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{{Finance sidebar}}
{{Finance sidebar}}
'''Naked short selling''', or '''naked shorting''', is the practice of selling a stock [[Short (finance)|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". However, the transaction generally remains open until the shares are acquired by the seller or the seller's broker, allowing a trade to occur when the order is filled.<ref>{{cite web
'''Naked short selling''', or '''naked shorting''', is the practice of selling a stock [[Short (finance)|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". However, the transaction generally remains open until the shares are acquired by the seller or the seller's broker, allowing a trade to occur when the order is filled.<ref>{{cite web
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In the United States, naked short selling is covered by various [[U.S. Securities and Exchange Commission|SEC]] regulations which, as of September 2008, prohibit the practice.<ref name="Ellis">
In the United States, naked short selling is covered by various [[U.S. Securities and Exchange Commission|SEC]] regulations, including a temporary rule issued September 2008, terminating July 31, 2009, that require delivery of shares within three days of a trade.[http://www.tradersmagazine.com/news/102374-1.html]<ref name="Ellis">
{{cite web
{{cite web
|url=http://money.cnn.com/2008/09/17/news/companies/sec_short_selling/index.htm
|url=http://money.cnn.com/2008/09/17/news/companies/sec_short_selling/index.htm
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}}
</ref> In 2005, "Regulation SHO" was enacted to curb the practice, requiring that broker-dealers have grounds to believe that shares will be available for a given stock transaction, and requiring that delivery take place within a limited time period.<ref name=KeyPoints>
</ref> In 2005, "Regulation SHO" was enacted to curb the practice, requiring that broker-dealers have grounds to believe that shares will be available for a given stock transaction, and requiring that delivery take place within a limited time period.<ref name=KeyPoints>
{{cite web
{{cite web
|title=Key Points About Regulation SHO
|title=Key Points About Regulation SHO
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As part of its response to the crisis in the North American markets in 2008, the SEC issued a temporary order restricting fails to deliver in the shares of 19 financial firms deemed systemically important.<ref>
As part of its response to the crisis in the North American markets in 2008, the SEC issued a temporary order restricting fails to deliver in the shares of 19 financial firms deemed systemically important.<ref>
[http://www.economist.com/finance/PrinterFriendly.cfm?story_id=11951246 Searching for the naked truth] Aug 17th 2008 [[The Economist]]</ref>
[http://www.economist.com/finance/PrinterFriendly.cfm?story_id=11951246 Searching for the naked truth] Aug 17th 2008 [[The Economist]]</ref>
Effective September 18, 2008, amid claims that aggressive short selling had played a role in the failure of financial giant [[Lehman Brothers]], the SEC made permanent and expanded the rules to remove exceptions and to cover all companies.<ref name='iht-Gordon'>{{cite news
Effective September 18, 2008, the SEC permanently removed an exemption for market making in options on stocks, and making an explicit anti-fraud regulation relating to that activity. The stringent delivery requirement is temporary.<ref name='iht-Gordon'>{{cite news
|title=SEC adopts rules against 'naked' short-selling
|title=SEC adopts rules against 'naked' short-selling
|url=http://www.iht.com/articles/ap/2008/09/17/business/NA-US-SEC-Short-Selling.php
|url=http://www.iht.com/articles/ap/2008/09/17/business/NA-US-SEC-Short-Selling.php
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|work=The International Herald Tribune
|work=The International Herald Tribune
|date=2008-09-17
|date=2008-09-17
|accessdate=2008-10-18}}
|accessdate=2008-10-18}}</ref>
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</ref><ref name="WaPo">
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{{cite news
|url=http://www.washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091703631.html
|title=New SEC Rules Target 'Naked' Short-Selling
|work=The Washington Post
⚫
|accessdate=2008-03-12
⚫
|last=Gordon
⚫
|first=Marcy
|agency=Associated Press
}}
</ref>


Some commentators have contended that despite regulations, naked shorting is widespread and that the SEC regulations are poorly enforced, although the SEC has denied these claims. However, the SEC and others have also defended the practice in limited form as beneficial for market liquidity.<ref name=KeyPoints /> 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.<ref name='iht-Gordon'/><ref name="Ellis"/><ref>[http://www.time.com/time/magazine/article/0,9171,1126706-3,00.html Watch Out, They Bite!] by Daniel Kadlec, Nov. 09, 2005, [[Time magazine]] </ref>
Some commentators have contended that despite regulations, naked shorting is widespread and that the SEC regulations are poorly enforced, although the SEC has denied these claims. 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.<ref name='iht-Gordon'/><ref name="Ellis"/><ref>[http://www.time.com/time/magazine/article/0,9171,1126706-3,00.html Watch Out, They Bite!] by Daniel Kadlec, Nov. 09, 2005, [[Time magazine]] </ref>
However, the SEC and others have also defended the practice in limited form as beneficial for market liquidity, said that the practice is not a significant factor in the markets, and that regulators have targeted naked shorting without evidence that it was a factor in the 2008 financial crisis.<ref>http://online.barrons.com/article/SB121702597332186163.html?mod=googlenews_barrons</ref> <ref name="nudists">
⚫
{{cite web
|url=http://online.wsj.com/article/SB114480254610823574.html
|title=Do Nudists Run Wall Street?
|publisher=online.wsj.com
⚫
|accessdate=2008-03-16
⚫
|last=Holman
⚫
|first=Jenkins
⚫
}}</ref> .<ref name=KeyPoints />


==Description==
==Description==
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</ref>
</ref>


[[Robert J. Shapiro]], former undersecretary of commerce for economic affairs, has claimed that naked short selling has cost investors $100 billion and driven 1,000 companies into the ground.<ref>[http://www.time.com/time/magazine/article/0,9171,1126706-3,00.html Watch Out, They Bite!] by Daniel Kadlec, Nov. 09, 2005, [[Time magazine]] </ref>
[[Robert J. Shapiro]], former undersecretary of commerce for economic affairs and a consultant to a law firm suing over naked shorting<ref>http://www.marketwatch.com/news/story/naked-short-selling-center-looming/story.aspx?guid={4B3FE0D6-1EFF-4986-83B3-54F21475CA1C}</ref>, has claimed that naked short selling has cost investors $100 billion and driven 1,000 companies into the ground.<ref>[http://www.time.com/time/magazine/article/0,9171,1126706-3,00.html Watch Out, They Bite!] by Daniel Kadlec, Nov. 09, 2005, [[Time magazine]] </ref>


==Regulations in the United States==
==Regulations in the United States==
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The [[Depository Trust and Clearing Corporation]] has been criticized for its approach to naked short selling.<ref>[http://online.wsj.com/public/article/SB118359867562957720-5Yb1Y_mpcl9a2nKbc0IaV0tDHyk_20070712.html "Blame the 'Stock Vault'?" [[The Wall Street Journal]], July 5, 2007]</ref><ref>[http://www.dtcc.com/news/press/releases/2007/wsj_response.php?lpos=3&lid=3 DTCC response to Wall Street Journal Article, July 6, 2007]</ref> DTCC has been sued with regard to its alleged participation in naked short selling, and the issue of DTCC's possible involvement has been taken up by Senator [[Robert Foster Bennett|Robert Bennett]] and discussed by the NASAA and in articles{{ndash}} disagreed with by DTCC{{ndash}} in the [[Wall Street Journal]] and [[Euromoney Magazine]].
The [[Depository Trust and Clearing Corporation]] has been criticized for its approach to naked short selling.<ref>[http://online.wsj.com/public/article/SB118359867562957720-5Yb1Y_mpcl9a2nKbc0IaV0tDHyk_20070712.html "Blame the 'Stock Vault'?" [[The Wall Street Journal]], July 5, 2007]</ref><ref>[http://www.dtcc.com/news/press/releases/2007/wsj_response.php?lpos=3&lid=3 DTCC response to Wall Street Journal Article, July 6, 2007]</ref> DTCC has been sued with regard to its alleged participation in naked short selling, and the issue of DTCC's possible involvement has been taken up by Senator [[Robert Foster Bennett|Robert Bennett]] and discussed by the NASAA and in articles{{ndash}} disagreed with by DTCC{{ndash}} in the [[Wall Street Journal]] and [[Euromoney Magazine]].


While there is no dispute that illegal naked shorting happens, there is a fight as to the extent to which DTCC is responsible.<ref>{{cite web |author=JP Whalen, et al. |year=2006 |title=Naked Short Selling: How Exposed Are Investors|format= |work= |url=http://www.houstonlawreview.org/archive/downloads/43-4_pdf/Christian.pdf|accessdate=2007-03-25}}</ref> Some blame DTCC as the keeper of the system where it happens, and say DTCC turns a blind eye to the problem. DTCC says naked shorting is not widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said.<ref name=Bloomberg>{{cite news
Some blame DTCC as the keeper of the system where it happens, and say DTCC turns a blind eye to the problem. DTCC says naked shorting is not widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said.<ref name=Bloomberg>{{cite news
|accessdate=2007-12-25
|accessdate=2007-12-25
|url=http://www.rgm.com/articles/bloomberg2.html
|url=http://www.rgm.com/articles/bloomberg2.html

Revision as of 13:01, 3 November 2008


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Naked short selling, or naked shorting, 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". However, the transaction generally remains open until the shares are acquired by the seller or the seller's broker, allowing a trade to occur when the order is filled.[1]

In the United States, naked short selling is covered by various SEC regulations, including a temporary rule issued September 2008, terminating July 31, 2009, that require delivery of shares within three days of a trade.[7][2] In 2005, "Regulation SHO" was enacted to curb the practice, requiring that broker-dealers have grounds to believe that shares will be available for a given stock transaction, and requiring that delivery take place within a limited time period.[3][4] As part of its response to the crisis in the North American markets in 2008, the SEC issued a temporary order restricting fails to deliver in the shares of 19 financial firms deemed systemically important.[5] Effective September 18, 2008, the SEC permanently removed an exemption for market making in options on stocks, and making an explicit anti-fraud regulation relating to that activity. The stringent delivery requirement is temporary.[6]

Some commentators have contended that despite regulations, naked shorting is widespread and that the SEC regulations are poorly enforced, although the SEC has denied these claims. 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.[6][2][7] However, the SEC and others have also defended the practice in limited form as beneficial for market liquidity, said that the practice is not a significant factor in the markets, and that regulators have targeted naked shorting without evidence that it was a factor in the 2008 financial crisis.[8] [9] .[3]

Description

Normal shorting

Main article: Short (finance)

Short selling is a form of speculation that allows a trader to take a "negative position" in a company. Conventionally, the trader will "borrow" securities from a current shareholder, typically a bank or prime broker, agreeing to return them on demand. The seller delivers these shares to a buyer, who takes full ownership and likely does not know that he is participating in a short sale. When the seller wants to "unwind" the position, he buys back equivalent shares in the market and returns them to the lender.

This short/borrow system provides the trader with shares to sell at current prices, in the hope that he will profit by repurchasing them later when the price has lowered. Because the seller/borrower is generally required to make a deposit for the full share price with the lender, it also provides the lender with interest on a position that he was not actively trading.

Naked shorts in the United States

Naked short selling is a case of short selling without first arranging a borrow. If the stock is in short supply, finding the borrow can be difficult to arrange. The seller may also decide not to borrow the shares, in some cases because lenders are not available, or due to the costs of lending. In the case where a borrow is not arranged within the clearing time period and the shares are not given to the buyer, the trade is considered to have "failed to deliver."[10] Nevertheless, the trade will continue to sit open and may eventually be filled.

It is difficult to measure how often naked short selling occurs. Naked shorting can be invisible in a liquid market, as long as the short sale is eventually delivered to the buyer. However, if the covers are impossible to find, the trades fail. A sudden rise in the number of fail reports will alert the SEC to the possibility of naked short selling. In some recent cases, it was claimed that the daily activity was larger than all of the available shares, which would normally be unlikely.[10]

Extent of naked shorting

The reasons for naked shorting, and the extent of it, have been disputed for several years before the SEC's 2008 action to prohibit the practice. What is generally recognized is that naked shorting tends to happen when shares are difficult to borrow. Studies have shown that naked short selling also increases in correlation with the cost of borrowing.

In recent years, a number of companies have been accused of using naked shorts in aggressive efforts to drive down share prices, sometimes with no intention of ever delivering the shares.[10][11] These claims focus on the fact that at least in theory, the practice allows an unlimited number of shares to be sold short. One Los Angeles Times editorial claims naked short selling "enables speculators to drive down a company's stock by offering an overwhelming number of shares for sale."[12]

Before 2008, regulators had generally downplayed the extent of naked shorting in the US. At a North American Securities Administrators Association (NASAA) conference on naked short selling in November 2005, an official of the New York Stock Exchange stated that NYSE had not found evidence of widespread naked short selling. An official of the SEC said that "While there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without incident."[13] Of all those that do not, 85% are resolved within 10 business days and 90% within 20.[13] The SEC has also stated that "fails-to-deliver can occur for a number of reasons on both long and short sales," and accordingly that they do not necessarily indicate naked short selling.[14] However, SEC chairman Christopher Cox described naked shorting as "abusive" while implementing new regulations to prohibit the practice, culminating in the September 2008 action following the failures of Bear Sterns and Lehman Brothers amidst speculation that naked short selling had played a contributory role.[15][16]

Effects of naked shorting

As with the prevalence of naked shorting, the effects are contested. The SEC has stated that the practice can be beneficial in enhancing liquidity in difficult-to-borrow shares, while others have suggested that it adds efficiency to the securities lending market. Critics of the practice argue that it is often used for market manipulation, that it can damage companies and even that it threatens the broader markets.

One complaint about naked shorting from targeted companies is that the practice dilutes a company's shares for as long as unsettled short sales sit open on the books. This has been alleged to create "phantom" or "counterfeit" shares, sometimes going from trade to trade without connection to any physical shares, and artificially depressing the share price.[17] However, the SEC has disclaimed the existence of counterfeit shares and stated that naked short selling would not increase a company's outstanding shares.[4] Short seller David Rocker contended that failure to deliver securities "can be done for manipulative purposes to create the impression that the stock is a tight borrow," although he said that this should be seen as a failure to deliver "longs" rather than "shorts."[18]

Robert J. Shapiro, former undersecretary of commerce for economic affairs and a consultant to a law firm suing over naked shorting[19], has claimed that naked short selling has cost investors $100 billion and driven 1,000 companies into the ground.[20]

Regulations in the United States

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 stipulates a settlement period up to three business days before a stock needs to be delivered,[10] generally referred to as "T+3 delivery."

Regulation SHO

The SEC enacted Regulation SHO in January 2005 to target abusive naked short selling by reducing failure to deliver securities, and by limiting the time in which a broker can permit failures to deliver.[21] In addressing the first, it stated that a broker or dealer may not accept a short sale order without having first borrowed or identified the stock being sold.[22] The rule had the following exemptions:

  1. Broker or dealer accepting a short sale order from another registered broker or dealer
  2. Bona-fide market making
  3. Broker-dealer effecting a sale on behalf of a customer that is deemed to own the security pursuant to Rule 200[23] through no fault of the customer or the broker-dealer.[24]

To reduce the duration for which fails to deliver are permitted to sit open, the regulation requires broker-dealers to close-out open fail-to-deliver positions in threshold securities that have persisted for 13 consecutive settlement days.[25] The SEC, in describing Regulation SHO, stated that failures to deliver shares that persist for an extended period of time "may result in large delivery obligations where stock settlement occurs."[21]

Regulation SHO also created the "Threshold Security List," which reported any stock where more than 0.5% of a company's total outstanding shares failed delivery for five consecutive days. A number of companies have appeared on the list, including Krispy Kreme, Martha Stewart Omnimedia and Delta Airlines. The Motley Fool, an investment website, observes that "when a stock appears on this list, it is like a red flag waving, stating 'something is wrong here!'"[10] However, the SEC clarified that appearance on the threshold list "does not necessarily mean that there has been abusive naked short selling or any impermissible trading in the stock."[21]

Recent developments

In July 2006, the SEC proposed to amend Regulation SHO, to further reduce failures to deliver securities.[26] SEC Chairman Christopher Cox referred to "the serious problem of abusive naked short sales, which can be used as a tool to drive down a company's stock price." and that the SEC is "concerned about the persistent failures to deliver in the market for some securities that may be due to loopholes in Regulation SHO.[27]

In March 2007, the Securities and Exchange Board of India (SEBI), which disallowed short sales altogether in 2001 as a result of the Ketan Parekh affair, reintroduced short selling under regulations similar to those developed in the United States. In conjunction with this rule change, SEBI outlawed all naked short selling.[28][29]

In June 2007, the SEC voted to remove the grandfather provision that allowed fails to deliver that existed before Reg SHO to be exempt from Reg SHO. SEC Chairman Christopher Cox called naked short selling “a fraud that the commission is bound to prevent and to punish.” The SEC also said it was considering removing an exemption from the rule for options market makers.[30] Removal of the grandfather provision and naked shorting restrictions generally have been endorsed by the U.S. Chamber of Commerce.[31]

SEC Chairman Christopher Cox in March 2008 gave a speech entitled the "'Naked' Short Selling Anti-Fraud Rule," in which he announced new SEC efforts to combat naked short selling.[32] Under the proposal, the SEC would create an antifraud rule targeting those who knowingly deceive brokers about having located securities before engaging in short sales, and who fail to deliver the securities by the delivery date. Cox said the proposal would address concerns about short-selling abuses, particularly in the market for small-cap stocks. Even with the regulation in place, the SEC received hundreds of complaints in 2007 about alleged abuses involving short sales. The SEC estimates about 1% of shares that change hands daily, about $1 billion, are subject to delivery failures. SEC Commissioners Paul Atkins and Kathleen Casey expressed support for the crackdown.[33][34]

In July 2008, the SEC announced emergency actions to limit the naked short selling of government sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac in an effort to limit market volatility of financial stocks.[35] But even with respect to those stocks the SEC soon thereafter announced there would be an exception with regard to market makers.[36] SEC Chairman Cox noted that the emergency order was "not a response to unbridled naked short selling in financial issues", saying that "that has not occurred".[37] Analysts warned of the potential for the creation of price bubbles.[38][39]

The emergency actions rule expired August 12, 2008.[40][41][42][43] However, at September 17th, 2008, the SEC issued new, more extensive rules against naked shorting, making "it crystal clear that the SEC has zero tolerance for abusive naked short selling". Among the new rules is that market makers are no longer given an exception. As a result, options market makers will be treated in the same way as all other market participants, and effectively will be banned from naked short selling.[44]

A ballot initiative in South Dakota, to be voted on in the Nov. 4 elections, would end naked short selling in that state. The Securities Industry and Financial Market Association claims that this measure would effectively ban all short selling. A similar measure was enacted and then repealed by the Utah legislature in 2006. The Securities Industry and Financial Market Association opposes the measure and has threatened to sue.[45]

Regulations outside of the United States

Several international exchanges have either partially or fully restricted the practice of naked short selling of shares. They include Australia's Australian Securities Exchange [46], the Netherlands's Euronext Amsterdam [47], Japan's Tokyo Stock Exchange [48] and Switzerland's SWX Swiss Exchange. [49][50].

Japan's naked shorting ban will run from Nov. 4, 2008 to March 31, 2009.[8] Japan's Finance Minister, Shōichi Nakagawa stated, "We decided (to move up the short-selling ban) as we thought it could be dangerous for the Tokyo stock market if we do not take action immediately." Nakagawa added that Japan's Financial Services Agency would be teaming with the Securities and Exchange Surveillance Commission and Tokyo Stock Exchange to investigate past violations of Japanese regulations on stock short-selling.[51]

Regulatory enforcement actions

In 2005, the SEC notified Refco of intent to file an enforcement action against the securities unit of Refco for securities trading violations concerning the shorting of Sedona stock. The SEC sought information related to two former Refco brokers who handled the account of a client, Amro International, which shorted Sedona's stock.[52] No charges had been filed by 2007.

In December 2006, the SEC sued Gryphon Partners, a hedge fund, for insider trading and naked short-selling involving PIPEs in the unregistered stock of 35 companies. PIPEs are "private investments in public equities," used by companies to raise cash. The naked shorting took place in Canada, where it was legal at the time. Gryphon denied the charges.[53]

In March 2007, Goldman Sachs was fined $2 million by the SEC for allowing customers to illegally sell shares short prior to secondary public offerings. Naked short-selling was allegedly utilized by the Goldman clients. The SEC charged Goldman with failing to ensure those clients had ownership of the shares. SEC Chairman Cox commented, "That is an important case and it reflects our interest in this area."[54]

In June 2007, executives of Universal Express, which had claimed naked shorting of its stock, were sanctioned by a federal court judge as “repeated and remorseless violators” of the securities laws. The SEC asserted that the company “appears to exist primarily as a vehicle for fraud.”[55] Referring to a court ruling barring CEO Richard Altomare from serving as an officer of a public company, New York Times columnist Floyd Norris said: "In Altomare's view, the issues that bothered the judge are irrelevant. 'Long and short of it,' he said in a statement, 'this is a naked short hallmark case in the making.' Or it is proof that it can take a long time for the SEC to stop a fraud."[56] Universal Express has claimed that 6,000 small companies have been put out of business by naked shorting, which the company says "the SEC has ignored and condoned."[57] A receiver was subsequently appointed to administer the company.

In July 2007, Piper Jaffray was fined $150,000 by the New York Stock Exchange (NYSE). Piper violated securities trading rules from January through May 2005, selling shares without borrowing them, and also failing to "cover short sales in a timely manner", according to the NYSE.[58] At the time of this fine, the NYSE had levied over $1.9 million in fines for naked short sales over seven regulatory actions.[59]

Also in July 2007, the American Stock Exchange fined two options market makers for violations of Regulation SHO. SBA Trading was sanctioned for $5 million, and ALA Trading was fined $3 million, which included disgorgement of profits. Both firms and their principals were suspended from association with the exchange for five years. The exchange said the firms used an exemption to Reg. SHO for options market makers to "impermissibly engage in naked short selling."[60][61][62]

In October 2007, the SEC settled charges against New York hedge fund adviser Sandell Asset Management Corp. and three executives of the firm for, among other things, shorting stock without locating shares to borrow. Fines totalling $8 million were imposed, and the firm neither admitted nor denied the charges.[63]

Litigation

The Depository Trust and Clearing Corporation has been criticized for its approach to naked short selling.[64][65] DTCC has been sued with regard to its alleged participation in naked short selling, and the issue of DTCC's possible involvement has been taken up by Senator Robert Bennett and discussed by the NASAA and in articles– disagreed with by DTCC– in the Wall Street Journal and Euromoney Magazine.

Some blame DTCC as the keeper of the system where it happens, and say DTCC turns a blind eye to the problem. DTCC says naked shorting is not widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said.[66][67] DTCC General Counsel Larry Thompson calls the claims "pure invention."[67] The SEC, however, views naked shorting as a serious enough matter to have made two separate efforts to restrict the practice.[68] And in July 2007, Senator Bennett suggested on the U.S. Senate floor that the allegations involving DTCC and naked short selling are "serious enough" that there should be a hearing on them with DTCC officials by the Senate Banking Committee. The committee's Chairman, Senator Christopher Dodd, indicated he was willing to hold such a hearing.[69]

Critics also contend DTCC has been too secretive with information about where naked shorting is taking place.[68] In 2007, WayPoint Biomedical sued DTCC for DTCC's refusal to comply with a subpoena request for documents Waypoint says it needs to track trades in the company's shares.[70] Ten suits concerning naked short-selling filed against the DTCC were withdrawn or dismissed by May 2005.[71]

A suit by Electronic Trading Group, naming major Wall Street brokerages, was filed in April 2006 and dismissed in December 2007.[72][73]

Two separate lawsuits, filed in 2006 and 2007[74] by NovaStar Financial, Inc. shareholders and Overstock.com, named as defendants ten Wall Street prime brokers. They claimed a scheme to manipulate the companies' stock by allowing naked short selling.[75] A motion to dismiss the Overstock suit was denied in July 2007.[76][77]

Studies

A study of trading in initial public offerings by two SEC staff economists, published in April 2007, found that excessive numbers of fails to deliver were not correlated with naked short selling. The authors of the study said that while the findings in the paper specifically concern IPO trading, "The results presented in this paper also inform a public debate surrounding the role of short selling and fails to deliver in price formation."[78]

In contrast, a study by Leslie Boni in 2004 found correlation between "strategic delivery failures" and the cost of borrowing shares. The paper, which looked at a "unique dataset of the entire cross-section of U.S. equities," credited the initial recognition of strategic delivery fails to Richard Evans, Chris Geczy, David Musto and Adam Reed, and found its review to provide evidence consistent with their hypothesis that "market makers strategically fail to deliver shares when borrowing costs are high."

An April 2007 study conducted for Canadian market regulators by Market Regulation Services Inc. found that fails to deliver securities were not a significant problem on the Canadian market, that "less than 6% of fails resulting from the sale of a security involved short sales" and that "fails involving short sales are projected to account for only 0.07% of total short sales."[79][80]

Media coverage

Reporting by major media outlets has been mixed. While concern expressed by the regulator has been echoed by journalists, some commentators contend that naked short selling is not harmful and that its prevalence has been exaggerated by corporate officials seeking to blame external forces for their own shortcomings.[9] Others have discussed naked short selling as a confusing or bizarre form of trading.[81][82]

Reviewing the SEC's July 2008 emergency order, Barron's said in an editorial: "Rather than fixing any of the real problems with the agency and its mission, Cox and his fellow commissioners waved a newspaper and swatted the imaginary fly of naked short-selling. It made a big noise, but there's no dead bug."[83] Holman Jenkins of the Wall Street Journal said the order was "an exercise in symbolic confidence-building" and that naked shorting involved echnical concerns except for subscribers to a "devil theory".[84] The Economist said the SEC had "picked the wrong target", mentioning a study by Arturo Bris of the Swiss International Institute for Management Development who found that trading in the 19 financial stocks became less efficient.[85] The Washington Post expressed approval of the SEC's decision to address a "frenetic shadow world of postponed promises, borrowed time, obscured paperwork and nail-biting price-watching, usually compressed into a few high-tension days swirling around the decline of a company."[9] The Los Angeles Times called the practice of naked short selling "hard to defend," and stated that it was past time the SEC became active in addressing market manipulation.[86]

Economist Donald Luskin has compared the practice to that of passing off a bad check, saying that it "amounts to fraud -- in very much the same way that kiting checks amounts to fraud." [87]

Lehman Brothers collapse allegations

During hearings on the bankruptcy filing by Lehman Brothers and bailout of AIG before the House Committee on Oversight and Government Reform,[88] former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. House committee Chairman Henry Waxman said the committee received thousands of pages of internal documents from Lehman and these documents portray a company in which there was “no accountability for failure".[89][90][91]

See also

References

  1. ^ Knepper, Zachary T. "Future-Priced Convertible Securities & The Outlook For "Death-Spiral" Securities-Fraud Litigation" (pdf). Bepress Legal Repository. Berkeley Electronic Press. pp. page 15. {{cite web}}: |pages= has extra text (help)
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  73. ^ US Judge Dismisses Naked Short Selling Suit Vs. Brokers, Dow Jones News Service, Dec. 20, 2007
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  77. ^ Overstock Shares Rise on Court Ruling in Broker Suit, Bloomberg News, July 18, 2007
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  79. ^ Investment Executive (April 15,2007). "No evidence of excessive failed trades on Canadian marketplaces: study". {{cite web}}: Check date values in: |date= (help)
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  81. ^ Suddath, Claire. [5]. TIME. Monday, Sep. 22, 2008
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  86. ^ .[6]
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  91. ^ http://news.hereisthecity.com/news/business_news/8317.cntns

External links

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