Whose shares are lent out to short sellers?

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Does anyone know the answer to this question?  A short seller must borrow shares at a fee, and so I wonder whose shares they borrow.  The other day I was reading at Stockhouse that bullboarder had put a sale order on his shares of Petrobakken @$30 per share  in order to prevent his brokerage from lending out his shares.  Does this mean that my shares are among those which may be lent out?

My friend “Just Me” sent me an article this morning about the subject of short-selling, A not-so-short story, at the Economist which deals with Patrick Bryne’s fight against the short-sellers who harmed his online-retail company.  But there were a few lines that caused me to wake up to the practice of shortselling:

The failure to deliver shares (and thus to settle trades) that goes hand-in-hand with naked shorting is more than just a plumbing problem: a buyer who does not receive his share cannot technically vote it.

What if my brokerage lends out to short seller, who sells them and then my shares are actually delivered.  We have the following scenario.

Stockholder A has 100 shares long.

Stockholder B sells short A’s shares.

Stockholder C buys 100 shares on open market and receives delivery on settlement date.

Now the problem is that if a brokerage can rent out A’s shares at a fee to B, and C receives them, then 100 fictional shares now exist in the market and these are non-voting shares (because only real shares can vote).  So only A or C can vote but not both.  But if C receives fictional shares, then only A can vote.

I reported that I never received ballots for my shares of SKW at Beating the Index.  I wonder if it was because my shares were the fictional ones and that the real ones were borrowed.  Does anyone know the answer to this question?

Given the meltdown of MF Global, I think we should all be concerned.  Perhaps we should go back to the system of my grandfather’s day when you received the stock certificates upon settlement and you kept them in safety deposit box.  Finally, if my brokerage is lending out my shares, I should be told and I should receive part of the fee that the brokerage receives from the short seller.  Has anyone else experienced not receiving ballots for important votes, such as the election of officers?

Be careful, please, of investing in the United States

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I wrote to fellow blogger Kevin Graham the following warning after his repeated insistence that Wells Fargo is very safe and cheap:

Kevin: Are you aware of the consequence of the FATCA legislation and how it will affect investments in the United States? As a Canadian you can easily protect yourself from these consequences by pulling your investments out of the United States. I am involved in a group blog, the Isaac Brock Society, which is dealing with the questions of US persons abroad and the attempt of the United States to crack down on alleged tax evaders living abroad, including Canada.

I say this because you promote Wells Fargo, and not a few other US equities as “safe”. I am not sure that anything in the United States can be deemed “safe” and I recommend all investors to get out before the meltdown of the economy there. The other issue of course, is that the United States debt has no surpassed 100% of GDP. This seems to me to be a reason to be extremely cautious.

Kevin and I had a good time going back and forth over Petrobakken last year, when PBN hit its nadir.  I was the bull; he was bear, even when PBN was at $6.50; Petrobakken achieved its year end exit production guidance and thus is on its way to a full recovery (which I think will be above $24).  It didn’t hurt that Sinopec bought Daylight Energy, a company which had a similar debt issues to Petrobakken, but Daylight was arguably less attractive because it was more weighted towards natural gas than Petrobakken, but it did give us an opportunity to see what an outside buyer would pay for a mature intermediate oil and gas company, and it was double the then-current market price of Daylight. I took tender for my shares of Daylight and I am happy to say that I have, as of today,  received into my brokerage accounts.

Unfortunately, Kevin’s recommends US bank after US bank.  But he is apparently unaware of FATCA and the likely damage that it will do as a result of the exodus of foreign investment in the United States.  Furthermore, I consider American banks black boxes.  Who can possibly know what they are worth when they have so many derivative contracts that nobody understands?  I consider the banks bad risk since the time that I learned that many of them (e.g., Scotiabank) have large short positions in gold through their sale of unallocated gold certificates.

One might ask why I bother checking Kevin’s blog.  Well, I like reading some blogs that look at the world in a totally different way than I do.  I also like to challenge them.  Then, if they can muster cogent responses, it makes me think about my position.  I can’t say that Kevin has ever succeed in convincing me of anything though.  Each time that he talks about a company being safe (like Sears), I get the urge to add to my Spam collection.

My Spam collection

Mainstream media: stuck on stupid

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Dollar Demise Refuted With 13% Gain Since 2008 – as compared to what?  Other currencies?  Or as compared to gold, oil or other commodities?

The Year U.S. Debt Beat Gold, shows 10-year treasury notes with 16.7% gain.  But this is unfair since the face value of these notes is 1.91% at year end.  That is you can only get 16.7% if you are trader in these notes.  Holders of US debt notes vs. holders of gold is a different story.  If you held gold over 2011, you outperformed treasuries.  Gold ended the year at $1,566.40 vs. $1421 at the end of last year.  That’s a 10% gain which is better than U.S. debt.

Introducing the Isaac Brock Society

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This the “About” page  at the the Isaac Brock Society, which I wrote to explain the reason for the new blog.  The official launch of the new site was 13 Dec 2011, and it was started initially by myself and five other people who felt the need to fight back against the current policies of the US government vis-a-vis US persons living abroad.  If I have only blogged here infrequently, it is because of this new venture.

Posted by Petros — DECEMBER 14, 2011

The Isaac Brock Society consists of individuals who are concerned about the treatment by the United States government of US persons who live in Canada and abroad.

Sir Isaac Brock

The United States is one of two countries in the world that taxes its people no matter where in the world they may reside. The other is the terrorist thug nation of Eritrea. The majority of US persons who live abroad are not aware of their filing requirements. But recently, the US government has decided to crack down on those who are not in compliance.

But what is more, the US government has begun, since about 2004, to apply with great pressure a long-neglected requirement of 35-year old law called the Bank Secrecy Act. That requirement is FBAR, the foreign bank account report, which the United States government expects annually from those who have accounts outside of the United States which exceed $10,000 in aggregate. The fines for failure to file this form are extortionate, and virtually no US person who lives abroad even knew about FBAR, while most of them, over a certain age, own bank accounts with retirement savings exceeding that amount. The threats of fines and imprisonment has frightened many people who as a result have consulted expensive accountants and tax lawyers to get this mess sorted out, only to face high accounting or legal fees on top of potential fines and back taxes. In 2009 and 2011, the IRS offered voluntary disclosure programs (OVDI). Some who entered into the 2009 OVDI, because of fear of the penatlies, were shocked when the IRS assessed them fines in the tens of thousands, essentially treating them as tax evaders instead of a law abiding citizens in their countries of residence.

For many US expats, renunciation now seems like a really good idea. Why not? Many haven’t lived in the US for years and now they have few ties there except perhaps some family members. So they want to renounce their citizenship only to find that the laws regarding expatriation are confusing and that the exit tax requirements are at best complicated and invasive, and at worst, extortionate and utterly in violation of their right to expatriate.

The media coverage of this issue has been uneven. There have a been a few balanced stories, but most of the time, the media has merely publicized the purposes of the US government; this is especially true of US media sources. The Canadian media has generally done a much better job of grabbing the attention of the world about the abuses of the US government. That being said, even the Canadian media sometimes falls into the IRS trap of projecting fear in order to force compliance. Overall, we regret when the media offers only condemnation and fear without telling the story from the side of the victims or informing them of their rights and alternatives.

US persons abroad also face US border guards who are starting to put pressure on all those who have a US place of birth to travel only on a US passport, even if the person has not been a US person for decades–an arbitrary change of policy making those who relinquished citizenship into would-be loyal taxpayers to a profligate government that has to borrow 40 cents on every dollar its spends.

The Isaac Brock Society is here to fight. Sir Isaac Brock Brock prepared Canadians for war with the United States and gave his life in repelling a US invasion in 1812. So also we want to fight for US persons who are frightened by the IRS, the border guards, and the media. We are here to provide one another with resources and strategies, comfort and advice.

But not only so, we are here to warn other Canadians about the illegal incursion of the US federal government into the lives of the US expat community. Pretty soon, with the new FATCA legislation, this arrogant attitude of the United States will affect every man, woman and child on the planet who wants to open or maintain a bank account or to invest in a retirement fund. Now, according to FATCA, you will have to tell the United States whether you are a US person when you open up a bank account in, e.g., Australia or Thailand. This makes every country in the world a protectorate of the United States, for, if they comply with FATCA, they are a ceding their sovereignty to nation which has not invaded or conquered the rest of the world, but only uses its waning hegemony over the financial sphere to coerce other nations.

So whether you are a US person living in exile, a Canadian or a citizen of any other country, we ask you to join us in this struggle for freedom and justice.