STOCKGATE TODAY...SEC Violates Own Policies Regarding Accuracy in Public Releases - June 25, 2007
David Patch
Think of it this way, SarBox was created over the vast concerns regarding the accuracy of public filings by America’s public corporations. SarBox is the scapegoat for the declining interest in bringing public companies to the US Capital Markets and SarBox is the lightning rod in the debate over the rising costs of public filings.
But SarBox remains in its released state because accuracy is the cornerstone in maintaining safety in the US capital markets. And it is the responsibility of the Securities and Exchange Commission to insure that what is filed publicly does not contain omissions or misrepresentations that could otherwise impact those who invest in these securities.
Accuracy in the dissemination of information to the public equals safe capital markets and high investor confidence.
Such principles in business practices and laws do not appear to carry over to the SEC who is also responsible for disseminating critical information to the public. In fact, it would appear that the SEC would purposely mislead the public to better serve a political agenda. This past month they were caught doing exactly that.
During a public proposal for short sale reforms to regulation SHO the SEC provided an inside look at some analysis conducted by the Office of Economic Affairs (OEA) regarding the performance of Regulation SHO. The OEA did not provide the raw data so much as the conclusions drawn by the department.
Their conclusions; SHO was working and that the daily aggregate level of trade settlement failures had been reduced by 34% after the effective date for SHO. Chairman Cox, in a June 13, 2007 speech during the open public hearings for the proposed reforms again stated, “Preliminary data indicate that Regulation SHO appears to be significantly reducing fails to deliver without disruption to the markets.”
Okay, so here you are monitoring this particular issue and you read the SEC reports and listen to the Chairman address the public and all the conclusions are, SHO is working. We don’t see the raw data so the Commission expects the public to take their word at face value.
If only there were laws against the SEC for misleading the public.
Based on the raw data received directly from the SEC under the Freedom of Information Act, we can now emphatically conclude that the SEC lied to the public. The SEC acted upon a political agenda intended to downplay the problem of abusive settlement failures and in their course of action they lied to the public.
Unlike the SEC OEA, who clearly made the data fit the conclusions drawn, I decided to take the novel approach of analyzing the data first and then draw conclusions based on the results. My conclusions were 180-degrees from those drawn by our Federal regulator. SHO is not only not working; settlement failures are getting worse and not better.
Want some raw data to support the conclusions?
Using averages is a dangerous tool to use when calculating performances but averages must be used here to prove my point. Since averages are dangerous to use, I will use several methods and timescales of averages to account for the associated variables of a volatile market.
SHO became effective on June 3, 2005 and the first SHO companies were published on the eve of January 7, 2005. The first trade day under SHO, with a threshold security identified, was January 10, 2005.
The daily average aggregate fail to deliver across all markets for the month of January 2005 was 638 Million shares. Based on the FOIA information received that spanned January 1, 2005 to March daily average aggregate fail to deliver across all markets for the month of February 2007 was 850 Million shares. This represents a 33% increase in fails after 25 months.
Since January 2006 there have been 6 months were the daily average aggregate fail to deliver exceeded the levels seen in January 2005.
In the months of April 2004 thru December 31, 2004 there was exactly one day in which the reported aggregate fail to deliver exceeded 1 Billion shares and that was in December. Since January 1, 2005 there has been 10 days where the aggregate fail to deliver exceeded 1 Billion shares.
Looking at this a little differently, the daily average aggregate fail to deliver across all markets for the entire year of 2005 was 414 Million shares. Compare this to the daily average aggregate fail to deliver across all markets for the entire year of 2006 being 550 Million. This again represents a 33% increase year over year in average daily fails. For the first few months in 2007 the daily average aggregate fail to deliver is at 629 Million shares.
Lets break it down yet another way.
Looking at the first five trading days of January 2005, the first five days before the publication of a threshold security list, the daily average aggregate fail to deliver was 524 Million shares. The last five trading days under this FOIA request represent the first few trading days in March 2007. The daily average aggregate fail to deliver over those 5 days was 614 Million shares. These 5 days in March traded with 17% more fails in the system that the first 5 days of SHO’s existence.
Did I miss an angle? Did the SEC publicly claim, in filings and in public speeches that SHO was working to reduce fails in the system? Can the agency provide the analysis that was used in coming to their conclusions?
I had submitted a FOIA request long ago seeking exactly that, the raw data used in generating the conclusions drawn by this agency but that data has not yet appeared in my mailbox. Like most FOIA requests to the SEC the data is slow to arrive if ever. While companies are required by law to file financials quarterly or run the risk of being de-listed the SEC takes the stance that they have no requirement for timely response to legal FOIA filings.
Tomorrow the SEC Chairman and Commission staff will testify before the House Financial Services Committee. It will be interesting to see if the Commission staff are willing to testify before that committee, under oath, and present the omissions and misrepresentations they have presented to the public. I tend to believe that after the last time SEC members spoke before a Congressional committee, and the committee was less than pleased with the conflicting stories presented regarding the Aguirre firing, that this Committee may become less tolerant of perjury.
