Mystery group wants state Securities Division to punish those SEC won’t bhpioneer.com
By Bob Mercer
State Capitol Bureau
PIERRE Upset with inaction by the federal Securities and Exchange Commission, a group from outside South Dakota wants the state securities director to have SEC-like power in regulating a type of legal gambling on stock prices, known as short selling, that is commonly done by traders on Wall Street and around the world.
That is the story behind Initiated Measure 9, which the organization, American Entrepreneurs for Securities Reform, paid petition carriers to gather signatures to put on South Dakota’s Nov. 4 election ballot.
IM 9 proposes changes in state laws so that the state Division of Securities has the legal authority to punish traders who fail to deliver shares of stock or other financial instruments within three days of a transaction.
State law currently doesn’t regulate the time frame for delivery of securities upon sale, according to state Attorney General Larry Long.
Long said in his official explanation of the ballot measure that IM 9 actually would prohibit short sales of securities in South Dakota. He explained short selling this way:
“An investor who believes a publicly traded stock is over-priced will borrow that stock from an owner, sell the borrowed stock, and repurchase the stock later at a lower price to repay the loan, thereby making money if the price has fallen. If the price goes up, the investor must repurchase the stock at the higher price to repay the loan, and will lose money.”
Long said IM 9, if passed, “will likely be challenged in court and may be declared to be preempted by federal law and the United States Constitution.”
A variation known as “naked” short selling, where no shares get delivered, is prohibited by the SEC but sometimes occurs and goes unpunished.
Naked shorting can be used to artificially depress the market price of a stock. On the other hand, academic experts have shown that legitimate shorting is effective in adjusting stock prices to actual value and for countering upward manipulation of prices.
South Dakota’s current director, Gail Sheppick, opposes the passage of IM 9. So does Matt Clark, chief officer for the state Investment Council that handles the assets of the South Dakota Retirement System and state government’s trust funds.
Sheppick predicted that securities companies will stop transacting business in South Dakota if IM 9 passes and that the federal courts would throw out IM 9 at the expense of South Dakota taxpayers.
He said there already are adequate state and federal laws to prosecute cases of fraudulently manipulating stock prices.
Clark said IM 9 if passed would take away one of the Investment Council’s tools.
“Our arbitrage strategies which have been important parts of our historic investment success do utilize short sales and could be shut down by a ban of short sales. So I believe our returns and diversification would be negatively impacted,” Clark said.
“We do not use naked short selling, but unfortunately the initiative by my reading would stop all short sales not just naked shorting. I also worry that we could have difficulty doing business with Wall Street, if brokerage firms refuse to do business with a South Dakota entity due to complications of complying with this measure.”
There’s seems to be no legal way to know for certain who comprises American Entrepreneurs for Securities Reform, the group pushing IM 9, other than it is a non-profit organization headquartered in a small-town Missouri lawyer’s office.
What the group has done is hire Mark Meierhenry, a former South Dakota attorney general, to be point man for the IM 9 campaign.
Meierhenry disputes that the proposed law, which he wrote, would prohibit short selling altogether. He said it merely would give South Dakotans the same protections as the SEC is supposed to be providing already with its federal regulation requiring delivery within three days.
According to Meierhenry, $6 billion worth of stock isn’t delivered daily.
“I am personally opposed to short selling and think it is bad for American business. However, the proposal that I wrote is more limited than what I personally would like to see,” he said.
The group which Meierhenry represents issued a news release this summer praising the SEC for temporarily restricting the practice of short-selling for shares of 19 companies. Under that SEC order, short sales could occur only if the person doing the short had borrowed shares to cover the sale.
The group threatened to put IM 9-like measures on the ballots in 19 states if the SEC didn’t ban all short sales by the end of 2008.
Since then, the financial whirlpool has led to much broader SEC actions regarding short sales.
In the past month, SEC officials announced emergency regulations on short-selling because of the international financial crisis. The SEC also declared a zero-tolerance policy and ordered new rules against abusive naked shorting for all publicly traded companies.
One of the new federal rules makes clear “that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver,” according to the SEC’s announcement. The ban on short-selling financial stocks was allowed to expire this fall. |
