When you buy stock, you naturally assume that your broker is able to take delivery from the broker for the seller. Ain't always true.

In fact, as the financial system self-implodes, it is becoming even more the case that offending brokers are increasingly not properly settling and clearing transactions as required by exchange rules.

What we have is a failure to deliver, and you should be screaming loud and clear about this matter to your elected representatives. Clearly the sell-side oriented media is unconcerned.

But do you recall a year ago, just before the Refco collapse, that Alan Greenspan called a NYC meeting in the Fed offices where the top executives of America's biggest banks and brokers were required to attend. The issue was "transaction fails" and how the whole financial system is at peril.

"Kaimu" sent me the following note this morning. I say, read it and weep. The great capitalist system you count on is failing you. (Pun intended, but very very serious.)

"ALoHa BiLL !! Did the word "Naked" get your attention? HA !! Here is the latest on the "enforcement" of naked shorting in the US and Canadian markets ... End result a slap on the wrist and continued failure to deliver and close share transactions. In other words ... business as usual for the BIG BANKS !! READ ON:

Naked Fines

Liz Moyer, 09.13.06, 5:00 PM ET

The U.S. Securities and Exchange Commission has received a deluge of requests to amend short-selling rules it enacted just two years ago as the New York Stock Exchange continues its efforts to enforce existing regulations.

JPMorgan Chase (nyse: JPM - news - people ) has become the fifth bank to be censured and fined by the NYSE's regulatory division for violations of trading rules meant to curb abusive short-selling.

The New York bank agreed to pay $400,000, without admitting or denying guilt. NYSE Regulation said Tuesday that JPMorgan violated numerous rules related to its handling of stock short-sales, a strategy in which the trader is supposed to borrow the shares, or at least find a broker who says he has them and is willing to lend them, before he makes the trade.

NYSE Reg says JPMorgan violated Regulation SHO, a rule put into effect in January 2005 by the SEC to curb abusive trading practices by limiting the ability of traders to do what's called a naked short-sale, which is selling a stock they haven't borrowed.

The exchange's enforcement arm says JPMorgan inaccurately marked sell orders, submitted inaccurate trading data and transacted short sales without reasonable grounds to believe the stocks could be borrowed. JPMorgan also had programming and systems errors that caused many of the problems.

A naked short-sale frequently results in those shares not being delivered to the buyer within the mandated three-day window. This is called a "failure to deliver," and despite assertions by some that the problem is not pervasive, it is enough of a problem to have attracted the increasing attention of the SEC and market regulators.

In July, Citigroup (nyse: C - news - people ), Daiwa Securities, Goldman Sachs (nyse: GS - news - people ) and Credit Suisse collectively paid $1.3 million for similar violations. They were the first firms to be slapped with a NYSE censure since the enactment of Reg SHO.

Daiwa paid the heftiest fine of those four, $400,000. NYSE Reg said one of the firm's proprietary trading desks transacted 103,000 short-sales without locating the shares to be borrowed. Also, the NYSE said, Daiwa's stock loan desk didn't document compliance with the stock locate requirements.

Critics complain that the enforcement efforts to date lack sharp enough teeth to discourage future abuses.

JPMorgan's fine looks miniscule compared to its $160 billion market capitalization. Through June, the bank had reported $1.7 billion in revenue from equity markets activities. A bank spokesman had no comment Tuesday.

"By levying a fine that is but a tiny fraction of the ill-gotten gains, the SEC is pinning a 'Kick Me' sign on the backside of the rule of law," says Patrick Byrne, CEO of Overstock.com (nasdaq: OSTK - news - people ), and big activist for reform in trading rules. "But the SEC is not monolithic: Though the brass are mostly captured regulators, in the rank and file, and at the highest echelons, I believe there are people who understand the gravity of the situation and who want to do something about it."

The SEC, recognizing continued problems with persistent and large trade failures in a few hundred stocks, is currently gathering comments about proposed amendments that would close some loopholes. The comment period is set to end early next week, and the agency has posted nearly 200 letters on its Web site urging reform.

Among the comment letters received so far is one from Utah Gov. Jon Huntsman Jr., who earlier this year signed into law stiff penalties for brokerage firms that didn't immediately report failed trades in the stocks of Utah companies to the state's division of securities.

The law was written for the benefit of Salt Lake City-based Overstock.com, a heavily shorted stock that has had persistently appeared on Nasdaq's lists of stocks that fail to deliver since Reg SHO was put in force. Gov. Jon Huntsman backed down during the summer after an intense lobbying effort by Wall Street firms, who complained that compliance would be too costly and cumbersome. Utah won't enforce the law until next June.

But in his comment letter, dated Sept. 8, the governor urged amendments to Reg SHO, including shorter trade settlement deadlines and daily disclosure of trade failures. "Restoring investor confidence requires both additional enforcement attention by the SEC and additional regulatory changes," the governor wrote.

The current rules don't require the brokers to fix the trades by buying shares to cover their short positions after 13 days, they merely say that if the trades aren't fixed, the broker can't do any more short-sales in that security without borrowing or arranging to borrow the stock.

The Depository Trust & Clearing Corp., the New York clearing house that is owned by the big brokerage houses and whose mission is to settle and clear the lion's share of the daily stock transactions that occur in the markets, says it has no power to force brokers to fix the trades either, a fact that also frustrates critics of the current system.

"We don't have any power or legal authority to regulate or stop short-selling, naked or otherwise," the DTCC says on its Web site. "We also have no power to force member firms to close out or resolve fails to deliver."

Brad Niswonger, a senior vice president for brokerage firm Robert W. Baird Co., complained in a July letter to the SEC, "It seems like every day the SEC fines someone for fraudulent stock transactions, but they walk away after collecting their fee without completing the transaction by making these players buy in the illegal short positions."

A Canadian brokerage firm also complained to the SEC about its experience trying to settle its purchases of shares in Overstock.com. The broker, Research Capital of Toronto, says it tried to buy shares of Overstock to satisfy customer orders but has never received the actual shares it bought, even after 39 attempts to force the brokers who sold it the stock to produce the shares.

Research Capital says this has been going on since February 2006. "The failed deliver has simply been replaced with another delivery commitment which also fails," the brokerage says.

NYSE Regulation says it has been reviewing broker firm compliance with the Reg SHO rules as part of its annual examinations, and more rule breakers could be exposed.

"This is definitely an area of focus for us," said a spokesman for the regulatory arm of the Big Board.

<>: http://www.forbes.com/2006/09/13/naked-shorts-jp-morgan-chase_biz_cx_0913naked.html?partner=alerts

BTW, Research Capital is a solid mid-sized independent Toronto-based broker. An old college roommate, Kenny Andras, was once a senior officer and partner at Research Capital (originally Andras, Hatch & Hetherington). Kenny is one of the nicest persons I ever met.

The issue they bring up: "The failed deliver has simply been replaced with another delivery commitment which also fails" is a message that cannot be ignored. Your assets are at risk.

Your assets are always at risk in capital markets, but you just assume the risk is market price related. Think again.