Conspiracy theorists can find plenty to terrify them in a new documentary about the inner-workings of Wall Street.
Entitled "Wall Street Conspiracy," the film looks at how the financial community's manipulation of the market has prompted CEO's of dozens of unsuspecting companies to reach for their Pepto Bismol.
Kristina Leigh Copeland, writer and director, paints a terrifying picture of Wall Street brokers systematically selling stock they don't own, getting paid for those phantom shares and never actually delivering them to buyers - a controversial practice known as "naked short selling" that drives stock prices down and, critics say, has the potential to destroy publicly-owned companies and short-changes legitimate investors.
Short-selling itself is an accepted Wall Street practice, allowing traders to "borrow" a security from a broker and sell it, with the understanding that it must be re-purchased and returned to the broker within three days.
When the broker doesn't deliver those re-purchased shares, however, the trade is said to have "failed to deliver." When stock prices are falling, the longer the short-seller delays in returning the stock the more money he or she will make.
It's when a trader "borrows" stock and sells it with no intention of ever delivering the shares that it becomes "naked" short-selling. Normally the phantom trades go undetected, though the SEC may react when fail numbers for a specific stock spike; then, if it can be proven it was done to drive down share prices (and thus boost broker profits), regulators can file charges.
Just recently, the U.S. Securities & Exchange Commission did charge Chicago-based optionsXpress, an online brokerage and clearing agency, along with four of its officials and a customer with "an abusive naked short-selling scheme," alleging the firm had racked up "continuous failures to deliver."
SEC Division of Enforcement Director Robert Khuzami alleged optionsXpress used what he labeled "sham reset transactions" to avoid complying with the regulations, saying that, "in effect, they 'kited' shares of stock, thus depriving buyers of the benefit of their bargain prompt delivery of their shares."
While the SEC filing didn't identify the target of the short-selling scheme, it did say that optionsExpress customers accounted for nearly 48 percent of the daily trading volume in one of the securities.
Naked short-selling has been banned by most other countries, but not here, in the U.S.
In her film, Copeland suggests the practice has made billions for the brokers while ruining unsuspecting companies that were, without realizing it, caught in their trading crosshairs. Companies like Eagletech, the brainchild of Richmond native Rod Young, were driven into the ground by the alleged stock manipulation. Others, like Overstock and Taser, though severely wounded, lived to fight another day.
All three companies are among dozens claiming damages from naked short selling that filed suit to recover their losses. Overstock, in fact, actually filed two suits - the first, targeting a hedge fund and a research firm, won them an apology and more than $5 million in cash. In the second, which is still being litigated, Overstock sued 11 Wall Street brokers, the company deemed responsible for the alleged stock manipulation, of which, Overstock Chairman and CEO Patrick M. Byrne said one has since gone out of business and two were sold at what he called "fire-sale prices," while others agreed to pay millions to be dropped from the suit.
(Overstock is still duking it out in court with Goldman Sachs and Merrill Lynch, and says a recent ruling denying the brokerages' motion to seal the evidentiary record on a summary judgment hearing is significant because in those proceedings, Overstock's attorneys were able to map out how the two brokerages allegedly used naked short selling to manipulate Overstock's shares. The brokerages have denied any wrongdoing.)
Taser, the company that built a stun gun empire, is also fighting back. Its shareholders, too, have sued some of the biggest names on Wall Street - Goldman Sachs, Merrill Lynch, Bank of America Securities LLC, Bear Stearns Securities Corp., Credit Suisse USA Inc., Deutsche Bank Securities Inc., Pierce, Fenner & Smith Inc., Morgan Stanley & Co. Inc. and UBS Securities LLC - claiming they flooded the market with shares in their company that didn't exist anywhere but on their computer screens. An indication of how many counterfeit shares were in the market - and how extensive the problem is - came in 2005: Taser had sold about 60 million legitimate shares, but at the company's annual meeting more than 80 million shares were voted - an obvious indication that something was amiss in the marketplace. Taser sued and settled the suit for what was, presumably, "a very large amount" in June 2011. Due to a confidentiality agreement, no one in the know can actually talk dollars and cents.
Eagletech, too, filed suit, alleging in 2001 that some of the best known Wall Street brokerages had conspired with organized crime to commit securities fraud against it. Young said there've been setbacks - his lead attorney died a few years ago in an auto accident, while a new judge presiding over the case dismissed it on jurisdictional issues with prejudice, meaning they couldn't refile.
His story is one of several cited in Copeland's "Wall Street Conspiracy."
"We appealed it for two-and-a-half years," he said. "The appeals court just reaffirmed the lower court decision (dismissing the suit on jurisdiction) but reversed him on the prejudice issue. That gives us an opportunity to refile, so we're back in the game. It's not like we're starting over, but we lost a lot of time."
In the documentary, Copeland insists naked short selling is not an isolated occurrence. She said on any given day $500 million to $1 billion in shares are sold and not delivered, and the investment community is able to get away with it because trading now is done on computers rather than paper.
She also insists the real losers are the everyday investors, people who are counting on their investments to pad their retirements or pay for their kids to go to college, not to mention the American taxpayer, on whose behalf Congress shelled out billions of dollars to stabilize Wall Street.
Rod Young's family, for instance, sold a 100-acre farm and invested the proceeds in Eagletech, a company that should have taken Wall Street by storm. He'd come up with the idea of a virtual telephone system where calls to their number would follow the user from phone to phone "no matter where they were," a patented "follow me" technology. The big broker houses took notice, though, and for whatever reason Eagletech's trading volume "shot up 10-fold" - meaning that counterfeit shares were flooding the market."
"It killed my company," he insists. "My company was targeted (by unscrupulous traders) for destruction."
Soon after the bogus shares drove prices into the ground, he said the SEC set out to deregister Eagletech's stock. Young fought that deregistration and in the process was able to get his hands on literally thousands of records that, he says, detail how the big brokerages killed his fledgling company. That deregistration battled ended up being a blessing in disguise, he said.
"I ended up with those records purely as a consequence of fighting a deregistration action," he said. "Eagletech may be the only company in history that ever got trading records from the SEC that proved the brokerage community was manipulating shares in my company, but they refused to do anything about it, even when you put it in their face.
"The real story here is that virtually every investor in this country has been ripped off by Wall Street," he added. "Even if you think you're not a victim, you probably are. If you have an IRA, a 401K or a pension fund, chances are some counterfeit securities are in that account. Your fund manager probably purchased some securities that failed to deliver, they don't exist and they never existed. It's not a problem today, but when the baby boomers start withdrawing more money from the retirement system than is going in, it could be a big problem."
Eagletech is privately held now, a figurehead company with 2,400 shareholders - all of them waiting to see if they can get some their money back when Young's lawsuit finally makes it into a courtroom. To give you an idea of how valuable his tech idea could have been, he said a company using technology very much like his patented process recently sold to Google for $95 million.
And while companies like Overstock and Taser have managed to hang on, Young said there are "probably a thousand other companies like mine that didn't survive."
Copies of "Wall Street Conspiracy" can be obtained at thewallstreetconspiracy.com.