Subject: Chairman Cox Entertains Jim Chanos over Short Sales

September 10, 2008


Could there be a conflict of interest at the staff level of the SEC?

Interviewed on CNBC today was one of the nations largest and more vocal short sellers, Jim Chanos. In the interview Chanos comes clean and identifies that it is the Broker-Dealers that are responsible for naked shorts and not the short selling hedge funds. Jim is too honest to be involved in that. Chanos does not limit that which he comes clean on as he likewise admits that he recently met with SEC Chairman Christopher Cox and Cox now understands who is at fault.

What a revelation?

The SEC, long considered captured by the industry, is holding private sessions at the staff level with powerful lobbyists and hedge funds while denying any equal time to small investors or public issuers alike.

Chanos, working with former Congressman turned short sale hedge fund lobbyist Richard Baker, drafted a comment memo on the emergency order issued for the financial sector and cried foul over the need to actually borrow shares before executing a short sale. The memo whined about how unfair it was for hedge funds to account for the expense of a borrowed share when executing a short sale as it would cut into their margins when such short sales are executed in rapid succession and intended to last less than the 3-day settlement window.

No doubt it was Baker, using his former Congressman credentials that opened to the door for the meeting between Chanos and Chairman Cox.

I wonder though, did Chanos explain how these Broker-Dealers that fail to settle trades do so for the health and betterment of funds like Chanos'? I wonder if conversation came up regarding how, instead of buying Chanos in when the locate Chanos provided was bogus, or failed to materialize into a borrow, the BD allowed Chanos to hold the failed short sale indefinitely so that Chanos had opportunity to profit from such a trade? Did Chanos discuss the wink and nod between BD and hedge fund where the broker dealer was looking towards future commissions and Chanos was looking to be insulated from a failed trade problem? Did the Chairman ask Chanos why he thinks BD's would violate securities laws for their benefit?

Finally, there is that whole issue of United Airlines this past week and the bear raid on the airline sector when the bogus news hit the wire. I haven't yet received response from the SEC on what their position was on that issue as John Heine denied any SEC comment on this matter but...Did the price discovery test meet the standards Chanos most likely spoke of regarding the role rapid trading short sellers play in our markets? How about the newly created raid on the financial sector where not only Lehman but Merrill Lynch are the new found targets for destruction? Jim Chanos must have explained how he and his peers are best at determining the proper price discovery of these markets and not the long invested shareholders and that any damage to efficiencies in such determination have nothing to do with his group despite the profits they may have reaped over the distortions created.

I only bring this concern I have to all your attention because of the public acknowledgement by Jim Chanos that he met with the SEC Chairman personally and that he straightened out the Chairman on who was at fault and who was not - it was the Broker-Dealers at fault. Chanos likewise admitting that once this conversation concluded the Chairman now understood.

Forgive little old jaded me for thinking this is as clear a conflict of interest as there can be based on the level of consideration the Chairman has offered the other side of this argument these past 3 years. Has the Commission even investigated the detailed trade data of Chanos recently, similar to the manners in which the SEC investigates public issuers who come into the SEC and file a complaint about trading abuses in their markets? Public issuers who complain typically become a target of the SEC once the complaint is filed, is this reciprocal to when Jim Chanos come knocking as well? Certainly after a NY times Op-Ed piece we are fully aware of how former SEC Attorney Richard Sauer responded to unofficial complaints brought to him by David Rocker were responded to.

I guess the victims should have bought a former Congressman to open the door for us the same way the crooks did. Then again, the victims have to account for the expenses associated with the trades when we trade securities so we are denied that excess capital that Jim seems to have to purchase such connected individuals.

Come clean Chris, what was that meeting all about and what did you really learn from Jim Chanos? What wink and a nod did you hand out this time?

Dave Patch

Note: In the CNBC Interview today Chanos mentions that he met with people at the SEC twice regarding the emergency order and discussed in each meeting how ludicrous the order was and how it left unintended consequences. Based on this acknowledgement I went back to the SEC web site and, while some meetings on this subject have been documented by the SEC there have been no such meetings with Jim Chanos being documented. Can the SEC explain why not? Was Chanos meeting with staff people above those who are participating in the rule making process? If so, isn't that a similar issue as what we witnessed regarding lawyers going over the head of Gary Aguirre in the John Mack investigation and speaking directly to Linda Thomsen? Can the SEC likewise explain how the meeting with was not only documented but that the position and proposal made by Overstock was also published. No other such meeting, when an industry member, fund, or law firm was involved has any notes published, why not?

oh, as for Chanos and his ethics....Why would this analyst risk his job to give out advance research in violation of company policy? Maybe for the same reason BD's engage in naked shorting on behalf of these people.

Copyright material redacted. Author reference the following article; "Morgan Keegan Fires Fairfax Analyst on Early Report Disclosure" By Anthony Effinger and Thom Weidlich