August 23, 2022 Version 2 – Revised: November 15, 2022 A MARKET STUDY: Three Decades of Naked Shorting ‘Meme Stocks’ or a Failure to Deliver Nightmare? This is not financial advice. Please email me if you find any errors: amarketstudy@proton.me 1 August 23, 2022 Version 2 – Revised: November 15, 2022 SUMMARY : At the time of setting out on my research I did already own shares of GME (Gamestop’s Stock) and still do. Gamestop was and is still the most well know ‘meme stock’. I set out to research naked shorting and Gamestop. I kept finding evidence and connections that supported the ideas behind the ‘conspiracy’ that GME and possibly many other stocks were being naked shorted. But also, I found evidence that maybe the problem is systemic and extends much farther back into the past. I found evidence that the 2008 financial crisis may have been more of a naked shorting problem than an MBS problem. I also found connections to Bernie Madoff’s famous blow-up in 2008. I believe that the stock market in 2023 could face very similar problems to the ones it faced in 2008. I try to stick with the facts, but it’s hard to wade through the conspiracies. Through my research I attempt to show that: 1. It’s possible Market Makers found a Failure to Deliver (FTD) loophole to hide naked shorting on stocks as far back as the late 1980s. 2. It’s possible these hidden naked shorts could have had an impact on the stock market crash of the early 2000s. 3. It’s possible that Market Makers continued to use the options market to use an FTD loophole to hide naked shorts when the SEC enacted Reg SHO in 2005. 4. It’s possible the SEC knew that the Failure to Deliver problem persisted after they enacted Reg SHO in 2005. 5. It’s possible that when the SEC rectified the loophole during a tumultuous economy in 2008 it instead could have been the ultimate catalyst of the 2008 Financial Crisis. 6. It’s possible that Market Makers moved to a new loophole using Exchange Traded Funds (ETFs) to hide their naked shorting. 7. It’s possible GME and other stocks are still naked shorted using this FTD loophole. 8. It’s possible GME could still be due for an FTD squeeze or naked short squeeze or MOASS. 9. It’s possible that the stock market could face incredibly volatile times in the Spring of 2023. 2 August 23, 2022 Version 2 – Revised: November 15, 2022 INDEX PART 1 – Introduction: Shorts, Naked Shorts & Short Squeezes PART 2 – FTDs and Arbitrage PART 3 – Timeline of Financial Crises in American History PART 4 – Toothless Rule 1: Circuit Breakers PART 5 – Gramm-Leach-Bliley Act PART 6 – Conspiracy 1: FTDs in the 90s & Bernie Madoff PART 7 – Stop the Naked Shorting! PART 8 – Toothless Rule 2: Reg SHO & the Madoff Exemption PART 9 – Options Contracts PART 10 – Married Puts PART 11 – Reverse Conversion PART 12 – Madoff & The Split-Strike PART 13 – Back to the Timeline: 2007 – Bye, Grandpa PART 14 – The 2008 Crash: Save Wall Street PART 15 – The 2008 Crash: Save Wall Street PART II: U Can’t Short This PART 16 – The 2008 Crash: Out of Options? PART 17 – The 2008 Crash: Emergency Extensions PART 18 – Amendments to Reg SHO PART 19 – The 2008 Financial Crises, Naked Shorting & Rule Changes PART 20 – Was Madoff FTDing? PART 21 – Options Fall While ETFs Rise PART 22 – ETFs PART 23 – ETF Loophole 1 – No Delivery PART 24 – Threshold List PART 25 – ETF Loophole 2 – ETF Hot Potato PART 26 – Leverage Through Swaps PART 27 – Internet Conspiracy 1: Bullet Swaps PART 28 – Internet Conspiracy 2: DTCC PART 29 – Witching Windows & Waves PART 30 – Predictions PART 31 – DRS Apes & The GME MOASS PART 32 – Who Really Has a Short Interest in GME? PART 33 – The SEC and DTCC PART 34 – Internet Conspiracy 3: FTX – Crypto Loophole (or Hedge?) PART 35 – Conclusion PART 36 – REFERENCES: PART 37 – TL;DR or TL;DRS 3 August 23, 2022 Version 2 – Revised: November 15, 2022 PART 1 – Introduction: Shorts, Naked Shorts & Short Squeezes To understand the entire picture you need to start with shorting and naked shorting. According to the Securities and Exchange Commission (SEC), a short sale is, “any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.” In other words, a trader thinks the price of shares will go down. They pay a fee to borrow some shares and sell them at the current price. When the price falls they buy back the shares and return them. They keep any profits from the difference in the sell and buy prices (spread), minus any fees they paid to borrow. Sell high, buy low. Figure 1.1 is a diagram showing an example of a successful short. I just used $2.50 as a borrow fee example. Usually it will be based on the price of the shares and how hard to borrow they are at the moment. An argument for shorting is that with a cost to borrow shares it usually requires attention to detail and research before a trader will jump into a short trade. If a company is overvalued and the trader believes the stock price will soon reflect that then it can be a lucrative play to try and short the high price and buy the low price. There’s one fatal flaw to shorting and that is if the price goes up. If the price starts rising too fast then it could potentially lead to a short squeeze. In 2008 several factors lead to a short squeeze causing the share price of Volkswagen to dramatically increase. 4 August 23, 2022 Version 2 – Revised: November 15, 2022 Here is a chart showing the Volkswagen share price in 2008 during a short squeeze. 1.1 “On October 26, 2008, Porsche announced that it had raised its ownership stake in Volkswagen to 43%, at the same time that it had acquired options that could increase its stake by a further 31%, to a total ownership stake of 74% . The state of Lower Saxony already owned another 20% stake in V W, so Porsche's announcement meant that only 6% of VW's shares were in “free float”, that is, held by investors who might be interested in selling .” 1.1 Porsche's buying had inflated the price of VW stock, and investors had been selling VW short , expecting that once Porsche's buying spree ended, VW shares would fall back to realistic levels. Short sellers had borrowed and sold 12.8% of VW’s outstanding stock, but with free float now down to 6%, short sellers owed more shares than were publicly available . If the lenders of those shares all at once demanded repayment of their shares, then there would be 12.8 buy orders for every 6 shares available. In what was called “ the mother of all short squeezes ” share price rose until the short sellers went broke.” 1.1 Short sellers sold too many shares short and got trapped when there weren’t enough shares to close out of their positions. The mad dash of short sellers trying to close their bad bets caused the price to skyrocket. Naked Shorts A naked short on the other hand is just a short that doesn’t include a borrow. A ‘seller’ takes a traders money and just never delivers any shares. Naked shorting is regulated and prohibited. Naked shorting is detrimental to any functioning market. Supply and demand determine the price, if the supply is artificially inflated then the price changes. 5 August 23, 2022 Version 2 – Revised: November 15, 2022 Figure 1.3 shows how supply and demand should work in a market, the point where supply and demand meet (the green dot) determines the price: Figure 1.4 shows how the price lowers when the supply is artificially inflated. In other words, if demand stands the same and you control the supply then you also control the price: 6 August 23, 2022 Version 2 – Revised: November 15, 2022 PART 2 – FTDs and Arbitrage FTD stands for Failure to Deliver – the simple summary is that an FTD is a share that has not been delivered yet. An FTD can be the result of a naked short, but there can also be valid reasons for a failure to deliver. For example: someone loaning out their shares requests them back, but before they receive the shares back they sell them on the market. However, for this paper we’re focusing on how FTDs could potentially be a sign of naked shorts on a stock and how naked shorting can be used to manipulate the price of stocks. For the rest of this paper naked short and FTD will be used interchangeably. There are several ways to make money on naked shorting, but let’s first focus on arbitrage. Let’s specifically take a look at something called convertible arbitrage. Convertible arbitrage can be used on stocks, bonds, and other convertible securities. For this example we’ll focus on a common stock and it’s preferred stock. 2.1 Common stock would be like Apple Inc. under common stock ticker: AAPL (currently at $155.81), or Ford Motor Company under common stock ticker: F (currently at $15.16). Preferred stock would be like Apple Inc. under preferred stock ticker: AAPL (currently at $155.81), or Ford Motor Company under preferred stock F.PRA (currently at $15.16) or F.PRB (currently at $24.66). “The main difference is that preferred stock usually does not give shareholders voting rights, while common stock does, usually at one vote per share owned.” Instead, “investors are usually guaranteed a fixed dividend in perpetuity.” 2.1 If you notice a difference in the price of Apple’s common stock and it’s preferred stock you could potentially use convertible arbitrage to make money off of the spread – the difference in the two prices. Convertible Arbitrage on common and preferred stock would play out in the following steps: 1. Short the convertible stock with the higher price. 2. Buy the convertible stock with the lower price. 3. Wait until the price of the stocks come back together and equal the same price. 4. Buy the stock to close your short at the lower price. 5. Sell your long stock for a profit at the higher price. 7 August 23, 2022 Version 2 – Revised: November 15, 2022 Figure 2.1 is a diagram showing an example of convertible arbitrage. Now, a spread of $5 would be very impressive, spreads are likely to much smaller than that usually. A Market Maker or large Institutions using an ‘algo’ would have the highest chances of catching these discrepancies in price quickly to take advantage of the spread. A Market Maker is, “[a] firm or individual who actively quotes two-sided markets in a particular security, providing bids and offers (known as asks) along with the market size of each. Market Makers can provide a lot of liquidity for markets because they take buy and sells on stock. They can also make trades for their own accounts.” 2.2 Some famous Market Makers that you may have heard of: Morgan Stanley (stock has a market cap of $148.334 Billion), UBS (stock has a market cap of $54.268 Billion), Deutsche Bank (stock has a market cap of $16.734 Billion), Citadel Securities (was valued at $22 Billion in January 2022). 2.3 An ‘algo’ is an algorithm, investopedia.com describes them as being like a recipe. Basically, it’s code or a ‘recipe’ for their incredibly fast computers to in this case find spreads in price between common stock and preferred stock, run some convertible arbitrage, and profit. 2.4 That’s just one example, any firm on wall street worth their fee would have many algorithms running at the same time, taking pieces of the pie from any part of the economy they can. You might be asking yourself, why it would be worth it on pennies or fraction of pennies though? Volume is the key. Large Institutions move a lot of stock. Pennies can add up on a lot of trades. Figure 2.2: 8 August 23, 2022 Version 2 – Revised: November 15, 2022 Around 2020 and “the coronavirus crisis” Citadel Securities was executing “37% of all US retail trades.” 2.5 Just a year later in 2021 SEC Commission Chair Gary Gensler told the Senate Banking Committee that he’s concerned about one market maker having “47% market share over all U.S.-listed retail volume”. 2.6 That market maker is Citadel Securities, while, “ another wholesaler, controls about 25% to 30%.” 2.6 That means that two large institutions handle around 72-77% of all retail trades in the United States. Daily average volume in 2019 was 7 billion, in 2020 it was 10.9 billion. 2.5 According to Morgan Stanley, retail traders are roughly 10% of trading volume. 2.7 So, based on those numbers Citadel Securities could have been on the other side of 403 million daily retail trades in 2020. In other words, Citadel Securities alone could have been on the other side of roughly 147 billion of retail’s trades in 2020. That’s a lot of volume. If you’re moving large enough volume then you can make lots of money even if you’re just making pennies per trade, but we’re really here to see how FTDs could potentially be used to make even more money. I’m going to call this Time-Delayed-Arbitrage. Other names could be FTD Arbitrage or really just Criminal Naked Shorting. 9 August 23, 2022 Version 2 – Revised: November 15, 2022 The basic idea is a ‘seller’ taking someone’s money and selling them a share they don’t own. The ‘seller’ then delays delivery until they can find the share(s) they owe at a better price. If a company took your money and then refused to deliver the product, you’d hopefully stop shopping there, but what if you had no way of knowing? Figure 2.3: What if the price goes up? Wouldn’t they be hurt just like in a short squeeze. Not exactly, if the first ‘buyer’ sells the FTD at a higher price, then in a system that allows FTDs you can just – fork over the cash for the old FTD and simultaneously FTD a new share to someone else. You still have one FTD, but now it’s set at the higher share price. Figure 2.4 is an example of how FTDing could be used to make money and manipulate the price of a stock that increases in value. 10 August 23, 2022 Version 2 – Revised: November 15, 2022 Now this is just an example using one stock over one day. I also used low volume, but even on low volume it led to a quick profit of $27,500. With the use of High Frequency Trading (HFT) Algos you could potentially do this on any number of stocks at a time and over longer time periods. Let’s break down the steps real quick: 0. If you know you’re going to pump a stock before crashing it then you can use this point to accumulate shares. 1. Put in large buy orders for the stock to start shooting the price higher and higher. 2. FTD shares to anyone who jumps on the stock. 3. Sell the shares you bought at the higher price. 4. FTD more shares to push the price lower. 5. Close out all of your FTDs at the lower price. 6. Buy more shares if you want and start another FTD cycle. If someone got stuck in a bad bet with their naked shorts they could potentially get out of it by naked shorting as the stock shoots to extreme heights, opening up new FTDs at higher and higher prices while closing out as few FTDs as possible. Then once the price starts dropping due to a mismatch in supply and demand, sell any long shares and FTD more shares to drive the stock towards lower and lower prices. Finally, settling once they’re profit margins look good enough. Or attempting to short the company into bankruptcy so they don’t have to settle. The only problem is if not enough traders start selling back those naked shorts, or worse, they rally around the stock and keep buying more. Time would be their only enemy. If they can outlast retail, like they always have in the past, then they can always win. This time might be different. This is all to show that FTDs (naked shorting) can be extremely lucrative. If there are loopholes to create FTDs, then its plausible that someone somewhere would eventually look to exploit those loopholes. Making pennies off of billions of trades can add up quickly, and if you could indefinitely delay delivery and keep passing your FTDs around then you could potentially always choose a profitable spread and much larger spreads. This system is complex, confusing, and continually changing. We need to cover some ground and work up to the present day. First, let’s start with a Timeline of Financial Crises in American History. 11 August 23, 2022 Version 2 – Revised: November 15, 2022 PART 3 – Timeline of Financial Crises in American History Figure 3.1 shows every financial crises that has happened in American history including any Global crises that reached American markets. To me it looks like there has been an uptick recently, but I think that’s even more apparent when you look at the timeline of crashes since the beginning of the 1900s. Figure 3.2 shows the dramatic increase in stock market crashes over the last thirty years. It’s why you’ve probably seen articles with headings like this pop up on your news feed: “ Millennials are facing another once-in-a-generation economic disaster ” 3.1 12 August 23, 2022 Version 2 – Revised: November 15, 2022 Let’s break this timeline down a bit. 1901 – The Panic of 1901 – the first stock market crash on the New York Stock Exchange. 3.2 1907 – The Panic of 1907 – “the New York Stock Exchange fell almost 50% from it’s peak the previous year.” 3.3 The Panic of 1907 was the first financial crisis of the 20 th century and led to monetary reform and the “establishment of the Federal Reserve System (FRS)”. 3.4 1929 – The famous “Wall Street Crash of 1929”: Black Thursday (October 24 th 1929) the market declines 21%, October 28 th the market declines 13%, then another 12% on Black Tuesday (October 29 th 1929). 3.4 The crash lasts until 1932, resulting in the Great Depression. After the market crash in 1929 Congress passes the Glass-Steagall Act in 1933, this act separated investment and commercial banking. 3.5 Basically, if you put your money in a commercial bank they could no longer use your money for their own risky investments. In 1934, the Securities and Exchange Commission (SEC) was created as “an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.” 3.6 The SEC came on the scene to set rules and be watchdogs over the market, their effectiveness is debatable. 13 August 23, 2022 Version 2 – Revised: November 15, 2022 1962 – Sometimes known as the Kennedy Slide of 1962 or the Flash Crash of 1962, is a stock market crash that occurred during John F. Kennedy’s Presidential term. At this time the “S&P 500 declined 22.5%, and the stock market did not experience a stable recovery until after the end of the Cuban Missile Crisis.” 3.7 We have two crashes in the first ten years of the 20 th century. Then after thirty years we have a horrible crash that leads to a great depression, in 40 years there are only 3 crashes. In the first 65 years of the 20 th century there are 4 crashes In the last 50 years there has been a crash, a mini-crash, a bubble crash, a bear market ending in a global financial crisis, a flash crash, a market fall, a crypto crash, and one last stock market crash in 2020. In the past 35 years there have been 3 major crashes with a few smaller ones peppered in – what happened? Here’s where I think things start to get interesting. 1987 – There was a Black Friday crash back on September 24 th , 1869. 3.8 Then we got Black Thursday and Black Tuesday. 3.4 Now we get Black Monday on October 19 th , 1987. 3.9 Such inspiring creativity with the naming. “The crash may have been accentuated by new-fangled, high-tech gizmos like program trading, and exacerbated by the roll-on negative impact of Portfolio Insurance, but it was also a fast way of lancing the speculative puss that had built up over the previous year out of the market.” 3.10 ‘[L]ancing the speculative puss’ now that’s some creative writing. What caused the crash? 1. A bull market due for a correction. 3.11 The market had been surging since 1982 when the bull market began. A bull market is just a financial market where prices are rising or are expected to rise. 3.12 The opposite is a bear market where prices see a prolonged decline. 3.13 In 1987 stock “ prices had more than tripled in value in the previous four and a half years, rising by 44%” 3.11 2. Computerized trading. 3.11 Computers “enabled brokers to place larger orders and implement trades more quickly. In addition, the software programs developed by banks, brokerages, and other firms were set to automatically execute stop-loss orders, selling out positions, if stocks dropped by a certain percentage.” 3.11 You can probably guess what happened next. Stocks started dropping and new computerized programs started selling stock if the prices fell too much. All of that selling caused the price to keep falling which caused more selling and so on. 3. Portfolio Insurance. 3.11 “Portfolio insurance involved large institutional investors partially hedging their stock portfolios by taking short positions in S&P 500 futures. The portfolio 14 August 23, 2022 Version 2 – Revised: November 15, 2022 insurance strategies were designed to automatically increase their short futures positions if there was a significant decline in stock prices.” 3.11 “As stock prices declined, large investors sold short more S&P 500 futures contracts. The downward pressure in the futures market put additional selling pressure on the stock market.” 3.11 And again we get a feedback loop of computerized selling leading to more selling and larger and larger declines in the market. It looks like computers already control the market in the late 1980s. 1989 – On October 13 th 1989 we get the Friday the 13 th mini-crash. The cause is often attributed to “ a leveraged buyout deal for UAL, United Airlines' parent company” falling through. I don’t know if there’s more to this story, but I think we can skip 1989 for now. It does however lead into the 1990s Recession which began in July 1990 and ended in March 1991. 3.4 So why do I think the crash in the late 1980s could be important? If you’re a nefarious person on Wall Street looking to make some money in the 80s, then I think it’s possible you could see computerized trading crashing the market as an opportunity. If you can flood a stock with short or even naked short sell orders then maybe you can get the stock spiraling downwards. Once the prices are low enough then stop selling short and start buying to cover. Profit off of the spread you created. Maybe you even fall upon naked shorting and FTDs by accident. 15 August 23, 2022 Version 2 – Revised: November 15, 2022 PART 4 – Toothless Rule 1: Circuit Breakers Really quick, is our first toothless rule change. After the crash in 1987, “ stock exchanges worldwide implemented “circuit breakers” that temporarily halt trading when major stock indices decline by a specified percentage.” 3.11 If the price of a stock “ falls by more than 7% from the previous day’s closing price, it trips the first circuit breaker, which halts all stock trading for 15 minutes. The second circuit breaker is triggered if there is a 13% drop in the [stock] from the previous close, and if the third circuit breaker level is triggered – by a 20% decline – then trading is halted for the remainder of the day.” 3.11 This rule means short sellers can only drop a stock by 20% in a day. If FTDs can last indefinitely then this doesn’t really stop you very much, might just slow you down some. PART 5 – Gramm-Leach-Bliley Act I briefly mentioned the Glass-Steagall Act earlier which made it so commercial banks and investment banks need to be separated or in other words your commercial bank can no longer make risky investments with your money. In 1999, the Gramm-Leach-Bliley Act eliminated that restriction, commercial banks were now free to make risky investments with your money if they wanted to, “which some argue set up the 2008 financial crisis.” 5.1 16 August 23, 2022 Version 2 – Revised: November 15, 2022 PART 6 – Conspiracy 1: FTDs in the 90s & Bernie Madoff Conspiracy 1: Was Bernie Madoff Naked Shorting? Was Bernie Madoff running a Ponzi scheme, or was he up to something worse? I believe Madoff started FTDing (naked shorting) in the early 1990s. I’m not sure he was the father of the FTD, but there’s are some strange connections that suggest Madoff was heavily involved in naked shorting from the early 1990s until 2008. This part relies a lot on words that came from Bernie Madoff’s mouth, so you may believe it to be all lies, but weirdly I think there might be a lot of truth to the things Bernie said over the years – he was a master of deceit. The writer of The Wizard of Lies: Bernie Madoff and the Death of Trust , Diana B. Henriques, corresponded with Bernie Madoff through letters from prison. From a letter dated October 11 th , 2011: “You can do a back of the envelope calculation as follows. From 1963 I made substantial arbitrage profits for the Picower, Shapiro and Chais families joined by the Levy family in 1970...” 6.1 “I started trading for [French banker] Albert Igoin and his French and Swiss banking associates. All of these accounts averaged about 20% annually and were involved in various forms of convertible arb ...” 6.1 Bernie on January 7 th , 2011 says, “...I readily acknowledged that the post [19]92 trades were ficti[ti]ous but the earlier trades were not .” 6.1 Later on January 17 th , 2011, “ ...Also remember th at the U.S. Attorney admitted that they had no evidence that the crime started in the 80’s ...” On March 10 th , 2011, “...I say once again the fraud started in the 90’s ...” 6.1 Bernie argues that his fictitious trades start in the 90s. Now you might think of fictitious ponzi trades that never happened. I think he could really mean naked shorts. I think this is the start of the key to the Madoff story and possibly where a journey into FTDs could have begun, on April 23 rd , 2011 Bernie wrote, “...These altered transaction[s] were long and short transactions , not model option trades like the other clients, i.e., banks and funds, and were no[t] part of any Ponzi scheme and took place post ‘92. The long positions were purchased legit starting in 1980 when everything was o.k....” 6.1 Letter from Nov. 23, 2011: “Try and picture the following chain of events. A portfolio of securities is established for clients with the intention of realizing long term capital gains The portfolio increases in value as the market moves higher. A series of transactions are 17 August 23, 2022 Version 2 – Revised: November 15, 2022 affected for the client, including shorts against the box , pairs [of] short sales and long term options , all with the goal of hedging the portfolio of securities.” 6.1 Let’s break this down real quick: 1. Bernie establishes a portfolio of shares for a client with the intention that they would be held long term. 2. The early 80s see incredible growth and the portfolio does well. 3. To hedge the shares in case the market falls, Bernie ‘shorts against the box’. Bernie keeps the long shares, but also shorts the same stock. 4. Bernie then pairs those shorts with long term options. From that Nov. 23, 2011 letter, “Now, the market crashes in 1987 and the client panics and is afraid of losing his benefit of long term gains if the market continues to sell off. The client knows that the hedge transactions were established with the understanding they were to be long term in duration due to the contra sides own currency hedging strategies. This being said, the client insists on realizing his long term gains on the equities, and leaving the short hedge transactions net short. It is important to know that at this point in time, the gains were substantially greater than the loss on the hedges. Because of the nature of our hedge agreements, and in order to preserve my very important relationship with the foreign counterparties of the hedges, I pleaded with the client to not force the sales. My pleas were to no avail.” 6.1 5. Prices start to fall and Bernie sells the long term stock. 6. Bernie doesn’t close the short position on the stock. “In order to avoid an ugly period of litigation and negative press, I agreed to take over the contra side of the hedge transactions with the understanding that the domestic client would hold me harmless from the losses on the hedge transactions. Provisions were made in the client’s trust agreements and wills to protect me even in the event of their death. Their hope was that the market would continue to sell off and erase the hedge loss. Unfortunately the - opposite occurred. The market moved higher (post-crash), resulting in huge loses on the naked short hedge position. For a period the client sent in bonds and cash to cover the margin calls but after a time claimed his inability to help due to his tax and other investment obligations. He assured me he would be able to re-liquify in time and honor his agreement. The rest is history.” 6.1 7. The market rises and the loses on the short position continue to grow. I believe it’s at this point where Madoff may have inadvertently fallen into the world of FTDs and naked shorting. Now, the prevailing story would be that it’s at this point that Madoff 18 August 23, 2022 Version 2 – Revised: November 15, 2022 started his Ponzi scheme or his “To rob Peter to pay Paul” scheme – Madoff tapped into a constant stream of new clients to pay back previous clients. I’m here to offer a different theory. My theory is that Madoff instead found a flaw in the system that allowed him to exploit FTDs to naked short the market. Bernie was making huge profits by naked shorting stocks, but when his loophole was taken away in 2008, the whole thing blew up in his face. Is it possible that Bernie Madoff was a fall guy and a distraction? Was Bernie really naked shorting? From a letter Bernie wrote on “Feb. 3, 2012 6:46 A.M”, “It was perfectly proper to short [my clients] securities or purchase those positions back from those clients or others with any profit or loss recorded on my books. ... The point is that this was my practice prior to the time that I fell into my crime of-staying Naked Short . The fact that the prosecutor and Trustee seemed clueless of this is why my frustration is so great.” For more evidence on Madoff we need to go back to the timeline and explore some weak ‘rules’ on Wall Street. 19 August 23, 2022 Version 2 – Revised: November 15, 2022 PART 7 – Stop the Naked Shorting! From Dr. Susanne Trimbath’s Naked, Short and Greedy, “Exactly the way that Ray Riley explained it to me in 1993, the fact is the excess supply of shares created by shorts, fails and loans will have a negative impact on share prices that is greater than any outright sale of the shares by an investor. The impact can run to multiples of the issued and outstanding shares. In documented cases, the number of shares being traded – and voted – was 150% of the issued and outstanding shares of a company , even a big company like Bank of America.” 7.1 In early 1993, even large companies are showing signs that they may have large percentages of FTDs. 2000 – If we go back to the timeline then our next crash is in 2000. Just like the 1980s you have the makings for a good crash. An economy overheated by the dot com bubble that’s just waiting to pop, high-frequency trading, and algorithms. And maybe some FTDs? The Continuous Net Settlement system’s “inability to moderate FTDs became clear during the dot- com bust of the early 2000s.” 7.2 From Naked, Short and Greedy, “I quickly recognize that this is the same problem the corporate trust officers like Ray Riley brought to me in 1993, when fails to deliver were around $6 million. In 2003, while I am meeting with Wes in New York, the fails in equities are over $6 billion.” 7.1 In 2003 there are already 6 billion dollars worth of FTDs. The STA (Securities Transfer Association) puts out a, “white paper in December of 2004 on the role of short sales in over-voting for corporate elections.” The white paper is titled: “Treating Shareholders Equally”. The conclusion of the white paper is that “some unauthorized parties are being allowed to vote while real owners unknowingly lose their voting rights.” 7.1 “Just four months after the STA’s white paper is released, the Securities Industry Association (SIA) sends a letter to the NYSE describing how they can hide over-voting caused by shorts, fails, and loans.” 7.1 “When the STA surveyed their members about the corporate voting experience around the time of the SIA letter, it showed that over-voting occurred in more than 90% of corporate elections .” 7.1 It really looks like naked shorting is a big problem in the early 2000s and it’s showing up on the market as FTDs and over-voting. 20