July 17, 2008
Mr. Christopher Cox Chairman
Securities and Exchange Commission
100 F. Street, NE
Washington, DC 20549-1090
Reexamination of Regulation SHO is timely in light
of current market stresses and the suspicion at
the SEC and elsewhere that illegal short selling
techniques were used to manipulate prices of
Bear Stearns, Lehman, Fannie Mae and Freddie Mac
over the past few months.
Naked short selling can be accomplished via the option
market maker exception and by using exchanges in other
countries (such as the TSE). Even a 13-day close-out
requirement allows plenty of time for a bear raid on
small cap stocks.
Naked short selling imposes substantial costs on
market participants, public companies and the
economy at large. Stockholders in target companies
obviously experience depressed prices for their shares.
1) they suffer excess dilution if their company needs
to raise a fixed sum via a public offering
at the depressed prices,
2) voting for corporate resolutions and directors is
distorted by those extra shares,
3) company management decisions are impaired by price
distortions in the shares,
4) in a severe financial crisis, those missing shares
produce liabilities for broker dealers, DTC, SIPC,
and may result in losses to individuals and entities
who thought they owned fully-paid-for shares.
One of the major advantages enjoyed by the USA is deep
and liquid capital markets. These market advantages
depend on fair play and minimal corruption. Solving
the fails-to-deliver/naked short selling problem is
important for maintaining our market advantages.
I recommend that the option market maker exception be
eliminated. I also recommend that any buy-in or close-out
requirement be set at 3 days, the same as normal settlement.
In addition, I recommend that the SEC use its existing
powers to prosecute naked short selling perpetrators,
especially in the small cap stocks where the activity is
way too common.