Practices Related to Naked Short Selling Complaints and Referrals
Executive Summary
Background
The Securities and Exchange Commission’s (SEC or Commission) Division of Enforcement (Enforcement) has received a great deal of complaints and related information during the past several years from issuers and investors about a type of trading called “naked” short selling, which has become an issue of increasing concern to both issuers of securities and investors.1 Some of the complaints received by Enforcement concerned the general impact of naked short selling on the market. Many complaints requested that Enforcement investigate specific instances of naked short selling. Other complaints concerned the perceived failure on the part of the Commission and others, including Enforcement, to address the harmful effects of naked short selling.
The SEC’s Office of Inspector General (OIG) has also received numerous complaints, particularly since December 2007, alleging that Enforcement has failed to take sufficient action regarding naked short selling. Many of these complaints asserted that investors and companies lost billions of dollars because Enforcement has not taken sufficient action against naked short selling practices. These complaints further indicated a lack of confidence on the part of some members of the public in Enforcement’s ability to protect investors.
Naked short selling has been a controversial practice for several years and, while not illegal per se, abusive or manipulative naked short selling (e.g., intentionally failing to borrow and deliver shares sold short in order to drive down the stock price) violates the federal securities laws. The Commission initially responded to concerns about abusive naked short selling in 2004 by adopting a short sale regulation, Regulation SHO, that included provisions specifically designed to address naked short selling.2 The recent financial crisis, including claims that aggressive short selling played a role in the failure of Lehman Brothers in September 2008, renewed the public’s concerns about naked short selling. From July through October 2008, the Commission undertook a number of measures, including emergency orders temporarily restricting short selling in the stock of certain financial companies and adopting amendments to Regulation SHO were designed to prevent abusive naked short selling and restore investor confidence in the markets.3
Because Enforcement does not have separate procedures and processes for handling complaints about naked short selling, our audit examined Enforcement’s general complaint receipt and processing procedures as they applied to the receipt and referral of naked short selling complaints.
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Moreover, the ECC’s policies and procedures expressly instruct staff, as a general matter, not to forward for further investigation complaints based on data obtained from “Level II” trading terminals. 8 Because many investor complaints of naked short selling are based on information obtained from Level II trading screens, no triage is performed on these complaints and they are automatically not forwarded to Enforcement staff, unless they pertain to an existing Enforcement matter. Our audit also disclosed a risk that naked short selling complaints with potential merit may be eliminated from further consideration during the initial complaint screening process because no supervisory review is performed of the initial screening.
Extract -
Practices Related to Naked Short Selling Complaints and Referrals
sec-oig.gov |
