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  Investing 101   -  Jun 3, 2004
- The Berlin Connection?
SEC and NASD to Meet With German Brokerage Firm Tomorrow
   by Mark Faulk

       This is a story that has everything: murder, kidnappings, intrigue, international espionage, and of course, a healthy dose of illicit sex.
    Just kidding. In reality, this story doesn't have any of the above, and that's the problem. By the time most reporters finish explaining the elaborate scheme that is continually unfolding in the world of OTC stocks, the majority of readers have either fallen asleep or are busy doing a websearch for the Paris Hilton sex tapes. Because of the complexity of this issue, most mainstream publications have either barely scratched the surface or have given up altogether.
    However, this is a problem that threatens the very foundation of the American stock market, and by extension, thousands of small businesses, their employees, their stockholders, and the financial well-being of our entire country. In other words, this is important, so pay attention. And, in the next few weeks, readers might just get a bit of intrigue and international espionage after all.    

        
April Fool's Day

    It was heralded on stock message boards and in the independent press as D-Day in the OTC stock market. On April 1st, after years of dragging their feet (and a final one month postponement just to give the crooks time to load up the last of the loot), the NASD finally implemented changes to Rule 3370, which would force naked short sellers, who had been systematically robbing companies and small investors, to "cover" their naked short positions. In other words, they would have to buy back the millions of shares that they had "borrowed" (mostly through Canadian brokers, who weren't covered by earlier regulations) and sold into the market, which created huge selling pressure on the affected companies' stocks and drove the prices down. I explain this entire scheme in detail in "Financial Terrorism In America" www.faulkingtruth.com/Articles/Investing101/1001.html . If you haven't read that article, you might want to go back and do it now. Consider it a required introductory course for this subject matter.

    So, finally, after much ado, the new regulations went into effect, and OTC stock investors waited for the "mother of all short squeezes" to happen. Short sellers would scramble to find the shares to buy to cover their "borrowed" stock, those who owned the real shares would refuse to sell, and the shortage of available shares would send stock prices skyward. Revenge would be sweet. As I said, OTC stock investors waited. And waited. And waited some more.
    Then, finally, trading volume did begin to pick up, and OTC stock prices did begin to move. Unfortunately, in most OTC stocks, the prices went down instead of up. To repeat a question I posed in my earlier article, "What the hell happened?"

        
Willkommen Noch Berlin
    
    Welcome to Berlin. First the facts: at the same time that the regulations were being tightened to shut down the Canadian connection for shortsellers, a brokerage firm in Germany, Berliner Freiverkehr, was quietly listing hundreds of OTC companies on the Berlin-Bremen stock Exchange. In fact, taking advantage of a loophole in the regulations of the Berlin-Bremen Exchange (which, incidentally, is partly owned by Nasdaq, the American exchange), Berliner Freiverkehr wasn't even required to notify the companies they were listing at all. In a matter of days, American companies (many of the same ones that had been the victims of the Canadian shortselling schemes) began to discover that they were trading on the Berlin-Bremen Stock Market, without their permission, and, according to them, without their knowledge. This is where the waters get a bit murky.

    Okay, you might need a program to keep track of the accusations and excuses in this next section. First, here are the players: the American companies (and their representatives), the companies attorneys, the Berlin Bremen Stock Exchange, Berliner Freiverkehr (the German broker), the NASD, NASDAQ, the SEC, and of course, the shortseller (or shortsellers).

        
The Accusations

    As company after company discovered that they had been listed on the Berlin-Bremen Stock Exchange without their permission, they began to put two and two together. Since the NASD had supposedly shut down the Canadian pipeline for those who were shorting their companies' stock into oblivion on April 1st, and since Berliner Freiverkehr, the German brokerage firm who listed the companies, had listed over 850 of those same companies during the same time period, and since the companies were still apparently experiencing massive shortselling, it made perfect sense that the scheme had simply been moved to the Berlin-Bremen Stock Exchange. Enmasse, they began to demand that their shares be delisted from trading in Germany, and many have already succeeded. However, it remains to be seen whether or not that puts a halt to the scheme.

    Here are a few of the responses I have received from the affected companies and their representatives:
One company stated that "Shorting was even worse after April 1st. They simply moved it to Berlin, and once that pipeline is shut down, London will be next". Another response was: "The Berlin Stock Exchange is being utilized to commit fraud on OTC companies." And one company told me that they believed that Charles Schwab was one of the main brokers perpetuating the scam, another one mentioned the market maker Knight as one of the likely culprits. At least two others said that they were pursuing information that the perpetrators were literally printing counterfeit stock certificates that could be presented to brokers in order to circumvent the new regulations. As I said, the accusations are flying, and which ones turn out to be accurate is anyone's guess.
    Several companies told me that they are considering joining a class action lawsuit filed by John O’Quinn of O’Quinn, Laminack & Pirtle and James “Wes” Christian of Christian, Smith & Jewell, which asserts that hundreds of companies have been victimized by stock manipulation schemes totaling $1 trillion.

    And then there was this statement, from an investor relations firm that represents over a hundred small companies. Pay close attention here, as this one began to make a lot of sense as I sorted through the pile of "information" I had accumulated: "I believe that those who think that their stock is being shorted through the Berlin-Bremen Exchange are being misled. Because of the large number of stocks that were listed by the Berlin-Bremen Stock Exchange during the same time period that the Canadian loophole was shut down, they naturally assumed that shortselling operations had simply moved there. I believe that the problem lies instead with the Depository Trust and Clearing Corp. (DTC) trading system, specifically with their Continuous Net Settlement (CNS) system, which allows the DTC to postpone the settlement of short sells indefinitely. It's possible that shortsellers are opening brokerage accounts in Berlin as a starting point, but they are still shorting their stocks by exploiting flaws in the American trading system. In fact, it's likely that they are hitting the companies that have gone public with their concerns about Berlin even harder, since the Berlin brokers will be blamed for any shorting that goes on, at least for the time being." However, he also told me that he was recommending that the companies that his firm represents "quietly initiate the process to have their stocks delisted from the Berlin-Bremen Stock Exchange, as a precautionary measure".
    At least one company, Nanopierce Technologies (OTCBB: NPCT) has filed a lawsuit against the DTC, claiming they have a $1 billion stake in continuing a program that results in naked short selling.

        
The Response

    I spent an hour on the phone with Holger Timm, founder and CEO of Berliner Freiverkehr, and he seemed genuinely perplexed by all the controversy surrounding his firm. This is what he told me: "We began listing OTC companies in earnest at the beginning of this year, before the new NASD regulations were announced. We decided to do this because in Germany, whoever lists the companies first gets a fee from every share bought or sold on the Berlin-Bremen Stock Market. The companies are not 'officially listed', the sponsoring broker provides a market for that company in Germany, utilizing the Berlin-Bremen Stock Exchange. Of the over 850 companies that we have listed since the beginning of February, not one of them has any trading volume. I swear we have never been contacted by any hedge funds or short sellers, and we require that all positions are closed at the end of each day. We don't short stocks at all, and we never hold a position of any kind overnight. We have no knowledge of any stocks shorted through the Berlin-Bremen Stock Exchange."
    When asked if anyone could be shorting stocks through the Berlin-Bremen without their knowledge, Timm replied, "We would have knowledge of any stock shorted through the Berlin exchange, the volume would show up on our exchange." When asked again if it was possible that it could be done without their knowledge, he replied "everything is possible". He also said that they had received letters from "about 50 or 60" American companies requesting delisting in Berlin, and emailed me a copy of a letter they were sending in response to those requests. If the companies still wanted to be delisted after receiving the letter, Berliner Freiverkehr officially delisted them. You can read that letter in its entirety at www.faulkingtruth.com/Articles/Investing101/1003.html

    Also, I received a reply from Eva Klose at the Berlin-Bremen Stock Exchange. Here is an excerpt from that response: "We understand that some OTC-BB companies fear prices may be manipulated on our exchange. Irrespective of the market segment, price manipulation is a punishable act by German Criminal law. The Berlin Stock Exchange only needs an application filed by one of its "Specialist" (comparable to the "Specialists" in the US). The "Specialist" applying for the dual trading is obliged to inform the company about the application filed. He usually applies for dual trading without being contacted by anyone (neither the company nor anyone else) asking for it." That email is also available in its entirety at www.faulkingtruth.com/Articles/Investing101/1003.html
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Visitors From America

    Berliner Freiverkehr has asked for help from the SEC, NASD, and the German SEC in "sorting out this unfortunate situation". As a result of that request and the furor that has been raised recently by the affected companies and the press, all three organizations are sending a representative to meet with Berliner Freiverkehr company officials tomorrow (Friday, June 4th). Timm hopes that the meeting will help to put an end to the speculation that has surrounded this issue for the past few weeks. He said to look for an official announcement sometime after the meeting takes place.

        
What Now?

    It seems apparent to me that this is a story fueled largely by rumors, speculation, and accusations. However, it also seems obvious that there is a valid concern among OTC companies and their stockholders concerning the current shortselling scheme that has crippled the OTC Stock Market. Whether the Berlin-Bremen Stock Market turns out to be a part of this scheme remains to be seen. If they are not, then the governing bodies of the American stock market (specifically the SEC, DTC, and NASD) must move swiftly to identify the culprits and put an end to this scandal. If in fact there are flaws in the DTC trading system, they must be corrected immediately.    

    Here is a simple definition of how the Continuous Net Settlement works: "Essentially a post-settlement process, CNS enables the seller who cannot deliver securities to postpone the settlement of his obligations to the next settlement. It is primarily a tool to impart flexibility to the seller and avoid bothersome auctions."
    There is too much "flexibility to the seller" there, in this writer's opinion, and furthermore, it seems that any rule that allows a seller to "postpone the settlement of his obligations" needs to be closely scrutinized.

    Here's my take on the situation so far: I believe that this scandal originates right here in the good old USA, and if in fact the Berlin markets are being used to perpetuate the scheme, they are unwitting accomplices. Since there is no trading volume on the Berlin Exchange, yet these companies seem to the victims of massive shorting, then we need to follow the trail where it leads. That volume is showing up somewhere, and the SEC needs to find out where that source is, and shut it down.    

        
The Faulking Truth

    In the end, no matter how this story plays out, the true victims here are once again the honest American stockholders who have invested their hard-earned money into start-up companies in the hopes of achieving the American Dream: financial success and a chance for a better life. And that, as always, is the faulking truth.



    Here is a partial list on the companies that have either already had their shares delisted from the Berlin-Bremen Stock Exchange, or have requested delisting:

Aegis Assessments Inc. (OTCBB:AGSI)
Advanced ID Corporation (OTCBB: AIDO)
Bentley Commerce Corp. (OTCBB: BLYC)
BGR Corp. (OTCBB: BGRR)
CalbaTech, Inc. (OTCBB: CLBE)
CareDecision Corp. (OTCBB: CDED)
Celsion Corporation (AMEX:CLN)
China Wireless Communications Inc. (OTC BB: CWLC)
CyberAds, Inc. (OTCBB :CYAD)
DataMEG Corp. (OTCBB: DTMG)
Datascension, Inc. (OTCBB: DTSN)
Dicut (OTCBB: DCUTE)
FemOne, Inc (OTCBB: FEMO)
5G Wireless Communications Inc (OTCBB: FGWC)
Gateway Distributors (OTCBB: GWDL)
Guardian Technologies International, Inc. (OTCBB: GDTI)
GK Intelligent Systems, Inc. (OTCBB:GKIG)
Golden Phoenix Minerals, Inc. (OTCBB: GPXM)
GoldSpring Inc. (OTCBB: GSPG)
House of Brussels Chocolates (OTCBB: HBSL)
ICOA, Inc., (OTCBB:ICOA)
InforMedix, Inc. (OTCBB: IFMX)
IPVoice Communications, Inc. (OTCBB: IPVO)
MultiCell Technologies, Inc. (OTCBB: EXTI)
Nanopierce Technologies (OTCBB: NPCT)
NHC Communications Inc. (TSX: NHC; OTCBB: NHCMF)
Provectus Pharmaceuticals, Inc. (OTCBB: PVCT)
Roanoke Technology Corp. (OTCBB:RNKE)
Stratus Services Group, Inc. (OTCBB: SERV)
Swiss Medica, Inc. (OTCBB:SWME)
Tissera, Inc. (OTCBB:TSSR)
Titan General Holdings, Inc. (OTCBB:TTGH)
TS&B Holdings, Inc. (OTCBB:TSBB)
Tidelands Oil & Gas Corp. (OTCBB: TIDE)
WARP Technology Holdings, Inc. (OTC BB: WRPT)
Whistler Investments (OTCBB: WHIS)
Wizzard Software (OTCBB: WIZD)



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