SEC Chairman shatters naked-shortselling conspiracy theories

Posted Aug 20th 2008 11:00AM by Zac Bissonnette
Filed under: Law, Scandals

SEC Chairman Chris Cox, who has been off battling the imaginary dragon of naked short selling as actual securities fraud continues to be as easy as ever to get away with, has a message for you about the recently-expired naked-short selling rule.

He said that failures to deliver in the 19 financial stocks affected "were reduced substantially" and added that "It was a very effective order from that standpoint." Fair enough. But then he dropped this bomb shell: "We expected and intended to have no impact whatsoever on the direction of prices. That's not the purpose of regulations."

Uh-oh. That takes quite a bit of the wind out of the sails of the naked shore-selling conspiracy theorists -- if naked short selling was an evil scheme driving down share prices, then wouldn't regulation designed to curb it be expected to impact the direction of share prices? That statement from Mr. Cox would seem to be an admission that failures to deliver are a procedural issue, not some conspiracy to drive down stocks involving crooked journalists and a "sith lord" as Overstock (NASDAQ: OSTK) CEO Patrick Byrne infamously suggested.

For a summary of the commentary on this mess, check out this post from Gary Weiss.

Tags: Chris Cox, ChrisCox, inthenews, Naked Short, NakedShort, SEC, Short

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Reader Comments (Page 1 of 1)

8-20-2008 @ 12:12PM

Dave said...

Come on Zac do you really read what you write? i understand that you have become a parrot for Gary Weiss and all but at some point it would help if you did a little research into teh issues before you write them down.

First, the SEC admitted that they put the grandfather clause in place because they fearedthat without the grandfather clause short squeezes would rule the markets.

Second, have you ever heard a standing staff member of the Commission admit that changes they make will impact pricing? That would be tantamount to admittng stock manipulation.

Third, and most importantly, if settling trades and the forcing of a pre-borrow before a short will have no impact on the markets, why are all the short sellers in an uproar? I believe, and you can correct me if I am wrong, the short sellers claimed (whined was more like it) that this emergency order was in fact attributed to the rise in the market price of the 19 stocks.

Bottom line, This fight is not about the present markets but future markets. Investors want the confidence that both sides of a trade are acting in good faith to the laws we now understand and laws that REQUIRE intent of 3-day settlement. I am not sure why you and Gary Weiss are so opposed to the enforcement of that rule. Maybe you could enlighten us all on that.

8-20-2008 @ 12:36PM

Dave said...

Zac, from a memo the SEC sent regarding Regulation SHO. Would you care to opine on that comment about why the grandfather cluse was created? If all trades are required settled in 3-days, why and how would this be an issue?

"This document provides a detailed response to many of the concerns expressed in your letter. For example, it appears from your letter that you misunderstand "grandfathering" under Regulation SHO. Regulation SHO does not require the closeout of fails to deliver that existed before a stock became a threshold security (known as "grandfathered" securities) because the Commission was concerned about creating volatility through short squeezes if existing positions had to be closed out quickly. SEC staff is working closely with the SROs to monitor whether "grandfathered" fails are being closed out in due course. In fact, the SROs are closely scrutinizing all sizeable fails, whether or not they reach the threshold securities levels, to assess whether brokerdealers are taking steps to close them out. In addition, the SEC and the SROs are currently examining firms for compliance with Regulation SHO."