SEC: 621,000 Shares in GameStop Trades Had Not Properly Settled by January 14

By Pam Martens and Russ Martens: February 5, 2021 ~

LifeLock Commercial

Scene from LifeLock Commercial

Remember that LifeLock tv commercial where masked bank robbers storm into a bank, smashing things with a baseball bat and screaming, “on the floor.” As the customers hit the floor, a security guard is still standing looking calmly at the robbers with his hands at his side. A woman looks up from the floor at the guard and whispers to him: “Do something.” His reply: “Oh, I’m not a security guard, I’m a security monitor. I only notify people if there’s a robbery.” After a few seconds of observing the scene around him, he looks back down at the woman and says: “There’s a robbery.” The commercial ends with the voice over: “Why monitor a problem if you don’t fix it?”

This commercial perfectly reflects the attitude of the Securities and Exchange Commission under the past two SEC Chairs, Mary Jo White and Jay Clayton, both of whom hailed from giant law firms representing the largest trading firms on Wall Street. The SEC had a front row seat at the serial crimes being committed by these firms; it monitored them in real time; and it did nothing to stop the serial crimes from reoccurring.

This morning we decided to take a look to see if the SEC was potentially aware of naked short selling in the shares of GameStop – the subject of House and Senate investigations and a hastily called meeting of regulators yesterday by U.S. Treasury Secretary, Janet Yellen, who also holds the position as Chair of the Financial Stability Oversight Council.

It turns out that GameStop shows up on the SEC’s list of “Fails-to-Deliver,” a report that raises suspicions (but not conclusive proof) that somebody was engaging in naked short-selling in the shares of GameStop.

GameStop’s market cap spiked from $2 billion to $22.6 billion in a matter of days in January. Along the way, a large hedge fund, Melvin Capital, which was short the stock (a bet that the price would decline) had to be bailed out by Ken Griffin’s Citadel hedge fund, while a related company, Citadel Advisors, was also net short the stock. This week GameStop shares have been plunging back to earth. Adding to the cries of foul play, devotees of a Reddit message board, WallStreetBets, who had been hawking GameStop’s future prospects and buying the stock, had restrictions placed on their ability to buy any sizeable number of shares by their favored trading app, Robinhood, which directs the bulk of its trades to Citadel Securities for execution.

In order to sell a stock short, your brokerage firm has to loan you the stock. The stock is typically borrowed from the brokerage firm’s own inventory, the margin account of other brokerage firm clients, or another lender. If the price of the stock declines, the short seller can buy the stock back at the lower price and make a profit. If the price of the stock rises, the short seller will lose money. Because there is no cap on how high the price of a stock can go, the short seller is taking on unlimited risk.

In a naked short sale, the broker handling the trade for the customer does not borrow or arrange to borrow the securities in time to deliver the shares to the buyer on the other side of the trade within the standard three-day settlement period. This is what is meant by Fails-to-Deliver, also known as simply “fails,” which can be a red flag of naked short-selling.

According to the latest Securities and Exchange Commission data for Fails-to-Deliver, GameStop has been experiencing huge fails to deliver since at least December 18, when an aggregate of 872,523 shares had failed to deliver on their settlement date. The figure of fails had been 10,874 just two days earlier, on December 16.

The SEC reports the fails to deliver data twice a month. The most recent data runs through January 14 of this year. On that date, GameStop still had an aggregate of 621,483 shares that had failed to deliver.

The SEC explains the following about how persistent fails to deliver are to be dealt with under its rules:

“Rule 203(b)(3) of Regulation SHO requires that participants of a registered clearing agency must immediately purchase shares to close out failures to deliver in securities with large and persistent failures to deliver, referred to as ‘threshold securities,’ if the failures to deliver persist for 13 consecutive settlement days. Threshold securities are equity securities that have an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency (e.g., National Securities Clearing Corporation (NSCC)); totaling 10,000 shares or more; and equal to at least 0.5% of the issuer’s total shares outstanding.”

According to Yahoo Finance, GameStop has 69.75 million shares outstanding, meaning that it has not only far exceeded the 10,000-share threshold  but that it has also exceeded the 0.5 percent of outstanding shares threshold.

It’s time for Sherrod Brown, the new Chair of the Senate Banking Committee, and Maxine Waters, the Chair of the House Financial Services Committee, to do far more than whisper to the SEC, “Do something.”

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