Will The SEC Protect You The Investor?
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Secretary
Securities and Exchange Commission
100F St.NE
Washington, DC 20509- 1090
Re: Release No. 34-58107; File No. S7-19-07 and Release No. 34-57511; File No. S7-08-08 Regulation SHO Pro~osedAmendments re: "Naked" Short Selling
Ladies and Gentlemen:
I write to urge the SEC to (i) adopt the proposed anti-fraud rule lob-21, (ii) eliminate the options market maker exemption to Regulation SHO, and (iii) aggressively enforce and/or further reform Regulation SHO to protect against the abuses being caused by illegal "naked" short selling. We commend the SEC for re-opening the comment period to allow further public input on this important issue.
Our company, VeraSun Energy Corporation ("VeraSun"), has been targeted by short sellers consistently since July 2007, which, we believe, has at times artificially depressed the price of our stock. As such, stopping the practice of illegal naked short selling is an important issue for our company.
Support for Proposed Amendments
First, while we support the adoption of the proposed anti-fraud rule, we question how its adoption, absent other significant actions, would halt the continued practice of naked short selling. Today, naked short selling is a clear violation of the anti-fraud provisions of Rule lob-5. As a consequence, we believe that restating in the proposed rule that this type of fraud is a violation will not significantly change the current situation. That said, the SEC's adoption of the proposed rule will further increase the attention being focused on this problem and, therefore, is another positive step in addressing this problem.
Second, we support the complete elimination of the options market exemption as proposed in Release No. 34-56213 (August 7, 2007), rather than one of the compromises presented therein. The new data presented in Release No. 34-58 107 (July 7, 2008) shows how pervasive this problem continues to be, and elimination of the exception is a fair balance to strike. Options market makers would continue to have 13 consecutive settlement days to close out a failure-to-deliver position in a Threshold Security, allowing them time to handle illiquid securities. At the same time, it would end the current practice of indefinitely-open failures to deliver, and therefore reduce the problem of "phantom stock" and its detrimental effects on
shareholder voting rights. Elimination of the exception would also level the playing field between those trading in option markets and equity markets, and it would close a loophole that is a well-known tool of manipulation.
In addition to the proposed changes to Regulation SHO, we believe the SEC needs to take additional steps to bring about meaningful change.
Additional Regulatory Changes Sought
We believe serious settlement failures will persist unless there is aggressive enforcement of current rules or the SEC implements significant additional reforms. We support:
P Aggressive enforcement of current rules. The sheer quantity of companies on the Regulation SHO Threshold Securities List (nearly 7,000 companies have appeared on the Threshold Securities List, with nearly 700 companies appearing for over 100 trading days) indicates naked short sellers are acting with impunity. VeraSun was on the Threshold Securities List for 120 total trading days starting on July 7,2007 and then came back on the list on April 23,2008. An economist's analysis of our stock found that FTDs during the first period were large and coincided with a steep price decline in our stock.
It is our view that a well-functioning capital market should not have many, if any, instances of failures to deliver large enough and protracted enough to merit inclusion on the Regulation SHO Threshold Securities List. Certainly, it is difficult to comprehend the reasons for hundreds of companies being on the list for over 100 days. We urge the SEC to aggressively enforce Regulation SHO to punish already-illegal market manipulation and deter other naked short sellers from doing so.
P Enactment of more stringent locate requirements. The "locate" requirement of Regulation SHO provides that a broker or dealer may not effect or accept a short sale order unless the broker or dealer has either (i) borrowed the security, or entered into a contract to borrow it, or (ii) has reasonable grounds to believe that the security can be borrowed such that it can be delivered when due. Broker-dealers can rely on a customer's assurances that the customer has identified a source of securities, if it is reasonable for the broker-dealer to do so.
The "reasonable grounds" prong of the locate requirement is difficult to understand and enforce and, consequently, prone to abuse. Instead, Regulation SHO should be amended to clearly require all short sellers of Threshold Securities to either (i) have possession of the stock in question or (ii) have entered into a bona fide contract to borrow the stock in advance of the sale.
P Increased transparency with regard to short selling and settlement failures.
We support full and prompt disclosure of FTDs, including the aggregate volume and the number of new FTDs, listed by broker-dealer and by company, to bring some daylight to these potentially abusive practices.
The U.S. Chamber of Commerce and other notable commentators have called repeatedly for such changes. SEC Chairman Christopher Cox has also raised his concerns about "abusive naked short selling" and "persistent failures to deliver." I urge you to adopt, implement and enforce the proposals discussed in this letter without delay.
I appreciate your consideration on this matter and would be happy to discuss this issue with you further.
Mark Dickey |
