Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a “failure to deliver” (“FTD”). The transaction generally remains open until the shares are acquired by the seller, or the seller’s broker settles the trade.
Financial Wire, 5 August 2010
This week, an important online news service released an article that should send shockwaves into our public markets. In very curt form, the article chronicles the many abuses of U.S. public companies by short selling manipulators, particularly through naked short selling and regular and derivative based synthetic shorting. By implication, the article recites the sheer embarrassing ineffectiveness of our regulators, who are engaged in a pattern of systematic conflicts of interest with revolving doors that are a major disgrace to our own government.
These Defendants, acting in the course and scope of their employment by the United States of America as duly authorized Commissioners of the Securities and Exchange Commission, a federal agency, through their acts and omissions knowingly, consciously, wrongly, without compensation and without due process of law have effected a taking of property from each of the named Plaintiffs and all who are similarly situated.
PDF (18 Pages): CMKM Lawsuit Against the SEC 9 January 2010
Congressional Research Service, 31 July 2009
Until the current financial crisis, the SEC did not view short selling of large, blue-chip stocks as a problem. In July 2008, however, the SEC temporarily banned naked short sales of the stock of Fannie Mae, Freddie Mac, and 17 other large financial institutions. On September 18, 2008, the SEC banned all short selling of the shares of more than 700 financial companies in an emergency action that expired on October 8, 2008. On October 1, 2008, the SEC adopted an interim rule requiring short sellers’ brokers to actually borrow shares to deliver to buyers, within one day after the expiration the normal three-day settlement time frame. The rule was made permanent on July 27, 2009, and it applies to all stocks. This report will be updated as events warrant.
PDF (10 Pages): Paper CRS Regulation on Naked Short Selling
Forbes, 24 March 2009
My, oh my. Here is a shocker. James Chanos, the billionaire short-seller, opposes any reforms that would tilt the stock market away from shorting selling. Here is his argument. Not surprisingly, Chanos, whose firm Kynikos means “cynic” in Greek, leaves out all the recent history that has made short-selling so lucrative. Such as:
3. Naked short-selling. Cox’s SEC failed to enforce its own rule against naked short-selling. Again, Wikipedia: “Naked short-selling, or naked shorting, is a type of financial speculation. It is the practice of selling a stock short, without first borrowing the shares or ensuring that the shares can be borrowed, as is done in a conventional short sale. When the seller does not obtain the shares within the required time frame, the result is known as a “fail to deliver.” The transaction generally remains open until the shares are acquired by the seller or the seller’s broker, allowing the trade to be settled. Naked short-selling can be used to manipulate the price of securities by driving their price down, and its use in this way is illegal. … Some commentators have contended that despite regulations, naked shorting is widespread and that the SEC regulations are poorly enforced. The SEC has denied these claims. However, the SEC and others have also defended the practice in limited form as beneficial for market liquidity. Its critics have contended that the practice is susceptible to abuse, can be damaging to targeted companies struggling to raise capital, and has led to numerous bankruptcies.”
InvestigateTheSEC.com via Wayback, 30 October 2008
To say that support for the Securities and Exchange Commission is at an all time low would be an understatement. With Congressional Investigations into the agencies handling of critical investigations and recent reports out of the Office of Inspector General, investors are left guessing as to what exactly the agency is doing to police our markets. Heck, even a presidential candidate has suggested that the SEC Chairman should be fired and it was his party that hired him.
Mark Pittman, Elliot Blair Smith, Jesse Westbrook
Bloomberg cited by RGM Communications via Wayback, 7 October 2008
U.S. Securities and Exchange Commission Chairman Christopher Cox’s regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos., according to an unedited version of a study by the agency’s inspector general.
The report, by Inspector General H. David Kotz, was requested by Senator Charles Grassley to examine the role of regulators prior to the firm’s collapse in March. Before it was released to the public on Sept. 26, Kotz deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency’s Division of Trading and Markets that oversees investment banks.
Brian Ross, Rhonda Schwartz
abc News, 6 October 2008
The SEC gave “preferential treatment” to Wall Street executive John Mack during an insider trading investigation three years ago because Mack was about to become CEO of the Morgan Stanley investment banking firm, the SEC’s inspector general concluded in a report obtained by ABC News.
The report recommended disciplinary action against the SEC’s chief of enforcement, Linda Thomson, and said the firing of an SEC lawyer was “connected” to his persistent attempts to take Mack’s testimony. Read the report’s conclusion and recommendations here.
Associated Press, 18 September 2008
Federal regulators yesterday took measures aimed at reining in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and that some feared could be used against other vulnerable companies in a turbulent market.
The Securities and Exchange Commission adopted rules it said would provide permanent protections against abusive “naked” short-selling. Unlike the SEC’s temporary emergency ban this summer covering naked short-selling in the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks, the new rules apply to trading in the broader market.