Short sellers still dominate procedures in InterOil, but as we argued in a previous post, their days are numbered. Not only is the fundamental news out of InterOil way too good for the present prices to maintain themselves for long, another front is opened on a nefastarious variety of short sellers, the naked shorts…

Naked shorting is selling shares one doesn’t own and (contrary to regular, garden variety shorting) one hasn’t even borrowed before. The SEC made that illegal by various rules (most recently outright banning any naked short selling in 19 financials), but those rules are not terribly well enforced.

But the momentum is growing to do something about that:

• A national organization dedicated to bringing attention to fraudulent financial practices today called on Securities and Exchange Commission (SEC) Chairman Chris Cox to make permanent his recent ruling prohibiting a corrupt practice of stock market “short-selling.”
• American Entrepreneurs for Securities Reform (ASR) applauded the SEC and Cox’s temporary rules, but pointed out that the emergency order has only been extended until August 12, and protects just 19 companies. The group pledged that if the rules are not made permanent in 2008, they will organize campaigns in 19 states via the initiative process to achieve this fundamental reform.
• “The SEC did the right thing when it voted for the second time to extend temporary rules and restrict short-selling. Now, it must finish the job,” said Jonathan Wilcox, spokesman for Americans for Securities Reform. “While we commend this courageous action in the face of opposition from greedy hedge funds and shady Wall Street players, it is only a band-aid on the serious corruption soiling our capital markets.”
• Chairman Cox’s emergency order stated: “False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by ‘naked’ short selling.”
• The order further requires that to sell short the shares of 19 specifically named financial institutions, traders are compelled to arrange to borrow the shares. This would prevent the shorting being “naked.”
• ASR also detailed that unless the SEC permanently extends these restrictions to all traded stocks, the group plans to qualify ballot initiatives in 19 states – the same total of companies specially protected by the SEC now. Ballot language has already been written banning naked shorting and establishing severe penalties on those who undertake this fraud.
• “What’s right and fair for these 19 financial firms should apply across- the-board,” said Wilcox. “There is no reason these consumer protections should not apply to all traded stocks.”
• Americans for Securities Reform collected more than 19,000 signatures and placed on the 2008 general election ballot in South Dakota language banning naked shorting on the state’s public companies and penalizing broker dealers who participate in the practice.
• “We do not oppose legitimate short selling and do not seek to end it. Like the SEC, we only want the rules followed,” said Wilcox. “While legal short selling provides liquidity, it occurs in an obscure corner of the market. So, the bottom line is: Our financial systems will benefit from the disinfectant that sunlight brings.”

We wholeheartedly support this action. Shareholders Unite!