Extract from http://www.deepcapture.com/
July 20th, 2008 by Patrick Byrne
Some time thereafter I sent him the editorial that appears below. The next day he called and said, “I’m terribly embarrassed to have to say this, but it appears I will not be able to publish this or anything by you.”
He sounded surprised. I wasn’t.
That said, it seems it a shame not to let it see the light of day, even at this late date. So again, the following is an editorial prepared for a major US newspaper which ostensibly is concerned with the operation of our capital market. The months referred to are 2006 months. Since then, the numbers involved have increased 30-100%.
A stock transaction is an exchange of stock for money. In our country the mechanisms by which stock and money change hands (”settlement”) have become divorced. Commissions are paid when money is delivered, not stock. Since follow-through incentives are weak, sometimes no stock changes hands, in which case the system creates markers of various kinds. These can be failed-to-deliver short sales (the famed “naked shorts”), the (perhaps more numerous) failed-to-deliver long sales, failures to receive from overseas exchanges, share entitlements (i.e., what is left behind in your brokerage account when your broker loans your stock to someone else), “open positions,” and “desked” trades (whereby your broker buries your order in his desk but takes your money and sends you monthly brokerage statements reflecting a trade that never actually occurred). Because our system does not adequately distinguish these markers from real shares, the markers take on lives of their own, multiplying, and creating three problems as they do.
First, these phantom shares turn proxy voting and corporate governance into a hoax. The April issue of Bloomberg magazine reports, “A robust market for stock loans puts into circulation billions of borrowed shares that can create multiple votes that corrupt corporate elections.” The effect is that, “In close contests with little room for error, the results of high-stakes company decisions may hinge on the invisible influence of millions of votes that shouldn’t be counted.” According to Thomas Montrone, CEO of Registrar & Transfer Co., “It is an abomination…. A lot of the time we have no idea who’s entitled to vote and who isn’t. It’s nothing short of criminal.” A securities consultant notes, “There are votes cast twice on almost every matter of substance… It definitely can and does, in my experience, affect the outcome of corporate elections and proposals.”
How deep is this problem? Bloomberg writes that the “Securities Transfer Association, a trade group for stock transfer agents, reviewed 341 shareholder votes in corporate contests in 2005. It found evidence of overvoting-the submission of too many ballots-in all 341 cases.” Bloomberg suggests that that this is not innocent, but that arbitrageurs have discovered and are exploiting this crack. As one source notes, “It appears to be the case where there are opportunities to game the system.” Bloomberg concludes that until these problems are fixed, “double and triple voting on one share will continue to make a mockery of shareholder democracy.”
