July 10, 2008
It is not clear to me why SEC is re-opening the comment period almost a year after proposing changes to Regulation SHO.
The proposed changes are necessary though probably not sufficient steps toward eliminating abusive naked short selling. This is self-evident. Eliminate the market-maker exception.
What useful purpose can be served by sharing more vague, summary-level data with the public when the only way to truly investigate what is happening with failures-to-deliver is to examine detailed, transaction-by-transaction data? Is SEC conducting this type of analysis? If so, where are the results? If not, why not? The additional data you have shared is useless.
What we have here is a lack of accountability. SEC needs to make someone accountable for delivery and file criminal charges when they fail. The term "failure-to-deliver" should be seen for what it is: theft. If FTDs were generally due to clerical errors or lost certificates they would not be concentrated in just a few issues. Novastar Financial, for instance, would not have had 4 million FTDs for weeks on end in 2007 with 9 million shares in the float and just a million shares trading per day. Someone was obviously sitting on FTDs waiting for the price to fall before locating shares. Why is this so hard to understand? Why not track down those who engaged in this practice and prosecute them?
Don't get me wrong - this is not about a single stock. Was Novastar a good investment in 2007? Obviously not. Did short sellers deserve what they earned by predicting the sub-prime melt-down? You bet. Did abusive naked short sellers deserve to make an extra billion dollars in profit by sidestepping the law and selling what they had not located? No.
I support the comments here by Kurt Schacht and Linda Rittenhouse of CFA Institute Centre for Financial Market Integrity.
Treat systematic failure to deliver as fraud and hold the broker-dealer responsible for delivery. When any issue remains on the threshold list for an extended period with huge numbers of FTDs relative to shares outstanding, identify the broker-dealer(s) allowing this to happen and initiate enforcement action. You don't need a new rule, you just need to enforce existing law. Other broker-dealers will see this happening and clamp down on specious locates. Problem solved.
SEC seems to be clouding the issue by focusing on intentional failure to locate (which is nearly impossible to prove) rather than massive, strategic, systematic failure to DELIVER, which is patently obvious. Furthermore, it is easy to stop. If I buy a stock and fail to locate the funds to pay for it, the broker-dealer voids the transaction. The same should apply to a naked short sale. If the locate is not in place by T+3, the transaction should be void.
Thank you for the opportunity to comment. I hope you have noticed how important this issue is to the average investor relative to other SEC matters. We view this as a classic case of Wall Street gaming the system to the detriment of individual investors. We are counting on you to do something about it before Congress is forced to step in.