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.

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Article: In Pursuit of the Naked Short by Alexis Stokes

Article - Academic

In Pursuit of the Naked Short

Alexis Stokes, Texas State University

Journal of Law and Business 5/1 (Spring 2009)

This article explores the origins of naked short-selling litigation; considers
the failures of significant naked short-selling lawsuits in federal court;
surveys the obstacles erected collectively by constitutional standing requirements, the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act, brokerage firms, death spiral financiers, and the Depository Trust and Clearing Corporation; examines the efficacy of Regulation SHO, SEC rule 10b-21, and new FINRA rules; discusses recent state legislation and state court litigation; and identifies non-litigation options to curb naked short-selling. Ultimately, this article seeks to answer the question: If manipulative naked short-selling is more than a mythological scapegoat for
small cap failure, what remedies are, or should be, available?

PDF (62 Pages): Article In Pursuit of the Naked Short

Article: Naked and Confused

Article - Media

Naked and Confused

Liz Moyer

Forbes, 12 February 2007

How a tiny software outfit fell victim to an illegal but unrestrained practice known as naked short-selling.

Most investors have never heard of Sedona (otcbb: SDNA.OB news people ) Corp., a piddling Pennsylvania outfit that sells customer relationship management software for small U.S. banks and credit unions. But to a rogue band of short-selling hedge fund managers, Sedona was prime meat.

Article: Naked Justice?

Article - Media, Publications

Naked Justice?

Liz Moyer, 29 August 2006

Louisiana State Attorney General Charles Foti is trying to force UBS, the Wall Street investment bank, to turn over vast quantities of information on its trading, stock lending and other activities related to shares of software firm Sedona.

The Louisiana Department of Justice filed documents in a state court Tuesday to compel UBS to hand over the information in ten days.

The state is probing naked short-selling, which is the practice of selling shares short without borrowing them. It is an issue that has already been raised in reference to Sedona Sedona. in an ongoing civil lawsuit against a number of brokers and hedge funds and in a Securities and Exchange Commission federal court case filed in April in New York against one brokerage and several individuals. Continue reading “Article: Naked Justice?”

Article: ‘Naked’ short selling is center of looming legal battle

Uncategorized

‘Naked’ short selling is center of looming legal battle

Companies on the defensive seize upon an aggressive form of shorting

Alistair Barr

MarketWatch, 14 June 2006

By one contentious estimate, it’s a big problem plaguing more than 10% of stocks on the New York Stock Exchange and Nasdaq. An NYSE probe into whether naked shorting was used to force down shares of Vonage Holdings Corp. VG, +3.53% lower during the Internet phone company’s May initial public offering has added fuel to the fire. See full story.

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Web: The Death of a Thousand Cuts

Web

The Death of a Thousand Cuts

Bud Burrell

Sanity Check via Wayback, 2 February 2006

During my undergraduate studies, I read of an historical method of execution known as the Death of a Thousand Cuts. I have come to see that as a metaphor for how guerrilla wars (like ours) are won and lost.

Whether any of us have fully realized it or not, we have been engaged by an insidious enemy whose sole desire was to steal what was not theirs from others they viewed as their inferiors, rather than earn it legitimately. When a person was executed by the infliction of a thousand small cuts, the pain was enormous, eventually killing the subject by shock and loss of blood, but very, very slowly.

Access archived page.

Article: U.S. Stock Market Commentary by Samex Capital

Article - Media

U.S. Stock Market Commentary by Samex Capital

Samex Capital via RGM Communications via Wayback, 7 February 2005

It seems the U.S. Chamber of Commerce’s Institute For Legal Reform has publicly stated their petition of William Donaldson, the chairman of the SEC, asking for an investigation into whether short sellers and the law firm of Milberg Weiss (“MW”) had engaged in securities fraud. MW represented a class action suit led by an investment company that was also shorting the stock of the company targeted by the class action. MW is best known for their role in pursuing class action suits against publicly traded companies.

PDF (2 pages): U.S. Stock Market Commentary by Samex Capital

Article: Future-Priced Convertible Securities & The Outlook For “Death Spiral” Securities-Fraud Litigation

Academic

Future-Priced Convertible Securities & The Outlook For
“Death Spiral” Securities-Fraud Litigation

Zachary T. Knepper

bepress Legal Series, 29 August 2004

In recent years, many companies in the United States have issued so-called “Future-Priced Convertible Securities.” These companies tend to be small, thinly-traded, and (most importantly) desperate for cash, and look to the Future-Priced Convertible Security as a necessary means of financing to keep their businesses operating. FuturePriced Convertible Securities are thus credited by some with providing an important form of financing in the marketplace.1 Yet these securities are also a source of controversy. Many companies have wound up regretting issuing these instruments, after watching their stock values tumble and their market capitalizations dry-up subsequent to issuing these securities. Issuers have even started to sue.

PDF (71 pages): Future-Priced Convertible Securities & The Outlook For
“Death Spiral” Securities-Fraud Litigation