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October 30, 2010 (FinancialWire) (Investrend Forums Syndicate) (By Bud Burrell) (Entire post at http://www.investrendsyndications.net/12-content/manl/burrell/2010/10/php/27.php) (Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries.) — On August 31, 2010, I predicted the departure of many American companies because of the intransigence of the Securities and Exchange Commission and its subordinate agency, FINRA, to reel in short selling abuses by a menagerie of criminal financiers, broker-dealers, and hedge funds, domestic and international. When most thought the arrogance could not get any worse, FINRA made the announcement it was pending a sale of the OTC Bulletin Board market to a FINRA member broker-dealer with a long history of questionable PIPES transactions to its credit, which in most cases resulted in the funded company being bankrupted or liquidated to conflicted parties.

PIPES concepts were derived from financings known in the securities industry as “Toxic Convertibles”, which were generally the product of conflicted enterprises manipulating unsophisticated small companies who were unable to properly evaluate the risks they took in such transactions. Beginning in the early 2000’s, a handful of companies chose to stand up to these criminal manipulations, linked to a very professional and ruthless network of specialty financiers who did these transactions. Following the tradition of the largest short seller on Wall Street, Goldman Sachs, the first focus of these financiers was not the economic health of the markets for the securities of these companies, but rather the most rapid possible recovery of their investments out of the very gate that these companies had just been led through.

In many cases, the monies provided to the funding of the companies was less than promised, which amount was determined by the Investment Banker first “Testing” the depth of the market for the companies’ securities by shorting into them until they began to collapse. In many cases, these proceeds from this shorting were used to fund the target company without their knowledge that they were taking money ripped off from their own markets. The toxic convertible provision provided for the funding source to get proportional additional shares for any trades at prices below which they did their financings, as a form of anti-dilution protection. In most cases, they insured this price decline by simply overwhelming the bid side of the companies’ markets with shares shorted both legally and illegally until they “brought the deal home.”

These funding entities obtained insider information from their clients used to destroy the markets for the companies’ markets by creating unbalanced selling supply, and to profit disproportionately while doing so. Companies that complained to the SEC found themselves the immediate target for investigation for complaining, when they were the victims, not the perpetrators. This is thoroughly documented in many cases which have produced over 100 criminal indictments, trials and many convictions thus far and will result in the second criminal trial in this space in 2011, over 10 years since the complaining company in that case first presented evidence of manipulation of their stocks by these professional counterfeiting thieves to the DOJ. How convenient that the civil case of the victim company in this pending trial had its civil actions “Stayed” by the DOJ, so as to not interfere with their criminal prosecution.  How convenient for the criminals, courts and more that the results of the criminal case prosecutions will be long after the statute of limitations has expired for any other civil actions.

What potential consequences do Bulletin Board market stocks face with the very timely dumping of this market by FINRA to one of its own members?  FINRA has repeatedly refused to enforce rules against shorting manipulation, except for the rather stunning civil action against 5 of its members for selling billions of shares of unregistered securities of a company, only months after a Federal Judge ruled that this company had abused its shareholders for selling registered securities under a bankruptcy court authorized S-8 to survive, jailing its Chairman for 83 days for his inability to pay a ludicrous fine. What can BB listed companies expect from its regulators in the future, and what recourse do they have to protect themselves?

After former FINRA Chairman Mary Schapiro said that all small publicly listed companies are nothing more than con jobs, there can be no doubt that short manipulations of early stage companies, which are at an all time high not just in stocks but in all forms of securities, will continue to expand. Officers of public companies must react responsibly. The SEC offers them no help; rather, they are the declared mortal enemy of any small public company with the temerity to complain about illegal manipulation.

In the coming period of turbulence after the November 2 elections, which are expected to be a landslide favoring the Republican Party, little will be done while higher priority crises are addressed, including the repeal of most of Obamacare, a daunting task when this unread bill is over 2600 pages. What path can they follow? Only so many tasks can be addressed in the 12 to 18 months before the campaign for the 2012 Presidential elections can begin.

It is clear that US regulators have no respect for the markets that produced most of today’s major companies beginning back in the 1970’s, along with their enormous wealth and job creation. Our regulators are hopelessly corrupt and conflicted. As I indicated in my blog on August 31st of this year, there is a path for these companies to follow:  Abandon the US, its regulators, its broker-dealers, its hedge funds and the corruption of its legal system for other international markets who would treat them with a modicum of respect.

The comments of many other objective observers would indicate that many have already come to this conclusion. Let the SEC and FINRA manage an empty basket, short securities illegally of companies that have blown them out the door. In short, deny them and the corrupt legal system that they are part of any access to the fees of these companies will pay while they go through the never-ending search for capital that has to be the principal focus of any small company while it is in development.

One source I respect told me that the SEC would try to block these companies’ departures from US registration. I say to the SEC to go for it. They have such a great track record so far, like the shining star example of their terrific work on the $65 Billion Ponzi scheme of Bernard Madoff which had to be shoved down their throat (or up some other orifice) only after he had ran and gunned 25,000 investors out of their assets over 40 years, or the 4 months house arrest given to Mark Valentine of the notorious Thomson Kernaghan, the latter “penalty” to be served in Canada which has no such thing. Let them give a pass to themselves, saying they did nothing wrong in either situation, or dozens of others like it.

I say to all of you, let them eat cake, baked by their own member firms and investment entities, foreign and domestic. There is no cake for entrepreneurs left in this country, and the sooner they realize it and get the hell out of Dodge, the better for everyone. Kudos to Christopher Cox, Mary Schapiro, the DTCC and friends.

Source: Investrend Weblogs (http://www.investrendweblogs.net/).

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