Post by kranker on Dec 10, 2005 17:18:35 GMT -4
David Hendricks: Naked short selling is a plague for businesses and investors
Web Posted: 03/02/2005 12:00 AM CST
San Antonio Express-News
Naked short selling sounds like something yucky. Visualize unclothed traders selling stocks short.
If only it were that harmless. Unfortunately, that's not what naked short selling is.
To the extent it occurs, naked short selling is a damaging, illegal form of selling stocks short. The practice is harmful to the financial process that allows startup businesses to go public and flourish, thus hindering the creation of wealth for entrepreneurs and investors alike.
Short selling itself is legitimate and has always existed. It is when traders and investors borrow stock, betting that the price will fall, making a profit from the difference. This is a natural practice that helps the market correctly price securities.
Naked short selling is different. The traders in this case do not borrow the shares they are shorting, using the allowed time lag before having to deliver certified shares.
In effect, they are selling counterfeited shares in an effort to drive down the price of a stock. They often do this through hedge funds, sometimes based offshore.
"It's like a company that has 1 million shares, but there are 2 million shares out there being sold. It puts selling pressure on the stock and becomes a self-fulfilling prophecy," explained Jordan Goodman, author of "Everyone's Money Book."
Think of airlines that oversell seats on a flight. Naked short sellers are doing the same thing — selling something they don't have.
"They are creating their own currency," Goodman said. "Legitimate shareholders see the price go down and panic."
This is the worst kind of manipulation by traders. "In football terms, it is called 'piling on,'" Goodman said.
This practice can delist and destroy public companies, and it usually happens to small, new and low-priced companies that do not have widely known reputations.
Naked short selling sometimes happens to big companies, too. Martha Stewart Omnivision, Delta Air Lines and Krispy Kreme are recent examples. Short selling occurred on the bad news at those companies, but the naked short sellers made price declines worse.
"It's happened to thousands of companies, and it is time it stopped," said Robert Flaherty, editor of Equities magazine in New York, who has long campaigned for short-selling reforms.
The naked shorting winners are the traders who can successfully profit by shorting without borrowing shares and the brokerage firms that make commissions.
The losers are the victimized public companies and their investors. The damage they suffer is far greater than the gains by the greedy manipulators. Damages are said to be in the hundreds of billions of dollars in past years, if not trillions of dollars.
Did I say this is illegal?
It's been against the law since the Securities and Exchange Commission was founded in 1933, because it is widely believed that naked short selling contributed to the 1929 stock market crash.
The SEC recently took another step to curb the practice. On Jan. 7, the commission implemented Regulation SHO (for "short selling"), which calls for the daily listing of companies where the number of shares being traded does not match the number of legitimate outstanding shares beyond certain percentages.
The difference is the shares that have not been delivered for borrowing. Some of those are "naked," or counterfeit shares. Most companies listed are on the NASDAQ small capitalization and over-the-counter bulletin board exchanges, but naked shorting happens also at the New York and American stock exchanges.
Sometimes San Antonio-based companies appear on the Regulation SHO list. One such company that recently appeared is Tidelands Oil and Gas Corp., a pipeline company that trades shares on the NASDAQ over-the-counter bulletin board.
Barry Gross, an investor relations spokesman for Tidelands, said only that being on the list may or may not indicate naked short selling.
The SEC's criteria are meant, however, to alert the investment world that traded share numbers are out of whack. The very existence of this daily list indicates that the illegal practice continues every day.
Equities editor Flaherty said some traders run these fake shares through foreign exchanges, especially one in Germany, and through offshore hedge funds to escape the SEC's reach.
What angers Flaherty is the way naked short selling kills new public companies trying to bring promising medical products to market.
Naked short sellers often claim a company's technologies do not work to justify their short positions, he explained.
Flaherty knows of companies offering vital products — including devices to detect mad cow disease and to prevent the spread of disease to rescuers administering mouth-to-mouth resuscitation — that have been victims of naked shorting.
Public company chief executives often are frustrated by these rumors when trying to report their companies' earnings and other measures of progress.
Should the SEC do more to stop naked short selling?
Flaherty said Regulation SHO is a positive step, but the SEC should follow up by contacting the brokerage firms and traders and ordering them to clean up the mess they have caused by producing and trading the shares involved.
But Lou Thompson, president of the National Investors Relations Institute, doubts the SEC will take further steps.
"We've been after the SEC to require more disclosure of short selling, especially when there have been large volumes of short selling. The SEC just says short selling is legitimate," Thompson said.
The courts may be another way investors and public companies can seek protection. Lawsuits have been piling up at a group of Houston law firms. The lawsuits name the Depository Trust & Clearing Corp., an electronic clearing exchange owned by the NYSE and NASDAQ, as part of the problem.
The lawsuits allege the DTC has a conflict of interest when naked short selling occurs because it charges fees when shares, including counterfeit ones, are traded. These lawsuits may uncover the true dimensions of this problem.
San Antonio-based ATSI Communications Inc., an international telecommunications company, is one company represented in the lawsuits. Christian Smith & Jewell in Houston is its law firm. Its lawsuit was filed Oct. 31, 2002.
In the meantime, advocates operating anti-naked shorting Internet sites are using the Social Security privatization debate to further their cause.
Their point: A stock market that allows manipulations of prices such as naked short selling is not a market where people should invest their Social Security dollars.
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dhendricks@express-news.net
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Online at: www.mysanantonio.com/business/stories/MYSA030205.1E.hendricks.f7fcad8d.html
Web Posted: 03/02/2005 12:00 AM CST
San Antonio Express-News
Naked short selling sounds like something yucky. Visualize unclothed traders selling stocks short.
If only it were that harmless. Unfortunately, that's not what naked short selling is.
To the extent it occurs, naked short selling is a damaging, illegal form of selling stocks short. The practice is harmful to the financial process that allows startup businesses to go public and flourish, thus hindering the creation of wealth for entrepreneurs and investors alike.
Short selling itself is legitimate and has always existed. It is when traders and investors borrow stock, betting that the price will fall, making a profit from the difference. This is a natural practice that helps the market correctly price securities.
Naked short selling is different. The traders in this case do not borrow the shares they are shorting, using the allowed time lag before having to deliver certified shares.
In effect, they are selling counterfeited shares in an effort to drive down the price of a stock. They often do this through hedge funds, sometimes based offshore.
"It's like a company that has 1 million shares, but there are 2 million shares out there being sold. It puts selling pressure on the stock and becomes a self-fulfilling prophecy," explained Jordan Goodman, author of "Everyone's Money Book."
Think of airlines that oversell seats on a flight. Naked short sellers are doing the same thing — selling something they don't have.
"They are creating their own currency," Goodman said. "Legitimate shareholders see the price go down and panic."
This is the worst kind of manipulation by traders. "In football terms, it is called 'piling on,'" Goodman said.
This practice can delist and destroy public companies, and it usually happens to small, new and low-priced companies that do not have widely known reputations.
Naked short selling sometimes happens to big companies, too. Martha Stewart Omnivision, Delta Air Lines and Krispy Kreme are recent examples. Short selling occurred on the bad news at those companies, but the naked short sellers made price declines worse.
"It's happened to thousands of companies, and it is time it stopped," said Robert Flaherty, editor of Equities magazine in New York, who has long campaigned for short-selling reforms.
The naked shorting winners are the traders who can successfully profit by shorting without borrowing shares and the brokerage firms that make commissions.
The losers are the victimized public companies and their investors. The damage they suffer is far greater than the gains by the greedy manipulators. Damages are said to be in the hundreds of billions of dollars in past years, if not trillions of dollars.
Did I say this is illegal?
It's been against the law since the Securities and Exchange Commission was founded in 1933, because it is widely believed that naked short selling contributed to the 1929 stock market crash.
The SEC recently took another step to curb the practice. On Jan. 7, the commission implemented Regulation SHO (for "short selling"), which calls for the daily listing of companies where the number of shares being traded does not match the number of legitimate outstanding shares beyond certain percentages.
The difference is the shares that have not been delivered for borrowing. Some of those are "naked," or counterfeit shares. Most companies listed are on the NASDAQ small capitalization and over-the-counter bulletin board exchanges, but naked shorting happens also at the New York and American stock exchanges.
Sometimes San Antonio-based companies appear on the Regulation SHO list. One such company that recently appeared is Tidelands Oil and Gas Corp., a pipeline company that trades shares on the NASDAQ over-the-counter bulletin board.
Barry Gross, an investor relations spokesman for Tidelands, said only that being on the list may or may not indicate naked short selling.
The SEC's criteria are meant, however, to alert the investment world that traded share numbers are out of whack. The very existence of this daily list indicates that the illegal practice continues every day.
Equities editor Flaherty said some traders run these fake shares through foreign exchanges, especially one in Germany, and through offshore hedge funds to escape the SEC's reach.
What angers Flaherty is the way naked short selling kills new public companies trying to bring promising medical products to market.
Naked short sellers often claim a company's technologies do not work to justify their short positions, he explained.
Flaherty knows of companies offering vital products — including devices to detect mad cow disease and to prevent the spread of disease to rescuers administering mouth-to-mouth resuscitation — that have been victims of naked shorting.
Public company chief executives often are frustrated by these rumors when trying to report their companies' earnings and other measures of progress.
Should the SEC do more to stop naked short selling?
Flaherty said Regulation SHO is a positive step, but the SEC should follow up by contacting the brokerage firms and traders and ordering them to clean up the mess they have caused by producing and trading the shares involved.
But Lou Thompson, president of the National Investors Relations Institute, doubts the SEC will take further steps.
"We've been after the SEC to require more disclosure of short selling, especially when there have been large volumes of short selling. The SEC just says short selling is legitimate," Thompson said.
The courts may be another way investors and public companies can seek protection. Lawsuits have been piling up at a group of Houston law firms. The lawsuits name the Depository Trust & Clearing Corp., an electronic clearing exchange owned by the NYSE and NASDAQ, as part of the problem.
The lawsuits allege the DTC has a conflict of interest when naked short selling occurs because it charges fees when shares, including counterfeit ones, are traded. These lawsuits may uncover the true dimensions of this problem.
San Antonio-based ATSI Communications Inc., an international telecommunications company, is one company represented in the lawsuits. Christian Smith & Jewell in Houston is its law firm. Its lawsuit was filed Oct. 31, 2002.
In the meantime, advocates operating anti-naked shorting Internet sites are using the Social Security privatization debate to further their cause.
Their point: A stock market that allows manipulations of prices such as naked short selling is not a market where people should invest their Social Security dollars.
--------------------------------------------------------------------------------
dhendricks@express-news.net
--------------------------------------------------------------------------------
Online at: www.mysanantonio.com/business/stories/MYSA030205.1E.hendricks.f7fcad8d.html