Wolfson Brothers Charged by SEC for naked short selling scheme

[Fairfaxnut]

I know this is chump change, but interesting nonetheless....

 

 

SEC Charges Brothers With Short Selling Violations

FOR IMMEDIATE RELEASE

2012-22

 

Washington, D.C., Jan. 31, 2012 – The Securities and Exchange Commission today charged two brothers living in Chicago and New York with naked short selling for failing to locate and deliver shares involved in short sales to broker-dealers.

 

Short sellers sell borrowed shares in hopes of profiting from declining prices. While short selling is legal, SEC rules require short sellers to locate shares to borrow before selling them short, and they must deliver the borrowed securities by a specified date. Market makers are excepted from the locate requirement when selling short in connection with bona-fide market making activities in the security for which the exception is claimed. Naked short selling occurs without having borrowed the securities to make delivery.

 

According to the SEC’s order instituting administrative proceedings against Jeffrey A. Wolfson and Robert A. Wolfson, they generated more than $17 million in ill-gotten gains from naked short selling transactions involving such stocks as Chipotle Mexican Grill Inc., Fairfax Financial Holdings Ltd., Novastar Financial Inc., and NYSE Group. As Jeffrey Wolfson stated in a recorded telephone conversation, “What I sell them is not guaranteed, it never gets delivered, it’s funny paper.”

Additional Materials

 

    SEC Order Against the Wolfsons

 

The SEC’s Division of Enforcement alleges that Jeffrey Wolfson engaged in illegal naked short sales while working as a broker-dealer himself and later as the principal trader at a Chicago-based broker-dealer that is no longer in business. He also taught his brother and others how to do it. Robert Wolfson conducted illegal naked short sales while trading through an account at New York-based broker-dealer Golden Anchor Trading II LLC, which also has been charged in the SEC’s enforcement action. The firm has changed its name to Barabino Trading LLC.

 

“By engaging in naked short selling, the Wolfsons had a major advantage over competitors who complied with the law and incurred the costs associated with actually borrowing the securities,” said George S. Canellos, Director of the SEC’s New York Regional Office. “The SEC is committed to recovering substantial ill-gotten proceeds made by traders who seek to circumvent important short selling regulations.”

 

According to the SEC’s order, the Wolfsons engaged in two types of transactions from July 2006 to July 2007 in violation of Regulation SHO. The first type of transaction – a “reverse conversion” or “reversal” – involves selling stock short and simultaneously selling a put option and buying a call option on the stock. The Wolfsons did not locate the stock before the sale, nor did they deliver the shares when sold or make a bona fide purchase of the stock when required to close out their resulting fail-to-deliver position. They were not entitled to the market maker exception to Regulation SHO because the short sales were not made in connection with bona-fide market making activities.

 

The SEC's order states that the second type of transaction was a stock and option combination that created the illusion that the party subject to a close-out obligation had satisfied that obligation by buying the same kind and quantity of securities it had sold short. However, the stock was always sold back either the next day or within several days, and the Wolfsons knew or had reason to know that the shares ostensibly purchased in these sham transactions would never be delivered because they were purchased from another naked short seller who did not have the stock either. The Wolfsons entered into a significant number of these sham "reset" transactions with each other and also took the other side of the "reset" trades done by each other as well those done by other market participants.

 

The SEC's Division of Enforcement alleges that by engaging in the misconduct described in the order, Jeffrey Wolfson willfully violated and willfully aided and abetted and caused BMR's violations of Rule 203(b)(1) of Regulation SHO, and willfully violated and willfully aided and abetted and caused others' violations of Rule 203(b)(3) of Regulation SHO. It further alleges that Golden Anchor willfully violated, and Robert Wolfson willfully aided and abetted and caused Golden Anchor's violations of Rules 203(b)(1) and 203(b)(3) of Regulation SHO. The administrative proceedings will determine what relief, if any, is in the public interest against Jeffrey Wolfson, Robert Wolfson and Golden Anchor, including disgorgement of ill-gotten gains, prejudgment interest, financial penalties, a censure or a suspension or bar from association with any broker-dealer.

 

The SEC’s investigation was conducted by Steven Rawlings, Peter Altenbach, Daniel Marcus and Layla Mayer and the litigation effort will be led by Kevin McGrath. They work in the New York Regional Office. The SEC’s investigation into violations of Regulation SHO is continuing.

 

The SEC acknowledges the assistance of the Chicago Board Options Exchange and the Financial Industry Regulatory Authority in this matter.

 

# # #

 

For more information about this enforcement action, contact:

 

Andrew M. Calamari

Associate Director, SEC’s New York Regional Office

(212) 336-0042

 

Steven G. Rawlings

Assistant Director, SEC’s New York Regional Office

(212) 336-0149

 

 

[Parsad]

Looks like they have tape recorded conversations on these guys, but us Fairfax and Overstock shareholders know it's a hell of alot bigger than this.  Cheers!

[ubuy2wron]

Looks like they have tape recorded conversations on these guys, but us Fairfax and Overstock shareholders know it's a hell of alot bigger than this.  Cheers!

I was going to post the link you beat me to the punch Parsad. You know if FFH or OSTK never receives  legal satisfaction I will be satisified if at least some of the cock roaches are stepped on and at  a few of the bigger players have some sleepless nights.

[Fairfaxnut]

It's nice to see a little action.  Better small ones than nothing.  The Billion(s) dollar hedge fund cartel can weasel there way out too easily.

[Ben Graham]

This scum makes me sick. You don't want to know what I'd like to do to these criminals. I'd be arrested for making terroristic threats.  ;D

[moore_capital54]

I suggest that you all read the actual SEC compliant. In it a special section has Mr. Wolfson visiting a large fund which the SEC refused to name, that was short FFH Shares. Mr. Wolfson offered to "reset" the hedge fund's short position in FFH in exchange for a 20% borrow fee as opposed to the 30% that was being charged by the funds prime broker.

 

This complaint feels very similar to the one brought against goldman, instead of Paulson for creating the abacus series of CDS's.

 

Why were Paulsons people allowed to sit and choose what piece of crap mortgages to throw into Abacus and then hire Goldman to sell them to the Germans, and goldman only gets in trouble? The architect was Paulson.

 

Once again, the wolfsons were just the grease in the machine, they were the enablers that allowed the funds to short synthetic shares, electronically of real businesses. Why aren't the funds being sued?

[Ben Graham]

I suggest that you all read the actual SEC compliant. In it a special section has Mr. Wolfson visiting a large fund which the SEC refused to name, that was short FFH Shares. Mr. Wolfson offered to "reset" the hedge fund's short position in FFH in exchange for a 20% borrow fee as opposed to the 30% that was being charged by the funds prime broker.

 

This complaint feels very similar to the one brought against goldman, instead of Paulson for creating the abacus series of CDS's.

 

Why were Paulsons people allowed to sit and choose what piece of crap mortgages to throw into Abacus and then hire Goldman to sell them to the Germans, and goldman only gets in trouble? The architect was Paulson.

 

Once again, the wolfsons were just the grease in the machine, they were the enablers that allowed the funds to short synthetic shares, electronically of real businesses. Why aren't the funds being sued?

 

Once again, the wolfsons were just the grease in the machine, they were the enablers that allowed the funds to short synthetic shares, electronically of real businesses. Why aren't the funds being sued?

 

Because it's not that Stevie Wonder is blind, it's because Justice is blind!

 

[JSArbitrage]

This complaint feels very similar to the one brought against goldman, instead of Paulson for creating the abacus series of CDS's.

 

Why were Paulsons people allowed to sit and choose what piece of crap mortgages to throw into Abacus and then hire Goldman to sell them to the Germans, and goldman only gets in trouble? The architect was Paulson.

 

Well not to nit-pick but it's because Paulson never made claims as to the quality of the securities.  Goldman didn't get in trouble for creating Abacus (it's not illegal to create crappy investments); they got in trouble because internally they were laughing about how crappy the security was while simultaneously withholding the fact that Paulson designed it to be crappy from their investors.  And then Goldman claimed that their incentives were aligned with investors when they were actually shorting it.

 

Why does Paulson get in trouble for claims Goldman was making?

 

But I agree with your sentiment.  It also seems like the Wolfsons are getting off easy; I think the most severe punishment the government is going for is being banned from the securities markets.  I don't believe incarceration is on the table from what I can tell.

 

There will always be fraud all over Wall Street until prosecutors start throwing the major players in federal PYITA prison.  And not just the Indian ones (yea, I don't think it's a coincidence personally.)

[Kraven]

I suggest that you all read the actual SEC compliant. In it a special section has Mr. Wolfson visiting a large fund which the SEC refused to name, that was short FFH Shares. Mr. Wolfson offered to "reset" the hedge fund's short position in FFH in exchange for a 20% borrow fee as opposed to the 30% that was being charged by the funds prime broker.

 

This complaint feels very similar to the one brought against goldman, instead of Paulson for creating the abacus series of CDS's.

 

Why were Paulsons people allowed to sit and choose what piece of crap mortgages to throw into Abacus and then hire Goldman to sell them to the Germans, and goldman only gets in trouble? The architect was Paulson.

 

Once again, the wolfsons were just the grease in the machine, they were the enablers that allowed the funds to short synthetic shares, electronically of real businesses. Why aren't the funds being sued?

 

Paulson didn't hire Goldman to sell Abacus to the Germans.  They hired Goldman to enable them to short these particular MBS.  They couldn't care less if Goldman sold it or retained it.  What got Goldman in hot water was simply disclosure.  Did they disclose all the material information that an investor would require in making it's decision to buy Abacus? 

[moore_capital54]

This complaint feels very similar to the one brought against goldman, instead of Paulson for creating the abacus series of CDS's.

 

Why were Paulsons people allowed to sit and choose what piece of crap mortgages to throw into Abacus and then hire Goldman to sell them to the Germans, and goldman only gets in trouble? The architect was Paulson.

 

Well not to nit-pick but it's because Paulson never made claims as to the quality of the securities.  Goldman didn't get in trouble for creating Abacus (it's not illegal to create crappy investments); they got in trouble because internally they were laughing about how crappy the security was while simultaneously withholding the fact that Paulson designed it to be crappy from their investors.  And then Goldman claimed that their incentives were aligned with investors when they were actually shorting it.

 

Why does Paulson get in trouble for claims Goldman was making?

 

But I agree with your sentiment.  It also seems like the Wolfsons are getting off easy; I think the most severe punishment the government is going for is being banned from the securities markets.  I don't believe incarceration is on the table from what I can tell.

 

There will always be fraud all over Wall Street until prosecutors start throwing the major players in federal PYITA prison.  And not just the Indian ones (yea, I don't think it's a coincidence personally.)

 

I agree with your logic to an extent, but the SEC should have simply "followed the money" and essentially this security was a tool that stole money from the germans and handed it to Paulson. Paulson was the architect, Paulson knew just as did Goldman what he was doing, and he did not deserve those gains.

 

I have much respect for paulson, and especially with this CDS Trade, but he does not deserve to get filled more than the market allows just because hes paulson. Synthetic securities should be outlawed. 

[Kraven]

I agree with your logic to an extent, but the SEC should have simply "followed the money" and essentially this security was a tool that stole money from the germans and handed it to Paulson. Paulson was the architect, Paulson knew just as did Goldman what he was doing, and he did not deserve those gains.

 

I have much respect for paulson, and especially with this CDS Trade, but he does not deserve to get filled more than the market allows just because hes paulson. Synthetic securities should be outlawed.

 

I think that you're looking at yesterday's situation with today's knowledge.  Abacus was put together prior to the crisis.  Paulson wasn't even Paulson yet.  He was just another hedge fund manager putting on a trade.  Paulson didn't necessarily get anything that anyone else couldn't have gotten.  As evidence of that, Paulson wasn't the only guy doing this - see Magnetar, etc.  At the peak of every bubble there are going to be people who make out better than the rest, whether that's due to luck, skill, or whatever. 

 

I also disagree that Paulson was the architect.  As I said earlier, Paulson came to Goldman wanting to do something specific, i.e. short certain MBS.  If Goldman had wanted to retain it on their books, Paulson couldn't have cared less.  The response might be that of course they were going to sell it, but as the CDO market got long in the tooth, all of the majors were warehousing this stuff to get trades done.  Because of course any "blip" would be short lived and they would need to hit the ground running when the market got back in gear.

 

Synthetic serve a purpose.  Don't blame the gun for being shot.

[Guest Hester]

I have much respect for paulson, and especially with this CDS Trade, but he does not deserve to get filled more than the market allows just because hes paulson. Synthetic securities should be outlawed.

 

If only those on the other side of Paulson's trade were able to actually see the securities and judge the quality for themselves before investing. You know, like financially sophisticated adults. Instead Paulson and his cronies held them at gunpoint and forced them to invest...

[ubuy2wron]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

[Kraven]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

 

I am not disagreeing that these things aren't used appropriately in many situations, but the same can be said for many things in life.  One of the things we used to say was don't blame the lion for killing it's prey.  It's the lion's nature.  It doesn't make it right, but it is what it is.  Regulators and such are great at regulating and preventing the last crisis.  Get rid of one thing and something else will take it's place.  Wall Street really isn't a den of thieves, it's a misnomer.  There have been dens of thieves of course, but Wall Street itself is simply a bunch of people who are made up of about 99% greed and 1% water.  Greed is as greed does (to adapt Forest Gump's famous line).  Most of these things serve a purpose, not all, but most.  Wall Street would serve itself better if it simply took things to the line instead of always going over the line and causing the rubber band to snap back.  But again, the lion and all that.

[moore_capital54]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

 

I am not disagreeing that these things aren't used appropriately in many situations, but the same can be said for many things in life.  One of the things we used to say was don't blame the lion for killing it's prey.  It's the lion's nature.  It doesn't make it right, but it is what it is.  Regulators and such are great at regulating and preventing the last crisis.  Get rid of one thing and something else will take it's place.  Wall Street really isn't a den of thieves, it's a misnomer.  There have been dens of thieves of course, but Wall Street itself is simply a bunch of people who are made up of about 99% greed and 1% water.  Greed is as greed does (to adapt Forest Gump's famous line).  Most of these things serve a purpose, not all, but most.  Wall Street would serve itself better if it simply took things to the line instead of always going over the line and causing the rubber band to snap back.  But again, the lion and all that.

 

Again, as disciples of Graham & Dodd and Buffett, I believe we are all held to a different standard around here. Kraven can it be argued that was Paulson did was on the right side of the law, probably, maybe.

 

Does it pass the front page of the newspaper test no, not at all.

 

Relating to synthetics I stick to my  position that they serve no purpose.

 

An analog would be, say you wanted to buy 50,000,000 shares of BAC right now at 7.39, and yet you can only  buy around 1,000,000 on the ask. Well you call up your prime broker, in my case Scotia, and I ask them to find me some german fund who is willing to take the other side, at 7.39 right this instance, and to sell me 50,000,000. Well they don't own that 50,000,000 so instead they will create a new security that now tracks the price of BAC and take the other side.

 

Well lets see what happened here, instead of buying those 50,000,000 shares in the market, and getting filled based on the laws of supply and demand, I coerced, or through my fees, convinced my prime broker to convince their clients to take the other side of this "gamble".

 

That is what Abacus was, Paulson could not get filled on enough mortgage securities, so he decided to create a tracking security, and paid his brokers to coerce idiots into taking the other side.

 

For this reason it does not pass the front page of the newspaper test, and it should be outlawed.

 

You can argue otherwise, but I stand firm on this point.

[Kraven]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

 

I am not disagreeing that these things aren't used appropriately in many situations, but the same can be said for many things in life.  One of the things we used to say was don't blame the lion for killing it's prey.  It's the lion's nature.  It doesn't make it right, but it is what it is.  Regulators and such are great at regulating and preventing the last crisis.  Get rid of one thing and something else will take it's place.  Wall Street really isn't a den of thieves, it's a misnomer.  There have been dens of thieves of course, but Wall Street itself is simply a bunch of people who are made up of about 99% greed and 1% water.  Greed is as greed does (to adapt Forest Gump's famous line).  Most of these things serve a purpose, not all, but most.  Wall Street would serve itself better if it simply took things to the line instead of always going over the line and causing the rubber band to snap back.  But again, the lion and all that.

 

Again, as disciples of Graham & Dodd and Buffett, I believe we are all held to a different standard around here. Kraven can it be argued that was Paulson did was on the right side of the law, probably, maybe.

 

Does it pass the front page of the newspaper test no, not at all.

 

Relating to synthetics I stick to my  position that they serve no purpose.

 

An analog would be, say you wanted to buy 50,000,000 shares of BAC right now at 7.39, and yet you can only  buy around 1,000,000 on the ask. Well you call up your prime broker, in my case Scotia, and I ask them to find me some german fund who is willing to take the other side, at 7.39 right this instance, and to sell me 50,000,000. Well they don't own that 50,000,000 so instead they will create a new security that now tracks the price of BAC and take the other side.

 

Well lets see what happened here, instead of buying those 50,000,000 shares in the market, and getting filled based on the laws of supply and demand, I coerced, or through my fees, convinced my prime broker to convince their clients to take the other side of this "gamble".

 

That is what Abacus was, Paulson could not get filled on enough mortgage securities, so he decided to create a tracking security, and paid his brokers to coerce idiots into taking the other side.

 

For this reason it does not pass the front page of the newspaper test, and it should be outlawed.

 

You can argue otherwise, but I stand firm on this point.

 

Moore, we will have to agree to disagree I guess.  No harm in that.  But just to respond, fwiw.

 

Paulson didn't do anything illegal as far as I can tell.  He went to to Goldman (actually went around to all the IBs) and proposed a trade.  Everyone could have said no.  You want to say that because of his fees he held them over a barrel, but I can't agree with that.  He wasn't anyone way back in 2007.  The fees he was paying on these things were no more or less than anyone else was paying.  The CDO machine was in full gear.  The banks could have said no.  But they never do.

 

Your examples use inflammatory images to suit your argument.  You say you could go to Scotia and force them to stuff some German investor.  Why would you care who the investor is in this kind of product?  It would never play out this way.  You'd go to Scotia and say I want to do this BAC trade, find a way to do it.  They either would or wouldn't.  You might not even know until much later who was taking the other side of it.  You wouldn't dictate who the investor is.  Would it be different if Scotia warehoused it?  The thing is that the Scotias of the world generally didn't get in trouble because they were inherently conservative on these things.  Part of it was being last guy at the party and trying to figure out where the beer keg is.  It isn't necessarily that they were teetotalers, but that they were a bit slow on the draw, but that served them well.

 

I think too you are mixing up synthetics with synthetic ABS CDOs.  What's wrong with going to your IB and saying I want to go long (or short) a particular hard to find bond.  But you don't have to worry on this front.  I suspect we won't see synthetic ABS CDOs for a very long time (essentially never).

 

Just a different viewpoint than yours.  I don't like the result any more than you do, but it's hard to always judge based on current facts.  I didn't see anyone speaking out about any of this in 2006-2007 (I am not talking about the overheated market generally, but synthetic ABS CDOs).