A couple of days before Lehman fell and all hell broke loose on Wall Street, Floyd Norris, the chief business correspondent of The New York Times, published a blog (headline: “Short Sale Conspiracies”) wherein he implied that I was mentally insane for suggesting that Deutsche Bank Securities had been caught selling “massive amounts of phantom stock.”

I promise to take this up with my psychiatrist, but first let me tell you a bit more about the peculiar case that led the New York Stock Exchange to hand Deutsche Bank Securities the largest fine in history for violations of SEC rules designed to prevent the creation of what the chairman of the SEC has called “phantom stock.”

The NYSE’s disciplinary order states that Deutsche Bank’s traders “effected an unquantified but significant number of short sales…without having borrowed the securities.” Indeed, the traders sold the shares “without having any reasonable grounds to believe that the securities could be borrowed for delivery when due…”

This is a clear-cut case of abusive naked short selling – traders selling stock without bothering to even check whether the stock could be obtained. In other words, Deutsche Bank’s traders were selling phantom stock, and it appears that they were doing this systematically over the course of the 22 month time period (ending in October 2006) that the NYSE investigated.

I asked NYSE spokesman Scott Peterson how much stock Deutsche Bank sold without knowing that the stock could be borrowed. He said, “We’re not saying how much, but let me put it this way: It was A LOT.” (The emphasis was his.)

Interestingly, however, the NYSE pointedly did not include the words “naked short selling” anywhere in its written disciplinary action. And the Big Board’s spokesman went to great lengths to suggest that Deutsche Bank was not engaged in naked short selling. “This is a case of failure to locate stock,” the spokesman said. “We’re being careful not to call it ‘failure to deliver’ stock.”

Mr. Peterson referred me to a section of the NYSE’s disciplinary order where it says that “according to [Deutsche Bank’s] delivery records,” there were “only two failures to deliver.”

So Deutsche Bank systematically failed to even locate the stock that it sold, but the NYSE isn’t calling it “naked short selling,” and Deutsche Bank managed to deliver the stock in a timely fashion in all but two instances.

[rest of story here]

http://www.deepcapture.com/deutsche-...

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