Complaints to regulatory agencies haven't stopped the practice of undeclared short selling.
Illegal Ex-U.S. Naked Short Selling
To All:
As with the corresponding market maker naked short selling, I can find no SEC enforcement actions against such activities. I suppose it is obvious that enforcement against such shenanigans, if they exist, is substantially more difficult than it would be if the misconduct did not have ex-U.S. aspects. Nonetheless, the SEC can and does bring enforcement actions even in cases one might expect would be extremely difficult to pursue. The Dennis Levine insider trading scandal of the last decade is a case in point. Levine was doing his trading via secret accounts in the Bahamas. Despite the obstacles of Bahamian banking secrecy and the extreme care with which Levine protected the secrecy of his trades, he was successfully caught and prosecuted (though the SEC is among the first to admit they were lucky in the less cooperative international regulatory environment of the 80's). Since the time of the Levine case, the U.S. has negotiated a substantial number of memoranda of understanding (MOUs) with the regulatory authorities of various countries (including Canada) to simplify bringing enforcement actions in ex-U.S. situations. Even in the case of countries for which there is no MOU, SEC is often able to get the necessary cooperation through less formal means. Further details are in the Senate testimony of Michael D. Mann in:
gwjapan.org (Warning: It's long - search for the third occurrence of the string 'mann')
As a result, one can find a reasonably large number of enforcement actions involving ex-U.S. aspects. For example here's a recent one involving alleged money laundering through a number of banks worldwide (Angel D: there's that 'l' word again<g>)
sec.gov
As noted above, despite the increased ease with which actions against ex-U,S, misconduct can be brought, I can find no cases involving naked ex-U.S. short selling described on the SEC web site*.
Of course, as noted in my previous post, I may have missed one or more such cases. Can anyone post a URL describing at least one civil or criminal enforcement action brought by SEC for a naked ex-U.S. short position?
A few further observations:
Even if the ex-U.S. trading records of the shorter were unobtainable by the SEC, the TA/DTC records might suffice.
In addition, I am still unclear on how an ex-U.S. naked short can evade a 'failure to deliver' at settlement time. Not withstanding the fact that from the standpoint of a Canadian brokerage, it suffices to leave a 200% deposit in lieu of borrowed shares, at the time of settlement in the U.S., the TA/DTC/brokerage of the seller would presumably expect one share delivered for each share sold. However, if I'm mistaken then, leaving aside a 'failure to deliver' the Canadian naked short seller has three options at settlement:
(1) buy in the shares
(2) borrow the shares
(3) maintain the required margin in his account
If option 3 is a viable alternative (and, again, I don't understand how that is possible) then it would seem to make no difference whether the purchaser has put his shares in NAME form or in street name. To put it another way, putting shares in NAME form reduces the number of shares available for borrowing. It would seem to have no effect on shares that are somehow delivered by virtue of a 200% margin deposit in a Canadian or other ex-U.S. brokerage account.
As with illegal market maker naked short selling, I have no doubt SEC would pursue the perpetrators. In at least some cases, I would expect some of these investigations would result in enforcement cases. If there are no such cases then ...
=====
* It's conceivable that the misconduct by the GFL Ultra Fund (discussed previously on this thread) included naked short selling. However, the only example given of the fund's tactics (Zeitel) makes no mention of whether the 'short' end of the transaction designed to evade registration of regulation S shares was naked. Presumably if the short end of the GLF maneuver was illegal/naked this would have been mentioned in the description of the case. See:
sec.gov |
