Naked Shorting News....
By Judith Burns
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Securities and Exchange Commission should do more
to attack abusive short selling, including tighten stock-borrowing requirements
and require daily reporting on the extent of stock-delivery failures, some
lawmakers and business executives say.
"We believe that naked short selling continues to be a serious problem for a
number of public companies," the U.S. Chamber of Commerce wrote in a Sept. 13
letter to the SEC.
Short sellers sell borrowed shares in hopes they can profit by replacing them
later at a lower price. "Naked" short sellers do not borrow shares they sell
short and may have no intention of doing so, which some liken to
counterfeiting.
The chamber said the practice is especially painful for smaller start-ups
whose shares are more easily manipulated and called for stricter requirements
to locate shares before engaging in short sales and daily reporting of
stock-delivery failures for hard-to-borrow "threshold" securities. It also
urged the SEC to study the stock-lending market and remove barriers that make
it hard to lend shares out of cash accounts.
Taser International Inc. (TASR), the Scottsdale, Ariz., stun-gun maker,
agrees the SEC needs to tighten Regulation SHO, its 2004 rule package targeting
short selling. In a Sept. 18 letter to the SEC, Taser said it has seen
"substantial evidence of market manipulation through abusive naked short
selling," including delivery failures, noting that one day in 2005, when short
sale trading volume in its stock was 19 million shares, about 45% were not
delivered.
Over-voting is another problem, according to Taser. It said 82 million votes
were recorded at its 2005 annual meeting, even though the company had only
about 61 million shares outstanding, suggesting the creation of 20 million
"phantom shares." Over-voting declined to about 10 million shares this year,
demonstrating there are lingering problems in this area, Taser executives
wrote.
This summer, amid criticism that Regulation SHO hasn't stopped naked short
selling, the SEC proposed changes to it, including eliminating a controversial
"grandfather" provision that exempted previously existing short sales from
stricter rules on borrowing and delivering shares. If the proposal is
finalized, transactions with pre-existing stock delivery failures that had been
"grandfathered" would have to be closed out within 35 days after the change
takes effect.
Ending "grandfather" protections is a good idea, according to many of the
comment letters to the SEC, which sought public reaction to the plan through
Tuesday.
"Grandfathering must be eliminated," Utah Gov. Jon Huntsman Jr. wrote in a
Sept. 8 letter. He also supported the SEC's proposal to end exceptions for
options market makers, saying they should be required to deliver shares
promptly after the underlying options trades have expired.
Utah's governor joined others, including Utah Attorney General Mark
Shurtleff; Rep. Jim Matheson, D-Utah, Rep. Rick Renzi, R-Ariz.; and
Overstock.com Inc. (OSTK) Chief Executive Patrick Byrne in calling for changes
beyond those proposed by the SEC, including requiring short sellers to have
shares - or have written contracts to borrow them - prior to short sales.
Currently, short sellers only need reasonable grounds to believe that shares
can be borrowed, which "amounts to an enormous loophole" that is being
exploited by abusive short sellers to avoid borrowing or delivering stocks they
sell, wrote Byrne. He said tighter borrowing rules would go a long way toward
solving that problem. Alternatively, he suggested borrowed shares be placed in
a separate pool that precludes them from being lent again until the trade has
settled, avoiding over-borrowing and over-voting.
Byrne, the Salt Lake City online discount retailing executive, has been a
vocal critic of the SEC and Wall Street brokerage firms, and says he's uniquely
positioned to weigh in on Regulation SHO. He noted that with a 20-day break,
since January 2005, Overstock has been on the "threshold" list of shares
experiencing delivery failures for at least five consecutive days.
Overstock wasn't able to get information on the extent of the problem, and
Byrne wants regulators to require a daily public tally of delivery failures in
all hard-to-borrow threshold stocks. He said that without that, "it is
difficult to know the level of 'naked shorting' and its risk to the capital
markets."
If the SEC can't deliver a national solution, Francine Giani, executive
director of Utah's Department of Commerce, warned in her own letter that Utah
"will increase its efforts to identify those firms causing settlement failures
and when justified, bring enforcement action."
-By Judith Burns, Dow Jones Newswires, 202-862-6692;
Judith.Burns@dowjones.com
(END) Dow Jones Newswires |
