BACK TO THE JUNGLE
S.E.C. Allows Resumption of Naked Shorting
By Wayne Jett
As scheduled, the emergency rule adopted by the Securities & Exchange Commission on July 15 that required pre-borrowing of shares before short-selling 19 protected financial firms expired at midnight of August 12. Anticipating the event, short sellers pounded those financial stocks Tuesday and Wednesday, wasting no time in cutting away the $270 billion in capitalization restored by the rule against naked shorting. No doubt the expiration of August options within the week motivates those who aim for lower prices.
Before Congress adjourned for its August vacation, SEC chairman Christopher Cox testified in the House that his agency would propose regulations “next week” to protect the shares of all companies from naked shorting practices which dilute share floats and drive prices down. That was two weeks ago, and this week someone leaked to the press that SEC staff is “working feverishly” to propose new regulations sometime in September.
September will likely be too late for some publicly traded companies, including a number of significant financial companies, who may now be driven to the wall by traders for investment banks and hedge funds who will not have to worry that SEC regulators might object to their practices of selling shares that they neither own nor deliver.
The optimistic view is that the SEC may act more promptly to protect the entirety of U. S. markets, now that Fannie Mae and Freddie Mac, Merrill Lynch, Lehman Bros., Goldman Sachs and Bank of America have been thrown back into the pool with all other publicly abused stocks. But SEC actions to date are indicative of a thoroughly captured regulator. Until effective law enforcement arrives, a difficult and bloody road lies ahead for publicly traded companies and their investors. ~