SEC Urged To Do More To Counter Naked Short-Sales
09/21/2006
Dow Jones News Services
(Copyright © 2006 Dow Jones &
Company, Inc.)
By Judith Burns
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Securities and Exchange Commission should do more to attack abusive short selling, including tighten stock-borrowing requirements and require daily reporting on the extent of stock-delivery failures, some lawmakers and business executives say.
"We believe that naked short selling continues to be a serious problem for a number of public companies," the U.S. Chamber of Commerce wrote in a Sept. 13 letter to the SEC.
Short sellers sell borrowed shares in hopes they can profit by replacing them later at a lower price. "Naked" short sellers do not borrow shares they sell short and may have no intention of doing so, which some liken to counterfeiting.
The chamber said the practice is especially painful for smaller start-ups whose shares are more easily manipulated and called for stricter requirements to locate shares before engaging in short sales and daily reporting of stock-delivery failures for hard-to-borrow "threshold" securities. It also urged the SEC to study the stock-lending market and remove barriers that make it hard to lend shares out of cash accounts.
Taser International Inc. (TASR), the Scottsdale, Ariz., stun-gun maker, agrees the SEC needs to tighten Regulation SHO, its 2004 rule package targeting short selling. In a Sept. 18 letter to the SEC, Taser said it has seen "substantial evidence of market manipulation through abusive naked short selling," including delivery failures, noting that one day in 2005, when short sale trading volume in its stock was 19 million shares, about 45% were not delivered.
Over-voting is another problem, according to Taser. It said 82 million votes were recorded at its 2005 annual meeting, even though the company had only about 61 million shares outstanding, suggesting the creation of 20 million "phantom shares." Over-voting declined to about 10 million shares this year, demonstrating there are lingering problems in this area, Taser executives wrote.
This summer, amid criticism that Regulation SHO hasn't stopped naked short selling, the SEC proposed changes to it, including eliminating a controversial "grandfather" provision that exempted previously existing short sales from stricter rules on borrowing and delivering shares. If the proposal is finalized, transactions with pre-existing stock delivery failures that had been "grandfathered" would have to be closed out within 35 days after the change takes effect.
Ending "grandfather" protections is a good idea, according to many of the comment letters to the SEC, which sought public reaction to the plan through Tuesday.
"Grandfathering must be eliminated," Utah Gov. Jon Huntsman Jr. wrote in a Sept. 8 letter. He also supported the SEC's proposal to end exceptions for options market makers, saying they should be required to deliver shares promptly after the underlying options trades have expired.
Utah's governor joined others, including Utah Attorney General Mark Shurtleff; Rep. Jim Matheson, D-Utah, Rep. Rick Renzi, R-Ariz.; and Overstock.com Inc. (OSTK) Chief Executive Patrick Byrne in calling for changes beyond those proposed by the SEC, including requiring short sellers to have shares - or have written contracts to borrow them - prior to short sales.
Currently, short sellers only need reasonable grounds to believe that shares can be borrowed, which "amounts to an enormous loophole" that is being exploited by abusive short sellers to avoid borrowing or delivering stocks they sell, wrote Byrne. He said tighter borrowing rules would go a long way toward solving that problem. Alternatively, he suggested borrowed shares be placed in a separate pool that precludes them from being lent again until the trade has settled, avoiding over-borrowing and over-voting.
Byrne, the Salt Lake City online discount retailing executive, has been a vocal critic of the SEC and Wall Street brokerage firms, and says he's uniquely positioned to weigh in on Regulation SHO. He noted that with a 20-day break, since January 2005, Overstock has been on the "threshold" list of shares experiencing delivery failures for at least five consecutive days.
Overstock wasn't able to get information on the extent of the problem, and Byrne wants regulators to require a daily public tally of delivery failures in all hard-to-borrow threshold stocks. He said that without that, "it is difficult to know the level of 'naked shorting' and its risk to the capital markets."
If the SEC can't deliver a national solution, Francine Giani, executive director of Utah's Department of Commerce, warned in her own letter that Utah "will increase its efforts to identify those firms causing settlement failures and when justified, bring enforcement action."
-By Judith Burns, Dow Jones Newswires, 202-862-6692; Judith.Burns@dowjones.
com
(END) Dow Jones Newswires
09-21-06 1437ET
Copyright (c) 2006 Dow Jones & Company, Inc.
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IMO, the SEC is cracking down on this problem!
Eagle1,
