Report: SEC IG Practices Related to Naked Short Selling Complaints and Referrals

Report

Editor: bottom line up front: SEC does not “do” complaints and considers naked short selling to be legal and generally contributing to “liquidity,”

Practices Related to Naked Short Selling Complaints and Referrals

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 prior GAO audit found that Enforcement’s system for receiving and tracking referrals from the Self-Regulatory Organizations (SRO) needed improvements and recommended enhancements that would facilitate the monitoring and analysis of trend information and case activities.

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.

Of approximately 5,000 naked short selling complaints received in the ECC between January 1, 2007 and June 1, 2008, only 123 (approximately 2.5 percent) were forwarded for further investigation. Moreover, we found that these complaints were forwarded only because the complaint subjects were involved in ongoing Enforcement investigations. None of the forwarded complaints resulted in enforcement actions, though one of the complaints referenced a pending enforcement action involving naked short selling. Furthermore, only six of the approximately 1,900 complaints entered into Enforcement’s CTR database during the period we examined, alleged naked short selling. Based on the data available to us, these complaints led to no enforcement actions.

OIE has no current ability to track electronically which types of complaints referred to Enforcement staff result in the opening of an informal inquiry or a formal investigation.

PDF (55 Pages): Reort SEC Practices Realted to NSS Complaints & Referrals