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More pressure on naked shorting

August 19th, 2008 · No Comments

After the temporary emergency rules for 19 financials proved to be a success, the SEC will propose a marketwide solution to combat naked shorting, or more especially, failures to deliver in the next couple of weeks.

It’s kind of funny, because they already have rules, but enforcement of them leaves, well, something to be desired. Perhaps the new rules will be easier to enforce. Whatever the exact reason, we wholeheartedly welcome this development. We did not expect that they would come up with something like this so soon.

Some concepts:

  • Shorting is borrowing shares, selling them, in order to buy them back at a lower level enabling the shorter to return them to the lender, and pocketing the proceeds.
  • Naked shorting is selling shares that have not been borrowed
  • Failure to deliver is selling shares nakedly (not borrowing them) and then, well, not being able to deliver them to the party that bought them.
  • Regulation SHO list is a list that keeps track of these failures to deliver
  • According to current law, failure to deliver should lead to an automatic close out of positions after 13 days.. Funny, as some shares linger on that list for weeks, months, or even years (InterOil is one of these)

A truly bizarre example:

  • On Feb. 3, a man named Robert Simpson filed a Schedule 13-D with the SEC describing his purchase of 1,158,209 shares of Global Links Corp. (OTCBB: GLKCE), “constituting 100 percent of the issued and outstanding common stock of the Issuer.”
  • As described in a story that ran on FinancialWire on March 4, Simpson stuck every single share of the company in his sock drawer — and then watched as 60 million shares traded hands over the next two days. In other words, every single outstanding share of the company somehow changed hands nearly 60 times in the course of two days, despite the fact that the company’s entire float was located in Simpson’s sock drawer. In fact, even as recently as last Friday, 930,872 shares of Global Links still traded hands.

Doesn’t provide a whole lot of comfort in enforcing these laws, does it?

How about that forced close out after 13 days?

  • The way it works is that one brokerage house sells short, has 13 days under your rule under which to acquire the shares, and in that 13-day period hands the whole transaction off to another brokerage house. They just keep moving it around and nobody ever has to settle.

Ever wondered about those big blocks of shares in IOC you see flying around? Now you know.

Harvey Pitt, former SEC chairman, should know. If only he did more when he was at the helm. Better late than never..

  • Harvey Pitt, former chairman of the Securities and Exchange Commission, has been named deputy attorney general of Alabama. He will assist the state in its investigation of naked short selling — in particular, negative rumors reported by The Colonial BancGroup Inc. of Montgomery, Ala., about the short selling of its stock.
  • Mr. Pitt will continue to serve as chief executive of Kalorama Partners LLC, a Washington consulting firm. “He will be coming in [to Alabama] on a regular basis,” said Joseph Borg, director of the Alabama Securities Commission in Montgomery.
  • “I went to our [attorney general] and said, ‘I want Harvey; he knows his stuff,'” Mr. Borg said. With the appointment as deputy attorney general for Alabama, “we can share all our investigative materials with him, and it’s protected” legally, Mr. Borg said. Mr. Borg said Colonial BancGroup had approached him about false rumors regarding short selling of its stock.
  • “We want to see where these rumors start,” he said.
  • Naked short selling is selling short without borrowing the stock to be sold, and failing to deliver it. In Alabama, spreading false information about a financial institution can be a criminal offense, Mr. Borg said.
  • He added that he has contacted other firms known to be subject to naked shorting, but most don’t want it known that they are the targets of short sellers.

Tags: IOC · Short Selling