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ILLEGAL SHORT SELLING ON WALL STREET

February 7, 2013

Since 1997, the New York Stock Exchange has possessed proof that Spear Leeds and Kellogg (SLK), which was purchased by Goldman Sachs in October 2000, permitted firms that cleared through SLK to sell stock short on a minus tick.
By Ed Manfredonia
December 12th, 2007

[Wall Street Scandals]
In this brief article, we shall demonstrate how the Securities and Exchange Commission changes federal securities laws to legalize illegal conduct by Wall Street specialist firms.

We shall prove that there were no serious penalties for New York Stock Exchange (NYSE) specialist firms, which sold stock short on a minus tick, which at the time was a serious violation of the Securities Exchange Act of 1934.

Selling stock long means selling stock, which you own. Selling stock short means selling stock, which one does not own. Selling stock short on a minus tick is selling stock, which one does not own, at a price that is lower than the last different price.

Individuals and firms sell stock short because they believe that the price of the stock shall decline. Then after the price of the stock declines the individual or firm can purchase the stock at a price, which is less than the price at which the stock was sold- and thereby earn a profit.

Until July 6, 2007 selling stock short on a minus tick was illegal under Section 10(a) of the Securities Exchange Act of 1934. This article shall prove that Section 10(a) was repealed to benefit large Wall Street firms.

Philip Peltz and Sol Mandel were small players. Philip Peltz (United States of America v. Philip Peltz, 433 F2d 48: year 1970) and Sol Mandel (United States of America v. Sol Mandel, 296 F.Supp. 1038: year 1969) were both sentenced to federal prison because Peltz and Mandel had sold several hundred shares of Georgia Pacific stock short on a minus tick, which was a violation of Section 10(a) of the Securities Exchange Act.

Since 1997, the New York Stock Exchange has possessed proof that Spear Leeds and Kellogg (SLK), which was purchased by Goldman Sachs in October 2000, permitted firms that cleared through SLK to sell stock short on a minus tick. Section 10(a) of the Securities Exchange Act of 1934 prohibited short sales of stock on a minus tick. This was illegal until July 2007- when the Securities and Exchange Commission changed the law to benefit Goldman Sachs and other brokerage firms.

How did the New York Stock Exchange know that a trader, who cleared through Spear Leeds and Kellogg, could illegally sell short stock on a minus tick and, thereby, violate Section 10(a) of the Securities Exchange Act?

In July 1995 I had received an anonymous package, which contained the records of Schettinos’s illegal trading- including Schettino’s illegal trading of stocks that were listed on the New York Stock Exchange. On 7 October 1996, I wrote a letter to Edward Kwalwasser, Executive Vice President of Legal and Regulation at the New York Stock Exchange.

I identified myself as a former market maker at the American Stock Exchange. In this letter I notified Kwalwasser that in March 1995 Pat Schettino, a managing director of Spear Leeds and Kellogg who was responsible for the option and stock clearing operations of SLK at the American Stock Exchange, had illegally sold short on a minus tick the stock of Micron, a stock which was listed on the NYSE, and had illegally traded NYSE listed stocks for account 43AC1209 of Bullseye Securities, which was a clearing customer of Spear Leeds and Kellogg.

In my missive to Kwalwasser I stated: “I have been informed that Schettino sold short 1,000 shares of MU stock, while the account was short 5,000 shares.”

On March 5, 1997 I received a letter from William Glynn, Sales Practice Analyst, at the NYSE, in response to my missives to Kwalwasser requesting that the NYSE investigate Schettino’s illegal trading, since the American Stock
Exchange was investigating Schettino’s trading. In his reply Glynn stated that the NYSE would not investigate Schettino’s trading. On April 3, 1997 I once again wrote to Glynn and requested that the NYSE investigate Schettino’s illegal trading. On April 9, 1997 Glynn once again responded and stated that the NYSE would not investigate Schettino’s trading because the American Stock Exchange was investigating Schettino’s illegal trading.

On July 29, 1997 I confronted Edward Kwalwasser, the NYSE Executive Vice President for Legal and Regulatory Affairs, in the presence of Andrew Kandel, Bureau Chief Securities Division of the New York State Office of the Attorney General, at a public hearing, which was held at New York Law School. At this hearing I asked in the presence of Kandel why Kwalwasser and the NYSE had refused to investigate Schettino for illegally selling shares of Micron short on a minus tick. I also asked Kwalwasser why the NYSE had not investigated Schettino’s illegal trading of NYSE listed stocks, including IBM, for the 43AC1209 account of Bullseye Securities. Kwalwasser stated that he could not comment.

On 25 June 1998 I wrote to Richard Grasso, Chairman of the New York Stock Exchange, and stated that the NYSE had refused to investigate Schettino’s sale of Micron short on a minus tick and Schettino’s illegal trading for Bullseye Securities. I enclosed a copy of a missive, which was dated 13 June 1998 and was addressed to Edward Kwalwasser. This missive to Kwalwasser discussed the illegal trading of NYSE listed stocks by Pat Schettino, a former managing director of Spear Leeds and Kellogg.

Thus the Regulatory and Enforcement Division of the New York Stock Exchange had been informed that a senior managing director of Spear Leeds and Kellogg had illegally sold stock short on a minus tick (1,000 shares of Micron). Furthermore, Schettino had illegally sold this stock short on a minus tick for an account at Bullseye Securities that was not his. And the NYSE took no action.

Eventually in 1999 after a four year investigation, the American Stock Exchange permanently banned Schettino from the securities industry for illegal trading at the American Stock Exchange.

On September 15, 2000 in a missive to Robert Katz, Secretary to the Board of Goldman Sachs, I notified the Board of Goldman Sachs that Schettino had illegally sold short on a minus tick the stock of Micron and that Schettino had illegally traded stocks, which were listed on both the New York Stock Exchange and the American Stock Exchange, for the account of Bullseye Securities. This was more than one month prior to Goldman’s purchase of Spear Leeds and Kellogg.

On January 31, 2006 the New York Stock Exchange announced that it had fined 18 NYSE member firms including Goldman Sachs and LaBranche, a total of $5.85 million for submitting false records, which showed that these firms had reported illegal short sales of stock as legal long sales of stock.

On January 3, 2006 the NYSE in Hearing Panel Decision 05-145 fined Goldman Sachs $150,000 for reporting illegal short sales as legal long sales of stock. The NYSE added this interesting caveat: The illegal short sales were reported as legal long sales for an indeterminable period of time and this may have been done since 1989.

On January 3, 2006 the NYSE in Exchange Hearing Panel Decision 05-146 fined LaBranche Specialists $150,000 for reporting illegal short sales as long sales.

But more is to come.

On December 21, 2006 the New York Stock Exchange in NYSE Hearing Board Decision 06-224 fined Spear Leeds and Kellogg Specialists, a subsidiary of Goldman Sachs, $600,000 for violating Section 10(a) of the Securities and Exchange Act by illegally selling stock short on minus ticks.

On December 21, 2006 the New York Stock Exchange in NYSE Hearing Board Decision 06-227 fined LaBranche & Co., a NYSE specialist firm, $600,000, for violating Section 10(a) of the Securities Exchange Act by illegally selling stock short on a minus tick.

Section 32 of the Securities Exchange Act of 1934 provides that any person, who willfully violates any provision of the Securities Exchange Act of 1934, is punishable by a fine of not more than $10,000 for each violation of the Securities Exchange Act of 1934 and imprisonment of not more than two years for each violation of the Securities Exchange Act of 1934. Mandel and Peltz were sentenced to federal prison for selling a few hundred shares of stock short on a minus tick. Why were not the specialists of Goldman Sachs and LaBranche sent to federal prison for selling stock short on a minus tick?

If one were to read every enforcement action, which the New York Stock Exchange made pertaining to illegal short sales of stock, it becomes readily apparent that the Securities and Exchange Commission changed the rules regarding sales of short stock on a minus tick to benefit firms such as Goldman Sachs and LaBranche.

Thus the legal equivalent of bubonic plague was permitted by the NYSE so that its member firms could earn money and defraud the public.

Goldman Sachs and other major firms own not only the Department of the Treasury, but they also own the Securities and Exchange Commission.

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