861 43rd Street
Los Alamos, NM 87544
8 February 2000
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Ref: File S7-24-99
I am writing this in response to your request for comments on short sales. I am a small investor nearing retirement. My training is in engineering and applied physics so I am not necessarily a very sophisticated investor and will limit my comments to the problem of "bear raids", something I have experienced several times. Although there are legitimate uses for short sales, bear raids are entirely destructive and have the sole purpose of artificially lowering the price of a stock to frighten or force an investor-typically a small investor-to sell his holdings at a greatly reduced price. Bear raids can also lead to unbalanced short positions in a stock, which is inherently unstable and bad for an orderly market. Let me use my experience as an investor in THQI, a very successful and conservatively run company, to illustrate what I find wrong with bear raids. I invite you to look at the financial reporting from THQI since 1995 when I first invested in the stock.
In the spring of 1998 some bears apparently made a serious misjudgment about the future of THQI and took a large short position. As an investor, I experienced a sharp decline in the stock price along with a large increase in trading volume. This was followed by day after day of relentless selling and further decline in the price. The bears, of course, operate anonymously so there was no way I could determine that what I was experiencing was an organized attack against my investment. Regardless, even I could see a pattern of a large block being sold shortly after the open each day, further depressing the price and discouraging buyers. I experienced margin calls and had to sell part of my holdings and came very close to having to liquidate all of my holdings. Fortunately, the stock bottomed and I was able to survive with part of my position intact.
Since that time the company has continued to prosper and remain debt free but the stock has had a high volatility and low PE, presumably because the short position remains very large. Between one-quarter and one-third of the total shares of THQI remain short. The company has continued to grow and recently it has become became clear that THQ is on the verge of becoming a major player in its industry-a major threat to those maintaining the large short position.
Since early to mid December of 1999, THQI has again been the target of a renewed bear attack but this time an attack taking many forms. To all appearances this is a well-coordinated attack involving several people or organizations. First, there was the sudden selling and decline in stock price. The stock has declined by more than 40% from its late November/early December highs. This time the selling was accompanied by a simultaneous campaign of false and misleading information in the media. One short appeared on CNBC and announced that THQ was a good short and wouldn't make their numbers. (A few days latter THQ pre-announced that they would exceed estimates). One of the on-line "financial journals" began a series of articles quoting unnamed shorts making unsubstantiated claims that THQ was using shady accounting practices, that sales were weak and that THQ was stuffing the channels without allowing adequate reserves. Much of this information, if true, would require access to insider information. These stories can be found as "news" items, though for a fee, under THQI on Yahoo. Simultaneously, a series of new names appeared on the Yahoo group devoted to discussion of THQI and these new names disrupted communication by multiple posts about poor sales, channel stuffing, shady accounting practices and a secondary being imminent-remarkably similar to the attacks in the on line media. I have had the depressing experience of watching my investments for retirement and for my children's education decline precipitously for no reason beyond a short or group of shorts trying to destroy the stock price and profit from my losses.
What could or should the SEC do to limit such bear attacks? Principally I think the SEC should strive to keep the investor informed and maintain an orderly market. I would like to suggest the following:
1. The SEC should remove the anonymity that protects the identity of people or organizations holding substantial short positions. Anybody holding a substantial long position must file a statement with the SEC, I believe it is a 13G, and that statement becomes public information. The same requirement should apply to those holding substantial short positions though possibly at a lower threshold.
2. Perhaps a maximum allowable short position should be established. This should be no more than 5% of the float or probably much less. This allows a large short position to be established but limits the ability to keep shorting more and more to maintain a depressed price. The short seller would then have to base his position more on what he perceives as poor company fundamentals and less on his ability to keep manipulating the price downward.
3. Anybody who is an investment professional or employed by an investment professional should be prohibited from releasing any information about any stock without attribution. What we see in the media and on the discussion boards is intended to influence the stock price and is often done anonymously.
4. Margin requirements should be stringently enforced for short sales. Because the losses on a bad short position are unlimited, a serious short squeeze could bankrupt the shorter and the losses would have to be picked up by somebody else. A serious short squeeze is not good for the market and the SEC should establish and enforce rules that reduce that possibility. Perhaps the margin limit for short positions should be set at 50%.
5. Make illegal blatant manipulation of the price like trading out of two accounts simultaneously. One account sells a huge block to depress the price and the other account covers at the reduced price. Using two accounts serves no purpose other than to mask the manipulation.
6. A short sale should be so indicated on the ticker. One of the problems for small investors is knowing when they are undergoing a bear attack and not massive selling by somebody who "knows something". Knowing that the sudden rash of sales are short sales could prove a valuable piece of information.
These are just some suggestions from somebody who has several times found himself victimized by bear attacks. I would like to finish by repeating my assertion that bear attacks are entirely destructive and potentially disruptive to the market as a whole. I thank you for any consideration you give to my suggestions
James L Munroe