Conversion Solutions Holdings (fka CSHD)

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Some cool news:News from the frontline...things are getting messy for NSS
South Dakota Targets Illegal Short SellingS.D. Targets Illegal Short Selling
By Associated Press November 28, 2007

An initiative that would impose state penalties for the illegal short selling of stock shares appears to be the first headed to the 2008 ballot in South Dakota.

It's part of a nationwide effort to convince states to pass their own laws against "naked" short selling, which involves selling borrowed shares without having borrowed them first.

The practice is already illegal in the eyes of the federal Securities and Exchange Commission because it tends to lower a company's share price by artificially creating more sellers than buyers. But proponents of state laws against the practice say the SEC is not enforcing its laws so states need to act.

State Rep. Hal Wick, R-Sioux Falls, said South Dakotans for Securities Reform has gathered 27,500 signatures and plans to deliver the petitions to the South Dakota secretary of state on Thursday.

Wick said he knew nothing of "naked" short selling until last March, when Tim Mooney, spokesman for the Union, Mo.-based American Entrepreneurs for Securities Reform, brought it to his attention.

If passed by voters, the law would require stock shares to be delivered to the buyer within three days of their purchase.

"This is a consumer protection issue that needs to be addressed," Wick said Wednesday. "The people of South Dakota deserve to have the protection of both the state and the federal government when they invest their hard-earned dollars in the stock market."

Travis Larson, spokesman for the Securities Industry and Financial Markets Association, said the SEC has addressed the issue and any state law dealing with short selling would likely run counter to current federal regulations.

"The SEC has been given control of our financial market regulations so that we have one single set of rules and regulations for our financial markets," Larson said. "And if every state were to pass its own rules _ some of which may run counter to the SEC _ the patchwork quilt of resulting rules and regulations would tie up our financial markets and slow them, hurting our competitiveness."

Larson added that where short selling occurs illegally, it should be punished to the fullest extent of existing federal law.

In a July letter to the industry association, South Dakota Gov. Mike Rounds said promoters might have good intentions, but the proposed initiative would unduly burden and obstruct interstate commerce.

"The initiative will not receive support from this office and, unfortunately, there is no realistic way to prevent the short sale initiative from appearing on the November 4, 2008, ballot if the proper signatures are obtained," Rounds wrote.

Traditional short sellers borrow a stock, then sell it, betting its price will decline and they will be able to buy it back and return it to their lender at a cheaper price. In "naked" short selling, as defined by the SEC, the seller does not borrow or arrange to borrow the securities in time to "make the delivery" to the buyer within the standard three-day settlement period for trades. It's called a failure to deliver.

Mooney said the practice amounts to fraud, and the American Entrepreneurs for Securities Reform is trying to get similar legislation passed in Oklahoma and Missouri.

"Phantom shares of stock are created in excess of that which has been issued," Mooney said. "It's the same economic impact as putting a $100 bill in the Xerox machine and hitting 'copy.'"

"Naked" short selling has received some attention in recent years from Patrick Byrne, chief executive officer of Overstock.com, who has become a vocal critic of the practice. The Salt Lake City-based Internet retailer is suing a stock research firm and hedge fund managers for allegedly driving down the company's shares.

Utah's legislature passed a law against the practice in 2006, but repealed it a year later.

The extent of "naked" short selling is not known.

Mooney estimates that as much as $6 billion a day worth of stock is not delivered, but he added that some of that is fixed over time.

Other business analysts contend the issue is overblown.

Failures to deliver can occur for a number of reasons, including human or mechanical errors or processing delays, and they can occur on both long and short sales.

Wick said he wasn't sure how prevalent the practice is in South Dakota, but he said he knows of one company in the state that has been impacted by it. He said he did not want to name the company.

But startup companies need protection against the practice so brokerage firms can't drive them into bankruptcy, Wick said. The conversion of the old Homestake gold mine in Lead into an underground laboratory will draw many startup companies to the state, he added.

Asked why he didn't introduce the bill in the Legislature rather than using the ballot initiative process, Wick said short selling is not the kind of issue that would otherwise get a lot of media attention.

"The things that go through the Legislature, most people never see," Wick said. "By doing this publicly and asking the people to vote on it, we let the people of South Dakota really say what they want."

Mooney said state efforts will also help get the attention of the SEC, which can then better enforce its laws.

Wick said he hasn't had any discussions with the South Dakota Attorney General's Office on how it would handle enforcement of the proposed law, but it would fall under the state's consumer protection division.

The ballot measure is titled the South Dakota Small Investors Protection Initiative.


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