Turn 24 - An Enigma
“What we have here, Your Majesty, is a classic example of a very well written and well meant regulation running face first into the blender of legal precedent and becoming an albatross.” Janet says after you call her in to consult on the proposed legislation.
Bridget nods, but lets the legal expert take the lead.
“The regulation in question is so simple that any average 6 year old can understand it. When executing a purchase of stock on the market the buyer must have sufficient funds in their operating account to fully cover the cost of said purchase. As applied to ‘short’ sales, this regulation is expanded to ‘at the moment of placing the short sale order and at the time of execution of the short sale, the seller must have sufficient funds in their operating account to acquire the full position’.” Janet continues, getting nods around the table.
Bridget then speaks up. “It’s a really good idea, because otherwise unethical short sellors would, and have in the past, made massive short bets which didn’t pan out and then simply walked away from the sale, leaving the buyer to have to try and pursue legal remedies in court and thus incur significant expense.” she points out.
“Exactly. Thus this regulation makes it a felony securities fraud violation to try and pull something like that. So far this is quite simple and straightforward.” Janet takes over once more. “Until it wasn’t.”
She takes a breath and takes out a small binder. “Right before the Gem Conspiracy exploded bringing down so many major corporations an analyst at one of the smaller investment firms that wasn’t implicated in the conspiracy spotted some trends that led him to take a massive short position in the single largest bank that was involved. At the time he took the short position it was the single most expensive stock on the market, but he still managed to cover a very large bet on the stock crashing. Then the Gem Conspiracy unraveled and that bank’s stock completely collapsed overnight. As assets were seized and the conspiracy broken, the stock market delisted the bank. At that moment, all active trades were honored but the short position that the investment house had made was excluded since it was set to execute the next day.”
Another binder. “The investment firm went to court, pointing out that as a matter of equity all trades needed to be honored, due to the specific wording of the declaration you’d made concerning cleaning up the mess left behind by the Gems.”
Bridget takes over again. “They won that case, and made a massive windfall that strongly contributed to the economic boom the planetary economy enjoyed. But this also set a precedent in that a short position, even if it were scheduled to execute at a given time, could theoretically trigger at any moment.” She scowls. “And certain solicitors realized the opportunity.”
Janet takes up the conversation again. “So they started sending demand letters to banks whenever somebody took a short position on a stock, demanding to know the current balance of the operating fund and comparing it to the stock price. They would then try to spike the stock price above that balance, then send threatening letters to the investment firms threatening to file fraud charges for failing to maintain a sufficient operating balance. Generally speaking, it would cost the investment firms far more to litigate this practice than to just pay off the solicitors.”
Bridget smoothly tags back in. “As a consequence, no ethical investment advisor would ever recommend that a small investor engage in short sales, because of the conduct of those solicitors. The solicitors make money, the investment firms write it off as a cost of doing business.”
Janet returns. “But the solicitors have been getting greedy and have started demanding that the banks do their research and monitoring for them so that they can lower their expenses while increasing the volume of such suits, and when the banks refused to become their unpaid research team the solicitors started trying to hold the banks liable for ‘concealing fraud’. The banks were far less willing to play ball, so the solicitors have been lobbying members of Parliament to attempt to tilt the playing field as far in their favor as possible.”
Bridget takes up the thread. “Most members of parliament simply don’t have the background to know that they are getting played. The solicitors would include language in the stipulations of settlement they are already getting from the investment firms that the banks were at fault for not notifying the solicitors, and the solicitors would be able to use this legislation to then sue the banks.”
How do you react?
[] Write-In (QM will interpret)
“What we have here, Your Majesty, is a classic example of a very well written and well meant regulation running face first into the blender of legal precedent and becoming an albatross.” Janet says after you call her in to consult on the proposed legislation.
Bridget nods, but lets the legal expert take the lead.
“The regulation in question is so simple that any average 6 year old can understand it. When executing a purchase of stock on the market the buyer must have sufficient funds in their operating account to fully cover the cost of said purchase. As applied to ‘short’ sales, this regulation is expanded to ‘at the moment of placing the short sale order and at the time of execution of the short sale, the seller must have sufficient funds in their operating account to acquire the full position’.” Janet continues, getting nods around the table.
Bridget then speaks up. “It’s a really good idea, because otherwise unethical short sellors would, and have in the past, made massive short bets which didn’t pan out and then simply walked away from the sale, leaving the buyer to have to try and pursue legal remedies in court and thus incur significant expense.” she points out.
“Exactly. Thus this regulation makes it a felony securities fraud violation to try and pull something like that. So far this is quite simple and straightforward.” Janet takes over once more. “Until it wasn’t.”
She takes a breath and takes out a small binder. “Right before the Gem Conspiracy exploded bringing down so many major corporations an analyst at one of the smaller investment firms that wasn’t implicated in the conspiracy spotted some trends that led him to take a massive short position in the single largest bank that was involved. At the time he took the short position it was the single most expensive stock on the market, but he still managed to cover a very large bet on the stock crashing. Then the Gem Conspiracy unraveled and that bank’s stock completely collapsed overnight. As assets were seized and the conspiracy broken, the stock market delisted the bank. At that moment, all active trades were honored but the short position that the investment house had made was excluded since it was set to execute the next day.”
Another binder. “The investment firm went to court, pointing out that as a matter of equity all trades needed to be honored, due to the specific wording of the declaration you’d made concerning cleaning up the mess left behind by the Gems.”
Bridget takes over again. “They won that case, and made a massive windfall that strongly contributed to the economic boom the planetary economy enjoyed. But this also set a precedent in that a short position, even if it were scheduled to execute at a given time, could theoretically trigger at any moment.” She scowls. “And certain solicitors realized the opportunity.”
Janet takes up the conversation again. “So they started sending demand letters to banks whenever somebody took a short position on a stock, demanding to know the current balance of the operating fund and comparing it to the stock price. They would then try to spike the stock price above that balance, then send threatening letters to the investment firms threatening to file fraud charges for failing to maintain a sufficient operating balance. Generally speaking, it would cost the investment firms far more to litigate this practice than to just pay off the solicitors.”
Bridget smoothly tags back in. “As a consequence, no ethical investment advisor would ever recommend that a small investor engage in short sales, because of the conduct of those solicitors. The solicitors make money, the investment firms write it off as a cost of doing business.”
Janet returns. “But the solicitors have been getting greedy and have started demanding that the banks do their research and monitoring for them so that they can lower their expenses while increasing the volume of such suits, and when the banks refused to become their unpaid research team the solicitors started trying to hold the banks liable for ‘concealing fraud’. The banks were far less willing to play ball, so the solicitors have been lobbying members of Parliament to attempt to tilt the playing field as far in their favor as possible.”
Bridget takes up the thread. “Most members of parliament simply don’t have the background to know that they are getting played. The solicitors would include language in the stipulations of settlement they are already getting from the investment firms that the banks were at fault for not notifying the solicitors, and the solicitors would be able to use this legislation to then sue the banks.”
How do you react?
[] Write-In (QM will interpret)