Naked' stock tactic blasted
"Crooks," "scoundrels" engage in naked short-selling, some claim. The SEC eyes new rules.
By Will Shanley
Denver Post Staff Writer
Article Last Updated:10/10/2006 02:59:43 PM MDT
Dozens of investors, small public companies and elected officials across the country are raising questions about how the U.S. Securities and Exchange Commission regulates a controversial investment strategy called naked short-selling.
"Stop these counterfeiting crooks," Dan Heilman of Golden wrote in a Sept. 15 note to the SEC, according to the agency's website. "Anybody who thinks that naked short-selling is (acceptable) is probably being paid by the crooks."
Wrote Bonnie Lavoie of Lakewood: "Without exception, you are being admonished to do right by the small investor and quit protecting and or profiting from Wall Street scoundrels."
Some Wall Street investment banks counter that additional regulation would disrupt the market and make short sells more difficult. They also argue that naked short-selling affects only a small swath of companies.
Short selling is when an investor borrows a company's shares from an investment bank, sells them and hopes to buy them back at a lower price. Naked short-sellers do not actually borrow the shares, which can cause an imbalance in the supply and demand of shares and result in a decline in share price.
The practice is regulated by the SEC. But critics say the tactic is rife with abuse if short-sellers are intending to profit by artificially depressing a company's share price.
"The interests of abusive short-selling hedge funds must not be placed ahead of investors and employees who often depend on these companies for their livelihood and retirement," wrote state Rep. Joe Stengel, R-Littleton, in an Aug. 19 letter to SEC Chairman Christopher Cox.
Naked short-sellers often target companies with revenues below $200 million or speculative stocks such as technology or biotech firms, whose share prices can swing wildly.
Denver-based Vyta Corp., formerly known as NanoPierce Technologies Inc., was part of a failed lawsuit against the Depository Trust & Clearing Corp., which settles equity trades in the U.S. The lawsuit, decided in 2005, alleged that Vyta's share price was hurt by naked short-sellers.
On April 10, Denver-based Metre tek, which sells commercial electricity-backup systems, was added to the American Stock Exchange's list of companies possibly targeted by naked short-sellers. The company was removed from the list July 25.
Phillip Marcum, chief executive of Metretek, told Bloom berg News in August that there "ought to be severe penalties" for naked short-sellers. Marcum was unavailable for comment Monday.
The SEC is considering toughening Regulation SHO, a slew of 2004 changes aimed at curbing naked short-selling.
Possible changes include shorter settlement deadlines of naked short-trading and mandating greater transparency for hedge funds, said Peter Chepucavage, a securities lawyer who has worked at the SEC and is now at Plexus Consulting Group in Washington. Chepucavage, who helped write Regulation SHO, said new rules may come within the next six months.
Join The Denver Post's online discussion about naked short-selling.
Staff writer Will Shanley can be reached at 303-954-1260 or wshanley@denverpost.com.
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