By Michael Flaherty
NEW YORK, Feb 10 (Reuters) - A new government measure aimed at cracking down on an abusive stock trading practice has been slow to deliver results for some companies, frustrating executives and shareholders who are calling for stricter enforcement.
The measure, known as the "Threshold Securities" list, identifies companies with a significant amount of shares that were sold short, but never delivered to the buyer.
In theory, by appearing on the threshold list, a company's trading volume is expected to stabilize and its share price is expected to improve, as brokers are now under tighter rules to buy up undelivered shares within a certain period of time.
While several threshold stocks have seen improvement since appearing on the list early last month, others have not, prompting some to question the measure's strength.
"The rules behind the list just aren't strict enough. There has to be more bite," said Kenneth Eade, chief executive of movie company Soleil Film Inc. (SFLM.PK: Quote, Profile, Research) , which has appeared on the list. "We ended up with some kind of compromise with the securities industry instead."
The threshold list is part of a broader effort by the U.S. Securities and Exchange Commission, known as Regulation SHO, to refine the rules that govern short-selling and thwart those who abuse the practice.
Short-sellers borrow shares and sell them hoping to return them later at a lower price and pocket the difference.
The adoption of Regulation SHO comes amid complaints, particularly from small companies, that manipulative short-sellers have taken their toll on the market.
"The question is, what enforcement is happening? If the list is just a list, then that's just counter-productive," said Herbert Becker, chief executive of Hee Corp. (HCCF.PK: Quote, Profile, Research) , a diabetic research company.
Becker said his company's shares have stabilized and climbed since appearing on the Threshold list. But that's not the case with other companies.
Since appearing as threshold securities, shares of Northfield Laboratories Inc. (NFLD.O: Quote, Profile, Research) , mortgage lender NovaStar Financial Inc. (NFI.N: Quote, Profile, Research) and holding company WHX Corp. (WHX.N: Quote, Profile, Research) have fallen, trading in choppy volume.
The main target of the threshold list are "naked" short-sellers, who short a stock they haven't borrowed. That results in what's called a "fail to deliver" after the trade's settlement date.
In that scenario, the broker who executes the sale never receives the borrowed shares. These unsettled trades are often overlooked by brokerage houses. But the impact can be big to a small company, as "naked" shorting can dilute a stock and send shares tumbling.
The "Threshold List" identifies stocks with aggregate "fails to deliver" of at least 10,000 shares for five consecutive days, or "fails" that constitute 0.5 percent or more of the company's outstanding stock.
If a "fail" in a threshold security remains open for 13 consecutive settlement days, the broker responsible for the transaction must purchase the shares, according to Regulation SHO.
Critics of "naked" shorting are angry that the SEC's new rule applies only to trades from Jan. 3 onward.
"Eliminate the grandfathering of existing undelivered stock sales. Enforce the buy-in provisions on ALL naked short positions, not just the latest violations," said a full page advertisement in the Washington Post on Tuesday.
The ad was sponsored by a self-proclaimed grass roots organization called the National Coalition Against Naked Shorting.
Regarding threshold stocks that are past the 13-day requirement with little evidence of buy-ins, SEC spokesman John Heine said the agency was "monitoring the situation and gathering relevant data."
David Lott, president of Limelight Media Group Inc. (LMMG.OB: Quote, Profile, Research) , said he has seen better volume and a move up in his penny stock since appearing on the list. But as someone who says he was burned by stock manipulators before, he worries about them coming back.
"I think we're seeing a sincere effort by the SEC to address the problem," Lott said. "But without hard penalties, you may see these short-sellers come back and do it all over again."
AI
