shares are lent out by the firm during a voting period. When you maintain a margin account debit balance at a brokerage firm, the securities used as collateral for the margin loan may be lent by the brokerage firm to other brokerage firms or institutions for various reasons. If your shares are lent out, the right for you to vote on the shares is granted to the borrower of the shares. As a result, you may not be able to vote on shares held as collateral in your margin account.

 

http://www.rwbaird.com/bolimages/Media/PDF/FI/Your-Financial-Goals/Margin-Risk-Disclosure.pdf

 

As I said, something seems wrong here  :D

 

Me!

 

Is the highlighted part of the statement accurate? Does the broker require that you have a debit balance in your margin account before they can lend out your shares? Or can they lend out any shares held in a margin account regardless of whether you are carrying a margin debit balance?

 

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They are not supposed to lend out the securities if you do not have a debit balance but they do it occurs when the broker on the other side fails to deliver and they do not force a buy in which they seldom do for their large clients, small retail clients ALWAYS get bought in. Horrible games are played in proxy fights and contested take-overs ,corporate democracy is for all intents and purposes a complete sham.

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Guest ericopoly

I had a related concern just now.

 

Is it okay for these firms to vote on a share they've borrowed, or do they need to actually buy it?

 

The term "rent a vote" comes to mind.

 

Locate/borrow/vote/return.  The original owner of the loaned share isn't meant to be voting, so that makes it still one vote per share.  You might be able to rent millions of votes in this manner, and there ought not to be any double-counting according to the rule that is meant to be followed preventing the owner of the loaned share from voting.

 

Now, if the borrower is not allowed to vote, then nobody is allowed to vote on that share... unless he actually shorts it, but what if he doesn't actually short it?

 

The person renting the vote also has no cost or risk aside from the lending fee paid.

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I can't remember the company, country, or hedge fund, but a few years ago hedge funds in Europe were shorting stock and then voting their shares in the manner that would cause the stock to fall during proxy battles or some other contentious vote.

 

Something seems wrong there!

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