NO QUARTER FOR CORRUPTION (Focussing on The Fed./FRBS)

[bartermania]

Trader’s Corner
By Thomas Catino
Chief Architect, Columnist
May 2005


Senators March Onward, United in Efforts to Strengthen Regulation SHO

The anticipation of investors is steadily growing as June 6th approaches. This is the day when hundreds of investors across the country will march from New York City to Washington D.C. to demonstrate in front of officials at the Securities and Exchange Commission as well as the Depository Trust Company and many other ranking government officials. These investors will participate in National Counterfeit Conspiracy Day, a day designed to expose the issue of naked short selling. This crucial problem is the horrible practice that has financially devastating effects because of the selling of a security short without borrowing the necessary security to make the delivery. This failure to deliver the security is usually done with the intention to manipulate and create downward pressure on a company’s stock price. It is estimated that the naked short selling scandal has caused billions of dollars of damage in the financial markets and has bankrupted many corporations.

In the Senate, the pressure is growing for SEC officials to strengthen Regulation SHO as they see it as ineffective legislation in providing for the curbing of the abuses of illegal short selling. It all started when naked short selling came into the spotlight during a hearing in the US Senate Committee. Senator Robert Bennett spoke about the issue of naked shorting with Chairman William Donaldson of the SEC. In his beginning remarks, Senator Bennet said that the SEC “…put out a new rule in January to deal with naked short selling, and as nearly as I can tell from my constituents, who feel victimized by this, it's not working." Senator Bennet then discussed an article about a little unknown company called Global Links Corp. and believes how it is representative of the practice of people “still selling short shares that they don't have and clearly are never gonna acquire." In response, Chairman Donaldson tried to discuss the recently instituted Regulation SHO that helps to eliminate the naked shorting problem. To conclude, Senator Bennet stated that his main message was to help bring out evidence to show that the new regulations are not working.

The pressure has spread to and is being intensely felt by the Depository Trust Company as well as the National Securities Clearing Corporation. Both institutions deal with the clearing and settlement of trades that are important to determining the validity of buy and sell transactions in the market. On May 9, 2005 the Securities and Exchange Commission approved rule filing SRNSCC-2004-09, which consists of modifications to the National Securities Clearing Corporation’s rules and procedures that change the current limitations of liability. According to Karen Saperstein, General Counsel of the NSCC, the approved changes “create a uniform standard limiting NSCC’s liability to direct losses caused by NSCC’s gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action.” Rather than taking responsibility, the heat was too much to handle and is indicative of failed regulations and regulators.

Now, Senator Richard Shelby (D-Ala.) and Senator Susan Colins (R-Maine) have joined numerous other individuals who want Chairman William Donaldson grilled on why Regulation SHO has been a complete failure. A little background check on their credentials shows Senator Shelby as the chairman of the Senate Banking Committee and Senator Colins as the chair of the Homeland Security and Governmental Affairs Committee. This gives current advocates of reforms for naked short selling, Senator Bennet (R-Utah) and Senator Richard Durbin (D-Ill.), the additional legitimacy and influence to ask tough questions in regards to the failures of the regulation. When the tough questions are asked, answers will be forthcoming.

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