NO BOTTOM UNTIL S.E.C. ACTS
By Wayne Jett
The scale of financial destruction is staggering when U. S. financial markets are lawless, as they remain today. Big players on Wall Street are no more constrained in their trading conduct now than they were prior to 1933, when only “gentlemen’s rules” of the exchanges applied. Until 2004, the Securities & Exchange Commission was relatively covert in permitting fraudulent treatment of investors by Wall Street. Since then, SEC came into the open in green-lighting activity that would make 1929’s short-selling marauders envious.
In 2004, the SEC adopted Regulation SHO “grandfathering” all shares previously sold short without delivery, permitting those billions of shares to remain undelivered indefinitely (without telling the buyers!). The rest of Reg. SHO tacitly approved additional naked short selling and intensified financial pressure on targeted companies by publicly listing them, while retaining loopholes that allowed plenty more naked short selling.
In September, 2005, the SEC squashed its only investigation in history of a major hedge fund, firing its own investigative attorney who had assembled evidence proving two dozen cases of insider trading. Worse, after firing that attorney, SEC lightly audited records of that same hedge fund, Pequot Capital, and found wash sales, creation of fake shares by short selling to related accounts, and manipulative trading practices that extracted $5.6 million from shareholders of a single target company within ten months among many, many other stocks similarly targeted.
Despite a Senate investigation revealing this SEC corruption and malfeasance, the SEC did nothing to restore its credibility. Three commissioners, the chief economist and the inspector general of SEC resigned, yet no one in government (except the few senators who conducted the investigation) or in the financial sector called for retribution or reform.
On July 15, the SEC ordered that no naked short selling was permitted in the shares of Fannie Mae and Freddie Mac, and short sellers must have an agreement in place to borrow shares before a short sale transaction could occur. The share prices of Fannie and Freddie more than doubled within a week. Trading volume fell by 90 per cent. But the public learned SEC’s emergency order would expire without additional protection on August 12, so share prices declined and hit new lows within days after the expiration.
Last week naked short sellers gorged on billions of Fannie’s and Freddie’s capitalization, with crucial assistance by Treasury secretary Paulson, as had already occurred in March with Bear Stearns. Naked short sellers consumed IndyMac’s capitalization in May with Senator Charles Schumer’s assistance in publicly instigating a run on the bank by depositors.
Thrown into the naked shorting meat grinder this week are Lehman Brothers, Merrill Lynch, Washington Mutual, Wachovia, American Insurance Group and General Electric, among many lesser known names that’ve been there an eternity already. The SEC continues to “labor intensely” towards acting “this week” to curtail naked shorting. With only four commissioners, Chairman Cox must persuade at least two of three other commissioners to take any action, each of whom is a political appointee. Leaks to media indicate action will be in the form of adoption of previous proposed amendments to Reg SHO, which have already been processed through public review and were ready for adoption months ago.
Adoption of the best of those proposals would be helpful, perhaps even determinative, for target companies fighting to survive against market lawlessness. However, the proposed amendments to Reg SHO do not include a pre-borrow requirement for all short selling, which must be done to prevent parties from getting money for shares without owning or delivering them.
Until the SEC acts effectively, the stock markets will not find a bottom. So long as naked short sellers are given loopholes to exploit, the selling of non-existent shares will crater share prices of every company targeted. Every rumor, no matter how false, unsupported or irrational, is given credence by a volatile, unpredictable share price. Watch the SEC and judge closely what it does, not only what it says. Only when fraudulent perpetrators at the highest levels are prosecuted and convicted for felonies will SEC regain credibility, but that is highly unlikely under current leadership of the agency. ~