If somebody were to tell you that you do not technically own your shares in a public company, would you believe them?
That seems rather ridiculous. Many people have their life-savings invested in the stock market, and how could somebody else own something that you paid for with your own money?
Unfortunately it’s true, and you are not the legal owner of your investments. The banks and brokers are the true legal owners, and you are just issued an entitlement — an unusual relationship that they characterize as “street name” ownership, and all shares are held in book-entry form (electronically) at the DTCC, with the banks and brokers acting as the registered holders on the company’s books.
By transferring ownership to the DTCC and registering the brokers as the true legal owners of your investments, it solved the problem of constantly having to transfer physical certificates from one location to another — a process that was cumbersome and created liability issues.
Back the in the 70’s, they describe this unusual relationship as a “Jumbo Certificate”
A perfect example of this ownership structure is illustrated in the document snapshot pictured below from a recent Broadridge Financial Services note offering, dated Dec.5th, 2019, only a few months ago.
“Under Article 8, the beneficial owner of the shares held in a custodial account with an intermediary (such as a broker) is considered to be the holder of a “securities entitlement” in a “financial asset” which is ultimately held by a depository”,
—Marcel Kahan, The Georgetown Law Journal
The “participants” are the same banks and brokers that are buying the debt securities from Broadridge.
But doesn’t that make them the indirect owners of this “Jumbo Certificate ” — or in this case, “Global Note ” — through their ownership of the DTCC?
The answer is yes, it does.
In the age of artificial intelligence, crypto currencies, smart phones and quantum computing, you might be wondering why we still need these brokers and banks to act as the legal owners of our investments. Nobody uses paper certificates anymore, and certainly there should be some kind of SAAS technology out there by now that could solve the liability and book-keeping issues that come with transferring these ownership interests back and forth between accounts.
In reality, this system hasn’t been necessary for practically 20 years, and many experts are equally as perplexed by this unusual “entitlement ” system as they are about the opaque black-hole that governs the stock loan industry today, where retiree’s (“the elderly “) are literally being forced to utilize middlemen that actively collude to separate buyers and sellers so they can charge higher spreads.
They don’t even let companies send “proxy” (voter) materials directly to their shareholders; the company is forced to send the voting materials to the brokers first, and only then will they send them to you.
Pictured below is an illustration of how this process works.
If you had trouble with that first one, this next illustration might be easier to understand. The other one is kind of old — from 1976 to be exact.
Yes, the same system that existed back then is still being used today.
Take a guess who these brokers contract out to send you these “proxy” materials (voting cards).
Broadridge Financial Services..
They control 80% of the “proxy” (voter) communication industry. Don’t worry, we’re just getting started. It gets much worse.
Did you know that you can borrow shares immediately before a corporate election for the sole purpose of influencing the outcome? Yes, in America if you borrow shares, the voting rights will be transferred to you.
You get to keep the dividend, but not the vote? Seems rather counter intuitive, doesn’t it? Or better yet, rife for exploitation?
..That’s because it is..
“The existing system of shareholder voting is crude, imprecise, and fragile. Gil Sparks, a leading Delaware lawyer, estimates that, in a contest that is closer than 55 to 45%, there is no verifiable answer to the question “who won?” “
—The Hanging Chads of Corporate Voting
Over and over again, and for multiple decades, it has been shown that votes are constantly being misappropriated, yet the only entity that can reconcile this problem is owned and controlled by them: The Depository Trust and Clearing Corporation.
Broadridge, the company they contract out to send us our proxy (voting) materials, even admits in their corporate filings that their relationship with these brokers constitutes as a “conflict of interest “.
Should we really trust these people to fairly tabulate our votes? You can make $100’s of million’s from being on the right side of a corporate merger, and as recent history has shown, these banks will rig anything so long as they can get away with it. Only 30% of shareholders were shown to have voted in 2014, and as we all know, there is no better industry than Wall Street at finding legal loopholes, so rigging such an opaque and outdated system should be a piece of cake for these mega-banks.
That alone should be enough cause for concern, but combined with the fact that they can borrow shares for the sole purpose of influencing an election, and it’s easy to see how this system could be manipulated. They even have a name for this practice: Vote Buying
Yes, Vote Buying..
From now on we’re going to try to avoid using the word “Proxy” because it acts to cloak what is actually going on: a vote, not a “proxy”. That word makes it sound much more complicated than it actually is, especially considering all the technology we have today. Every country in the western world holds elections, yet for some strange reason, the only place that exhibits such unusual complications is on the stock market; the lifeblood of the American economy.
From: “Double Voting in Proxy Contests Threatens Shareholder Democracy”, Bloomberg, By Bob Drummond
“It is an abomination,” says Thomas Montrone, chief executive officer of Cranford, New Jersey-based Registrar & Transfer Co., which oversees shareholder elections. “A lot of the time we have no idea who’s entitled to vote and who isn’t. It’s nothing short of criminal.”
“In a little-known quirk of Wall Street bookkeeping, with the growth of short sales, which involve the resale of borrowed securities, stocks can be lent repeatedly”.
….”The loans allow three or four owners to cast votes based on holdings of the same shares”.
(CARL T. HAGBERG AND ASSOCIATES) “Over-voting is, quite simply, untenable. Allowing it to continue makes a mockery of the idea of corporate democracy. There is ample evidence that people do try to “game” the system, since votes do indeed have value – especially when the voting outcomes have the potential to move the stock price, as often they demonstrably do. (See, for example, “Vote Trading and Information Aggregation” which is easily accessible on the Internet and which documents huge spikes in share purchases near meeting record dates and corresponding sales immediately thereafter). There is also a great deal of evidence that the “gamesters” quite often succeed in gaming the vote, since, (a) as the study pointed out, one can buy votes for about $6 per million votes and (b) vote buyers will vote 100% of the time, while long-term owners tend not to vote at all, which allows the voters with “duplicate voting credentials” not just to go undetected, but to have their way in terms of the election outcomes. It is especially important to note in the context of election “gaming” that the interests of short-term and long-term owners are, almost always, diametrically opposed in election contests”.
“The customer doesn’t know this is happening,” says John Wilcox, head of corporate governance at TIAA-CREF, the biggest private U.S. pension plan for teachers. Often, the broker still permits the customer to vote the shares even though they’re out on loan. That policy is not sound. It definitely means that shares can be voted twice.”
But most of the time none of these tactics are necessary, because again, people usually don’t even show up to vote anyways.
“It’s invisible,” says Paul Schulman, executive managing director of Altman Group Inc., a proxy solicitor based in Lyndhurst, New Jersey. Most of the time you don’t get overvotes because so many shareholders don’t vote.”
You can only imagine the power one would have if they could manipulate the voting outcomes in a corporate election.
Just going off the Wilshire 5000, the combined market cap of every publicly traded company in America is equal to roughly $33 trillion, and some of these corporations are larger than most countries. Directors can also exert significant control over the company finances, and they pour billions into our elections.
“How Broadridge and its customers—the bank and broker custodians—adjust overvotes, revocations, and other problems within its system is entirely opaque”.
—The Hanging Chads of Corporate Voting
If you wanted to influence the outcome of an election, what do you think would be the easiest way to accomplish this? You would probably want to wait until you could see the results first, right?
Guess what, that’s how they can do it! It’s up to them whether they want to count the votes before, or after receiving the tallies. Yes, they can literally wait until they know the results, then tabulate everything knowing what the outcome is going to be.
Just imagine if the American people found out a political election was being handled like that? There would probably be a revolution the very next day..
… “there is no guidance in the rule (NYSE’s Rule 452) itself or from the Exchange in any other form as to how a member firm is to handle a situation where it receives proxy voting instructions for more shares than it holds in record ownership. Thus a member firm apparently enjoys substantial flexibility when it cannot act on all the instructions received, and in particular it presumably may select at its own discretion which voting instructions it will disregard“ . . . (SEC (1991), p. 28)
Vote Trading and Information Aggregation,
Let’s say there is a voting discrepancy because these TBTF banks and brokers decided to issue more voting entitlements than actually exist; it turns out that the entity that counts the votes doesn’t even have a fixed procedure for dealing with this problem.
Sometimes they will count the votes on a “first-in” basis, and other times they will count the votes on a “last-in” basis, meaning your votes could be completely discounted in favor of somebody who borrowed stock immediately before the record date, or worse, they could include fake votes because one of their better customers had an interest in the outcome. Again, they own the DTCC, and Broadridge openly admits in their company SEC filings that their relationship with these brokers constitutes as a “Conflict of Interest”
According to the NYSE, this was shown to have occurred in “numerous instances”.
“As set forth more particularly below, during the period from about January 2000 to April 2004, the Firm: voted more shares than it was entitled to vote in corporate elections (“over-voting”) in numerous instances “
From, “Economic Warfare – Risks and Responses, by Kevin D. Freeman“
….”the day of the vote there were roughly 17.2 million shorted shares of TASER stock. Thus, even if all of the TASER shares that were sold short were able to vote… there were at least 3. 7 million shares that were undoubtedly counterfeit.
…..”When investigated, however, there is substantial evidence that over- votes are increasingly impacting elections, even if participation by traditional shareholders remains low. In 2005, for example, the Securities Transfer Association reviewed 341 shareholder votes finding evidence of over voting in every single case”.
You’re probably thinking that all those citations are kind of old, and it’s been almost 20 years since that NYSE complaint, so something must have been done about this by now — right?
Unfortunately, no, and still to this day in the year 2020, nothing has changed. Just look online and you will see numerous articles and white papers from reputable sources addressing all of the problems outlined in this article.
Just last year in 2019, one investor advocacy group sent several letters to the SEC addressing this strange phenomenon of “over-voting“.
But you can’t visit their website anymore because this is what will happen.
You can still read their letter though..
It also looks like their website was recently shutdown
They’ve published numerous reports on this topic, yet even now as of the time of writing, if you try to read their pdf’s, you still get this message.
Not something you see very often in this day and age. This is what you see when you visit another one of their websites.
What does this all mean?
They’ve been at this for more than a decade now, so it just seems rather odd that you can’t even visit the website of what appears to be one of the most prominent advocacy groups fighting for change on this matter without risking your computer being infected with a virus.
Does corporate election meddling happen all the time?
Can it happen? Yes, it’s been shown to happen on numerous occasions, and there has been extensive research published on this fact.
“As a result of these NYSE administrative proceedings, the securities industry adopted written guidelines to address this reconciliation problem.These guidelines permit brokers to select one of two reconciliation methods“
The securities industry guidelines that provide two methods of beneficial owner reconciliation should be replaced with an SEC rule that requires pre-mailing reconciliation (finding out which shares entitlements Are Fake and which ones are real before letting everybody vote) as the only method for brokers and other intermediaries.
Street name positions should be reconciled as of the record date (the record date is the last day you are allowed to vote) for each shareholder meeting, in order to avoid discrepancies in tabulating final vote counts and to avoid distributing proxy materials to beneficial owners who are ineligible to vote (Fake Shares).