Why Does Failure to Deliver Go Unpunished?

There is a systemic problem in the equity market, but the magnitude of the problem is impossible to gauge because the parties involved refuse to answer a simple question: Why?

My mutual fund purchased five blocks of stock in Overstock(OSTK Quote - Cramer on OSTK - Stock Picks) during the first quarter. There was a failure to deliver shares in four out of the five purchases, with delays for delivery lasting as long as three weeks. Nobody can tell me why shares were not delivered within the requisite three-day settlement period -- the so-called T+3 requirement.

This is not a single isolated occurrence, or a one-in-a-million bookkeeping bump in the road. The Securities and Exchange Commission recently acknowledged that $6 billion in stock have failed deliveries each day. Out of 6,000 publicly traded stocks, over 300 are currently experiencing significant delivery problems.

There are two common ingredients to every financial scandal that has rocked Wall Street over the years.

The first is that the perpetrators have power or influence that the average investor does not have. While small investors have to play by the rules, market players with power or influence work around the rules or simply break them.

For some sellers of stock, it appears that property can be delivered at a time of their choosing. It's not T+3. It's T plus when they get around to it. In one of my purchases of Overstock, it was T+21. The vast majority of investors do not have the luxury of delivering stock that they sell at a time of their choosing. A market is unfair when some market participants can ignore rules that others have to follow.

The second common ingredient to past scandals is greed. Greed causes market participants to break the rules. Implicit in the failure to deliver shares to my fund is this: Delivery was delayed because it was financially advantageous to the seller. The seller, in effect, grants himself a free option to take extra time for delivery. The seller's unilateral modification to our agreement (giving the seller as much as three weeks for delivery) is made without my prior notice and consent.

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