ATTENTION ALL CCTR MARKET MAKERS, INVESTORS, TRADERS: U.S Securities and Exchange Commission
Is naked short selling the reason my stock has lost value? Naked short selling, however, can have negative effects on the market. Fraudsters may use naked short selling as a tool to manipulate the market. Market manipulation is illegal.(1) The SEC has toughened its rules and is vigilant about taking actions against wrongdoers.(2) Fails to deliver that persist for an extended period of time may result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled. Regulation SHO is intended to address these effects by reducing the number of potential failures to deliver, and by limiting the time in which a broker can permit a fail to deliver to persist. For instance, as explained above, Regulation SHO requires brokers and dealers to close-out the open fail-to-deliver positions in "threshold securities" (i.e., securities that have experienced a substantial number of extended delivery failures) that have persisted for 13 consecutive settlement days.
...Regulation SHO was designed to target potentially problematic failures to deliver. Prevention of fails is the goal of the locate requirement. Regulation SHO requires broker-dealers to identify a source of borrowable stock before executing a short sale in any equity security with the goal of reducing the number of situations where stock is unavailable for settlement. But, because the locate is usually done three days before settlement, the stock may not be available from the source at the time of settlement, possibly resulting in a fail.
Regulation SHO also requires some fail positions to be closed out. When a broker-dealer has a fail position in a "threshold security," and that fail position has persisted for 13 consecutive settlement days, the broker-dealer must take immediate steps to close-out the fail by purchasing securities of like kind and quantity. Even market makers that have such persistent fails in threshold securities must close-out their positions.
...The markets and the SROs are primarily responsible for the surveillance and enforcement of trading activity pursuant to their rules. The SEC, however, independently or in conjunction with the SROs and other regulatory authorities, actively investigates and prosecutes violations of the federal securities laws.
The SEC takes information alleging violations of the federal securities laws very seriously. If you have specific enforcement-related information, please send it in an email to enforcement@sec.gov. Please note, however, the SEC will neither confirm nor deny the existence of an investigation unless, and until, it becomes a matter of public record as the result of a court action or administrative proceeding. As you may also be aware, SEC investigations are conducted on a non-public and confidential basis to help assure the integrity of the investigative process. See http://www.sec.gov/investor/pubs/howoiea.htm for more information on how the Commission handles complaints.
(1) The Commission recently brought an enforcement action against certain parties, alleging manipulative naked short selling, in a scheme sometimes termed as a "death spiral." See Rhino Advisors, Inc. and Thomas Badian, Lit. Rel. No. 18003 (February 27, 2003) at http://www.sec.gov/litigation/litreleases/lr18003.htm.
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