In what may be recognized as a prophetic call within a few years time, legendary gold investor Jim Sinclair (also known as Mr. Gold), issued a dispatch this month entitled “Street Name Review” to readers of his highly followed jsmineset.com, urging investors to hold stock certificates in an ownership form other than “street name registration”.

Says Mr. Gold, “Investors should avoid margin accounts and instruct their broker dealer to not register stock certificates in street name…99.9% of brokerage account investors have no idea what is being done to them when their stock certificates are registered in ‘Street Name. It allows their broker to lend their shares to short sellers, driving down the price of your investment.

Jim “Mr. Gold” Sinclair

Additionally, this method allows the broker to re-hypothecate your assets and borrow money against your shares so they can speculate in the derivatives market…

These hidden risks are the seeds of tomorrow’s ultimate collapse of broker dealers which could dissipate the assets of customer accounts as experienced in the MF Global fiasco.” -Jim Sinclair, April 5, 2012

By our estimation here at BullMarketThinking.com, Mr. Sinclair is 100% correct, and those who take defensive action now will avoid the next “MF-Global” style collapse of a broker dealer. We are in the eye of an economic storm, and as the economy begins to nosedive once again, Western financial firms will continue their industry-wide wave of bankruptcies.

Those holding stock investments in a traditional brokerage account may be wondering: What are the alternative methods of holding stock certificates, and how do I get started in following Mr. Sinclair’s wise advice?

Here is a reprint of our January 13th article published here on Bull Market Thinking, which covers the basics of “direct registration” and “paper share certification” forms of share ownership. They are both easily accessible, and remove all the risks inherent in “street name registration.” Additionally, my report, “BulletProof Shares” – How To Protect Your Stock Investments From Broker Bankruptcy & Theft, is a step-by-step how-to guide on executing both “direct registration” and “paper share certification” of shares. Learning about these methods and taking action now may help prevent your stock portfolio from being ransacked by the next Jon Corzine.

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How To Protect Your Stock Investments In The Event Your Broker Dealer Goes Bankrupt

By Tekoa Da Silva

Deeply bothered by the MF Global(MFG) collapse, I spent the entire month of December researching a report which I’ve now released, entitled, “BulletProof Shares” – How To Protect Your Stock Investments From Broker Bankruptcy & Theft.

The reason I began researching and ultimately put this paper together was simple: fear. As a stock investor, I became afraid to continue holding my stock investments in the financial system. My investigations into this matter were both shocking and relieving as I’ve previously reported, for the reason that all the financial “safe guards” to protect investors from losses are flimsy at best. I’m indirectly referring to the SIPC when I say that by the way. I discovered that in the economic “good times”, the SIPC carries around a billion dollars in capital, which is raised from annual member company dues. But in bad economic times such as we’re in now, member companies go bankrupt and many fall behind in their annual contributions–while at the same time broker bankruptcies increase, putting a tightening financial noose on the entire organization.

Easily Severing Broker Dealer Counter Party Risk and Removing Your Shares From The Financial System

The relieving aspect of my research was the discovery of how easy and simple it actually is to protect and remove stock investments from broker dealer’s custodial possession and the financial system itself. By default, stocks are always purchased under the “street name registration”when you purchase them with a broker dealer. This means the stocks are held in custody under the name of the broker dealer you’re using. The two alternative methods which serve to “de-risk” your shares from counter party risks in the system, are “direct registration” and “paper share certification”.

Direct registration and paper share certification are covered in depth in“BulletProof Shares”. It took hundreds of hours of research pouring through the internet, and speaking with dozens of transfer agents, brokers, and public companies. While I highly recommend stock investors purchase a copy of “BulletProof Shares”, I’d also like to point out that anybody can use these methods at no cost, provided they do the research on their own. All my data was acquired from public sources and companies which happily hand it out(some less happily than others I might add) for free. So the question for most people is simply a matter of value vs time. Spend a couple bucks and save a few hundred hours, or spend a few hundred hours and save a couple bucks. The choice is yours.

Why We Must Be Aware of Alternative Forms of Share Ownership

While MFG may be the last high-profile investment custodian bankruptcy the United States will see during this financial crisis, there’s a high likelihood in my opinion that it won’t be. In my conversations with the SIPC I discovered they’re replenishing 800 MFG client stock accounts, but they would not tell me how much of the fund has been used in doing so. In my last written piece, I spoke to the fact that over 30,000 customer accounts were comprised in the MFG collapse. I’ve also previously written that all it takes for $1 billion in SIPC funds to be tapped out, is a total of 2,000 compromised stock accounts each containing $500k in securities or more.

Let me repeat this for new readers–the SIPC only covers the first $500k in bankruptcy losses of a customer’s account. After that $500k threshold, all the losses are suffered by the investor with zero insurance coverage. The only other means of loss recovery would be the investor engaging in a lawsuit against the fallen broker. But as we’ve seen with many previous high profile bankruptcies, when these companies go out–they go out with a bang–meaning billions upon billions upon billions in losses. Any single account holder looking for recovery of a $1.2 million investment portfolio will be standing in a creditors line for a decade before being told “there’s simply no more money left to pay you.”

Therefore, in my humble opinion and as a student of the investment markets, I feel we must understand each and every tool in our investment toolbox in order to build a proper wooden shed. Or for our readers who are inclined to the cooking—we must be familiar with each utensil in order to prepare a savory banquet. What would the meal be like if we were forced to use a fork to pour gravy over the chicken? Likewise, how are we suppose to saw a wooden 2×4 in half using a pocket knife? We must learn of all tools available to us (whether on our own of through “BulletProof Shares”), and carefully prepare for times in which an alternative tool or utensil is required for the occasion.

Common Misnomers & Broker-Fed Resistance Lines

As previously stated, direct registration and paper share certification are investment tools we must be aware of. Thousands of “BulletProof Shares” readers have already sent in streams of feedback and questions to which we’ve used to further improve the paper. Some common questions & circumstances we’ve seen are:

-”I use xyz broker-dealer and I know they are SAFE because they specifically say in all their company materials that they don’t use “re-hypothecation” or enable discrete lending out of shares (short selling) in customer accounts.”

Market commentator Peter Grandich is known for saying, “I’d rather be a scared chicken than a dead duck.” His comment sums up my feelings completely. I began researching these methods without a plan of writing a report—my research began when I decided I no longer trust any broker dealers. To add clarity to the point—your broker dealer may in fact be a fantastic, trustworthy organization. What I discovered which bothered me specifically, is that many “safe” brokers are using “unsafe” banking organizations. Some of them are using 3-5 diff. “unsafe” banking organizations. When I say “unsafe” by the way, I’m simply using my own opinion of what safe is. Everyone has a different opinion. So in order for a broker to be fully “safe”, they need to also be only dealing with safe counter parties in this writer’s opinion.

At this juncture you might ask this writer’s opinion on what a safe bank is—which is a conversation that cannot be fully addressed in this article. One thing I will say however, is that any bank which received a penny from the bank bailout is not a safe bank in my opinion. As an additional point, I recently listened to a presentation by famed hedge fund manager Kyle Bass, in which I learned many Swiss bankers are held personally liable for fraud occurring in their bank. Also, China is executing individuals who are discovered of investor fraud. Executions and personal liability in response to these high profile frauds are items which would coax my trust back out of the bottle.

“I have my shares held in a retirement account and I don’t want to pay capital gains when I sell my shares in order to use direct registration or paper share certification.”

This is a common misunderstanding. Direct registration and paper share certification are not “sales or dispositions” of shares. They are simply a “transfer” from one party to another, or from one physical manifestation to another. You can digitally send a stock position from your broker to the transfer agent, have it printed as a share certificate, then send it back to the broker, before going through the process all over again—all without selling your stock. You’re simply moving the shares around. Speak to some of the transfer agents listed in “BulletProof Shares” to learn more about this.

“My broker says I’ll need an attorney to use these methods, or that it will cost too much money, or that it will take too long, or that it’s a bad idea, etc, etc, etc…”

Let me make this perfectly clear: You’re broker’s job is keep all client accounts in their possession for as many commission generating buy & sell cycles as possible, and most will say or do anything in their power to keep it that way.

Much like holding physical precious metals or real estate, when you’re holding paper share certificates or using DRS method, chances are your “trading activity” will completely dry up. You will trade maybe only once or twice a year, and you may even end up owning the shares long enough to pass them down to a family member. How will your broker make money if you’re not trading in his accounts?

Therefore, many broker dealers will tell you anything they need to tell you to prevent you from considering these cost-free methods which will protect your shares(did I mention I recommend two brokers in the report which offer free transfers to transfer agents?). As a final point to this question, I spoke with dozens of brokers myself during a search for a broker to recommend in “BulletProof Shares”. I called one broker after another asking if they charged fees to use DRS stock transfers to the transfer agents.

Most of the time I was dealing with customer service agents who knew nothing of transfer agents, and I was often transferred from one representative to another before obtaining the correct information. Since there has yet to be a highly-publicized broker dealer collapse affecting tens of thousands of stock investors, the entire broker-dealer customer service industry is mostly unaware of how to precisely use these methods. That discovery was probably the most alarming of all. Many people I spoke with in the investment industry had no idea how counter party risk works, what a transfer agent does, or why a stock investor would use direct registration or paper share certification.

In wrapping up, my journey in researching, writing, and releasing “BulletProof Shares” – How To Protect Your Stock Investments From Broker Bankruptcy & Theft has been fascinating to say the least. The only thing left to do after learning about direct registration and paper share certification, is to use the methods and protect your shares, sit back, and get ready to watch a real storm.

I remind everyone that I wrote this paper myself, stand by it 100%, and take great pride in my work. If for any reason you purchase a copy and don’t feel it was worth the money—simply send me an email, and I’ll return every penny, no questions asked. I’ll even make that offer a lifetime guarantee.

What are your thoughts on the issues discussed here? Please share them!

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Thanks,
Tekoa

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