Chairman Cox before Senator Bennett
Transcript from April 25, 2006
FNWIRE
SEN. SUNUNU: Thank you very much.
Thank you, Mr. Chairman.
SEN. BENNETT: Thank you. Several items.
Chairman Cox, thank you for being here, and welcome to your first
experience. I hope we have a lot of subsequent ones and that they are
pleasant.
I heard the conversation about Sarbanes-Oxley. My experience during the
break was not the same as Senator Dodd's. I had some venture capitalists
tell me flatly they no longer do IPOs. And Sarbanes-Oxley is the reason. And
if it becomes necessary for them to take a company public or if it's the
logical thing, they look to do it at some foreign exchange rather than in
America. So, as you do your analysis of the reports you have, this is
anecdotal, there's nothing scientific about it, but it's a different kind of
constituent response than the one that Senator Dodd --
MR. COX: Well, I appreciate that it's anecdotal. On the other
hand, I was speaking up at Harvard University recently, Harvard Business
School to a group of venture capitalists who expressed precisely the same
views.
SEN. BENNETT: Okay.
MR. COX: That is also anecdotal, as there are now two --
SEN. BENNETT: Right. Okay. Well, I -- I just -- I heard Senator
Dodd say he found nothing but good comments about it, and I had heard some
of the other kind. Let me move to a subject that I've been on for some time
and begin my remarks by saying that the SEC staff has been responsive. I've
been talking about this for maybe a year or more, and they have staff
members have been in and been in to see me. But the problem still exists.
We're talking about naked short selling and the problems connected with
that.
One of the things that I've been told that I want to lay down and say I
think this is an immaterial excuse, when they say, but you get 99 percent
settlement, the FTDs are only in 1 percent of the dollar volume, and
therefore it's not really a big deal. You made the comment earlier with
respect to Sarbanes-Oxley that you got 80 percent of the companies that
might be made exempt, but if you look at a market cap, it'll be very large.
That same dichotomy exists with respect to the naked short selling.
I got into this because I had constituents that had little companies, and
for them, it's a huge deal. And many of them insist that they've been
destroyed by it -- that is, the naked short sellers keep hammering their
stock until finally they can't raise any money, the company goes under, and
nobody ever has to cover. And I don't know that that's the case; again, this
is an anecdotal accusation that's made. But if indeed it is true, it's a
demonstration of market manipulation that is not only clearly illegal, but
devastating to people who form companies and then try to turn to the markets
to raise money and can't because the shorts keep hammering them.
I want to make it clear also, I do not think short selling is improper. I
have sold short in my investment life. Usually, I've been burned by it, but
I've done it. And the broker that handled it gave me the old statement, "He
who buys what isn't his'n" -- or "He who sells what isn't his'n, must buy it
back or go to prison." And apparently, some of these people are not buying
it back. I always had to when I sold short. And it's gotten into the news
again.
I started doing this because, as I say, I heard from very small companies,
who were my constituents, and their stocks were traded on the pink sheets,
and it looked like nobody cared on the pink sheets. And they could hammer
companies there all day long with naked short selling, and nobody'd look at
it. And that's the thing that I raised with the SEC before.
Well, now, it's getting a little more current, see. There was a piece in the
Wall Street Journal on the 13th of April. The headline said, "Despite SEC
rules, a small amount of naked shorting appears to persist," and in that
article, they talk about companies that have stayed on the list for months
and months -- on the list where the FTDs have not been cleaned up.
Overstock.com, Martha Stewart Living, Omnimedia and Krispy Kreme Doughnuts
have been on the threshold list for months. Overstock.com happens to be
located in Utah, and so that caught my eye.
Then, on the 12th of April, Forbes had a piece about short selling in hedge
funds, and how they felt that they were being taken advantage of. The latest
Bloomberg has a piece not specifically on short selling, but entitled,
"Corporate voting charade," and says that the people who buy shares to sell
them short, then get involved in proxy fights and that people end up voting
shares they don't own. They have borrowed the shares for short-selling
purposes, and then vote them when they really have no interest in the
long-term health of the company.
And there's an interesting chart in the Bloomberg piece about how some close
corporate elections were decided by the voters of the short sales. It says
that Alaska Air Group, the short sales were 4 percent of the winning votes
-- 4 percent of the voting, and the winning votes were 2.4. Mony Group --
M-o-n-y -- 6.2 percent of the votes were in short proxies, and the winning
margin was 1.7. And El Paso, 67 percent were short votes, and the winning
margin was 17.2. And there are those who say this whole situation cries out
for more SEC oversight and attention.
So let me, with that, ask you the question; if you can't answer it here,
would like a response for the record. There have been a lot of companies --
well, a lot -- several, we'll say several companies have been on the Reg SHO
Threshold List for a very long time, and one of them, as I say, is one of my
constituents. Presumably, at least some of what has led to these companies
to be on the threshold list for so long is illegal short selling.
So I would like to know, as you examine the list, are you willing to use
your authority to have the SEC continue its pursuit of basic transparency by
requiring the disclosure of the amount of FTDs?
_ (Pause.)
MR. COX: Well, you covered a lot of ground.
SEN. BENNETT: Yeah, and I apologize, maybe overwhelmed you here,
but --
MR. COX: I'm trying to keep track of all of it.
SEN. BENNETT: We'll be happy to provide you with pieces of paper on all
of this.
MR. COX: Of course I'll take advantage of that, as well.
SEN. BENNETT: Sure.
MR. COX: To start at the beginning and end at the end, the
experiences that you describe, some of your own and many more that you've
been apprised of by your constituents and others, are experiences that in
some respects I've shared. When I first came to the Congress in 1989, I
served on a subcommittee chaired by then- chairman of the Consumer, Commerce
and Monetary Affairs Subcommittee, Doug Barnard of Georgia, that focused for
several months on bear raids and short sellers and what was going on in that
industry. I share completely your approach to this problem that short
selling is a component part, and -- of healthy markets and one that is
perfectly respectable. And indeed it's an important check and balance in our
system.
From the standpoint of orderly markets, it's vitally important that shares
be delivered. These are contracts, and they have to be fulfilled. And there
has to be a rule of law.
I also, moving to your next point, agree with you that it is faint comfort
for someone with a micro-cap company to hear that statistically we're doing
great, that we're reducing these failures to deliver, and that life is much
better now than it's ever been before, because statistically we can prove
it's so. I mean, in a thinly traded company, life is different. And so
enforcing these rules in very different circumstances is also vitally
important.
Having said that, I do think it is important to recognize the progress that
has been made under Regulation SHO, which the commission, as you know,
adopted in 2004, before I became chairman. That rule became fully effective
in January of last year. It has a modest ambition. It is designed not to
eliminate but to reduce failures to deliver on short sale transactions and
to target potentially problematic short selling, abusive naked short
selling.
What I can commit to now is that when we have internalized and understood
the results of our examinations, which are now ongoing, of compliance with
Regulation SHO -- and we've completed the examinations of some 45 firms that
include comprehensive target exams of 19 clearing firms -- that I will
recommend changes to our rules if those exams demonstrate that changes are
necessary for the reasons that you describe.
SEN. BENNETT: Let me just conclude -- and I -- Mr. Chairman, I
applaud what you're saying, and I'm sure you will go forward with that.
Picking up on what The Wall Street Journal had to say with these three
companies that are listed, that have been on list for months, that might be
one of the places to start. The company stays on the list for months.
That's an indication to me that there's something going on that is unusual.
I can understand an FTD. I can understand a flood of FTDs for a variety of
benign reasons. But when a company is on the list one month, that says,
"Well, okay, there are just some problems." When they're on -- the same
company's on the list for two months --well, maybe something is going on. We
need to pay -- when it's on for month after month after month and it catches
the attention of publications like the Journal, I think that ought to be a
rather informal but strong flag that says, "We ought to pay attention at
least to these companies to see why they keep showing up on the threshold
list."
Thank you very much.
MR. COX: Thank you very much, and I hope to be able to follow up
with you on these things.
SEN. SHELBY: Thank you, Senator Bennett.
Senator Schumer.
SEN. CHARLES E. SCHUMER (D-NY): Thank you, Mr. Chairman.
And thank you, Mr. Chairman, for being here, and glad to see you're on top
of all of these things. I have a whole bunch of questions on cats and dogs
here, but one I know you've been asked about -- I'd just like to underscore
my concern here as a New Yorker that so many of the IPOs -- none of the top
10, one out of the top 24 -- haven't listed in the United States. In 2000,
nine out of 10 listed in the U.S. And as I understand it, some people have
asked you a little about that. But, you know, obviously I hear from somebody
whose goal is to keep New York the financial capital of the world -- that
troubles me.
What can we do about it? Does it worry you, I guess is the first question I
have, and what can we do about it to try and change it? Is it temporary?
MR. COX: All right. Let me begin by saying that I share your
objective.
SEN. SCHUMER: Thank you.
MR. COX: The United States capital markets are today, and
certainly have been for some time, the largest, deepest, most liquid in the
world. They are also -- and I believe not coincidentally --subject to the
highest standards of quality in the world.
SEN. SCHUMER: Right.
MR. COX: It was remarked upon, I believe, by Senator Sarbanes
earlier that some studies show that there is a quality premium that
companies can demand when they list in the United States.
That is the way -- strategically, I believe -- the United States should
continue to approach our role in the world's capital markets, rather than
participate in a race to the bottom that surely, in terms of comparative
advantage, we would lose. It should be our objective to work together with
other high-standards countries to make sure that that's the way the world
goes as increasingly there are more global markets.
It is a fact of life that the domestic markets of other countries are
becoming rather rapidly more mature. And so I don't think that by birthright
the United States can lay claim to every large issue by every foreign
issuer. But we certainly are entitled to our share, and certainly if we are
correct in our view that our markets are, in fact, the most liquid, deepest,
largest in the world, we can expect that countries will want to come and
list here for precisely that reason and to gain that premium --
SEN. SCHUMER: Right. But they're not coming now.
MR. COX: -- the price premium that they should be getting.
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