The Wall Street Journal reports (subscription required) that "The Securities and Exchange Commission received 5,000 complaints over a year and a half about an aggressive form of short selling that critics call market manipulation, but it didn't bring any enforcement cases, according to a report by the agency's inspector general."The SEC's Inspector General suggested that the SEC develop some sort of approach to dealing with the complaints it receives about naked short selling and the SEC responded by essentially laying the smackdown:
In recent months, a small but vocal cadre of advocates has emerged decrying the practice and suggesting that it has damaging market effects. But there is hardly unanimity in the investment community or the financial media on either the prevalence, or the dangers, of "naked" short selling. The Commission has repeatedly stressed the fact that the practice can provide needed market liquidity in certain circumstances. For instance, market makers sometimes engage in legitimate "naked" short selling when there is high buying demand in a security. Still others view the threat posed by "naked" short selling as wildly exaggerated, and point to instances in which allegations of abusive "naked" short selling were used to cover up other management malfeasance, like the dumping on the market of large blocks of unregistered shares. We have recently alleged such behavior in the widely-discussed CMKM Diamonds litigation. Other fraud defendants have also attempted to portray depressed stock prices as the work of clandestine short sellers.
Despite its assertions regarding the potential danger of "naked" short selling and the growing interest in the subject, the Report can cite to no bona fide studies or empirical data regarding the practice's market impact. The Division of Trading and Markets debunks the theory that NSS creates "counterfeit" or "phantom" shares. The Report cites to the emergency orders, final rules, and interim final temporary rules addressing short selling, including "naked" short selling that the Commission issued in July, September, and October of 2008. When it issued each of these rules, the Commission noted in its releases that the purpose of the emergency actions was to address the lack of market confidence and investor fears that short selling, including legitimate short selling, could exacerbate the current financial crisis by creating downward price momentum unrelated to the fundamental financials of issuers.
Gary Weiss commends the SEC's strongly-worded rebuttal to the conspiracy-mongering corporate blame-shifters, writing on his blog that the SEC has "shown some commendable guts."
There are enough serious issues that the SEC has failed to protect investors from to waste resources appeasing the naked short selling nuts.
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