November 12, 2008
There is no legitimate reason for shares of publicly-traded companies not to be obtained by the seller, prior to being sold. There is no advantage to the capital markets in it being possible to sell shares that the seller does not yet own. In fact, the damage done by the fraudulent sale of nonexistent shares during the past several years includes the corruption of our capital markets, the destruction of numerous emerging companies, and the theft of substantial wealth from individual investors in the U.S. equities market. What theoretical advantage from the ability to sell shares that one has not yet obtained could possibly justify this kind of real damage? Clearly, the answer is that there is no justification for having allowed this counterfeiting of shares to exist, ever, under any circumstances.
It is intolerable that the SEC continues to allow traders to flood the markets with counterfeit shares. The proposed rules do not put an end to this practice, allowing numerous exceptions, as well as a T+3 closeout provision. In addition, even those who violate the T+3 provision face no penalty, other than a very limited requirement that they cease to sell shares that they have not obtained. Even this requirement itself is riddled with exceptions that are unjustifiable.
Restoration of a free and fair equities market in the U.S. requires simply that sellers obtain shares prior to selling them. Anything less, including the proposed weak regulations with their numerous exceptions that do not include any real penalties, is a slap in the face of investors, and an abrogation of the regulatory responsibilities of the SEC.
It is clear from the proposed regulations that the SEC does not have the well-being of the investing public in mind, but rather the continued enrichment of those who willfully create and sell phantom shares of U.S. equities, to the detriment of honest investors, as well as the companies whose shares are being counterfeited.
The SEC should stop enabling those who are counterfeiting shares. The SEC should simply issue a rule requiring that all shares be obtained prior to selling them, and imposing real penalties including substantial fines and imprisonment for not doing so. There is simply no excuse for the SEC not putting an end to this era of widespread share counterfeiting. Investors in U.S. equities have suffered too long under a lax and complicit SEC.
If employees of the SEC have a conscience, then they ought to be embarrassed by the long history of SEC complicity in manipulation of the equities markets by corrupt trading entities. Certainly the obvious weakness of the current half-measures to restrict naked short selling ought to be a source of embarrassment. One is left to conclude that the potential for future wealth after leaving the government to join companies that one is now charged with regulating, must be sufficient to soothe the pain that any such embarrassment might cause.