June 5, 2009
Dear Chairman Shapiro,
While I feel the potential re-instatement of the uptick rule is coming long after the horse has long escaped the proverbial barn and is well into the next state, there is little doubt the rule desperately needs to be re-instated. I found it more than a little ironic when the rule was first implemented that then Chairman Cox stated that the SEC was incapable of monitoring any naked shorting that might occur as a result. Even more appalling is the fact that the Commission failed to act on the large number of cases reported. There is little doubt that naked shorting became more egregious as the meltdown began to unfold in the fall 0f 2008. This was particularly true with the financial stocks. While clearly fundamental problems existed, declining share prices exacerbated by massive shorting undermined an economic sector that relies heavily on the confidence of investors and depositors. When one considers the information content implied in stock prices, cross referenced against credit default swaps, an arena as you well know has also been charged with manipulation, the toxic mix necessary for disaster was, in my mind, self evident. When the #8220can not short list#8221 of financial stocks was created, prices in that sector generally stabilized. Once it was removed Lehman came under attack and was subsequently destroyed. Even the venerable Goldman Sachs came under pressure. AIG#8217s stock price began a dizzying decline of 78 percent on September 10th through September 19th and traded nearly 2 times its outstanding number of shares. AIG#8217s reported short interest as a percentage of float increased from something over 4 percent to slightly over 5 percent during that time frame. During the week of September 15, Goldman traded 72 percent of its outstanding shares, suffered a price decline of 20 percent and yet the reported short position increased less than 2 percent. Does anyone in the SEC really believe that the entire shareholder base of AIG turned over 2 times in 8 business days or that the vast majority of Goldman holders sold their stock in a mere 5 days? Hopefully no one can, at least with a straight face. Traders have told me a standard procedure at that time was to short in the morning and cover in the afternoon, no shares need be delivered. Failure to deliver shares, no problem, we will by you in at a handsome profit. Former Chairman Cox is lucky that public floggings are a thing of the past. What has happened is unconscionable. The uptick rule provides a simple circuit breaker to minimized trading distortions based on fear and rumor. I urge you to re implement this rule immediately.
Respectfully,
Gregg T. Summerville
President
Tecumseh Capital Partners LLC