Naked Short Sales Provoke Complaints but No Cases
By Kara Scannell
March 19, 2009
WASHINGTON -- The Securities and Exchange Commission received 5,000 complaints over a year and a half about an aggressive form of short selling that critics call market manipulation, but it didn't bring any enforcement cases, according to a report by the agency's inspector general.
The findings will likely stoke the debate about short selling, which has been blamed for driving down shares of financial stocks, and the SEC's aggressiveness in enforcement.
Short selling occurs when investors borrow shares and sell them, hoping the stock will fall and they can buy back the shares at a lower price. In the "naked" variation, investors sell stock without first borrowing the shares.
Naked short selling is legal in principle but may shade into impropriety if market players use the practice to flood the market with sell orders.
The inspector general's report said the SEC received some 5,000 complaints alleging possible market manipulation using short sales between Jan. 1, 2007 and June 30, 2008. Of those, 123 or 2.5% were forwarded for investigation and no cases were brought, the report said. By comparison, about 12.5% of emails alleging insider trading prompted an investigation.
The report, by SEC Inspector General H. David Kotz, said the agency lacks uniform procedures for handling tips. He also noted understaffing, saying four people were charged with reviewing the 1.38 million emails that came in during the year-and-a-half period.
In a written response, the SEC's enforcement staff played down the likelihood of naked short-selling abuses. It noted that most trades settle on time. The SEC staff said the agency needs to "intelligently leverage" its resources and a large number of complaints provide "no support for the allegations." The SEC said it is looking to improve its handling of tips.
Defenders of naked short selling say it can provide liquidity by allowing trades to go through even when sellers can't immediately get their hands on shares to sell.
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This is the OIG report referenced in the above article:
Practices Related to Naked Short Selling Complaints and Referrals
sec-oig.gov |
