Complaints to regulatory agencies haven't stopped the practice of undeclared short selling.
Illegal Naked Short Selling by Market Makers:
To All:
I have recently spent some time at the SEC web site searching their extensive collection of enforcement cases. There were plenty of actions brought by SEC for a whole litany of wrongdoing - Ponzi schemes, fraud, misappropriation of funds, selling of unregistered shares by company insiders and/or boiler room operations, excessive markups/markdowns by broker/dealers, market manipulations by market makers, broker/dealers and/or private citizens, etc. However, despite the presence of enforcement actions against market makers, I found no cases brought against market makers involved in illegal naked short sales, let alone short situations similar to the supposedly huge illegal naked short position which has been asserted for RMIL (alleged naked short position > total public float maintained for an extended period of time [5+ months]).
It's certainly possible that I could have missed seeing these cases even though they were there to be found. Thus my question/request: Can anyone post a URL describing at least one civil or criminal enforcement action brought by SEC against a market maker for a naked short position? It would seem that this would be a fairly simple violation for the SEC to identify and pursue. They have the authority to examine the trading records of suspected market makers. Even if those records were inadequate or unavailable for any reason, SEC could still investigate via the DTC/TA.
One technicality to be avoided by anyone who undertakes to find such a case - As mentioned above there are plenty of enforcement actions against company insiders and boiler rooms for selling unregistered shares. I suppose this could be regarded as technically being a form of illegal naked short sale (though these cases involve real but unregistered shares not 'virtual' shares). Clearly any attempted short squeeze in such a case is futile and would likely only bring forth even more unregistered shares (In the words of a potato chip vendor: "Eat all you want, we'll make more"). These cases are of no interest to me - I've already located plenty of them.
It is my understanding that market makers can legally short the stocks in which they make a market if they have none currently in inventory. The illegal aspects, if any, of their activities would therefore appear to come into play only in the maintenance not the initiation of a naked short position. To maintain the short position, the short market maker would appear to have only three options at settlement time:
(1) Buy in the shares.
(2) Borrow the shares for delivery to the purchaser(s).
(3) Fail to deliver the shares (forever??) using some sort of maneuver.
I have found no SEC cases involving perpetual 'failure to deliver' on the short side. Interestingly, I did find one case on the long side where the defendant, a private citizen - not a market maker, attempted to maintain a partially 'virtual' long position by a process similar to check kiting. See:
sec.gov
Do market makers indulge in misconduct and does SEC go after them when they do? Here's a link, which gives 100 million reasons why the answer to both these questions is 'yes':
sec.gov
(Though in this case, as in a number of other cases, the penalty arguably was relatively mild.)
If there were illegal naked short selling going on, would SEC go after it? Of that I have no doubt. But I'm still waiting to find a SEC enforcement action against a market maker involved in illegal naked short selling.
P.S. A companion post will address the corresponding absence of SEC enforcement actions against illegal offshore naked short sales. |
