“This is an outrage!”
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This is the first bill this new Senator has introduced. Great start, Senator!! Help him out and notify your Senators to support this legislation.
FAIRNESS OF FINANCIAL MARKETS — (Senate – March 19, 2009)<p><center><pre>[Page: S. 3536]
Sen. Edward Kaufman [D-DE]: Mr. President, I wish to spend a few minutes talking about action that needs to be taken to restore the credibility of the fairness of the American financial markets.
On Monday, Senators Isakson, Tester, and I introduced S. 605, which directs the Securities and Exchange Commission to write regulations that will deal effectively with abusive short selling.
One of the abusive techniques addressed in the bill is so-called “naked short selling.”Naked short selling is when traders sell shares they don’t own and have no ability to deliver at the time of sale–which dilutes the value of a company’s shares and can drive prices down artificially.
Before the ink on our bill was even dry, we received a profoundly disappointing report from the SEC’s inspector general entitled “Practices Related to Naked Short Selling Complaints and Referrals,” a report detailing the results of an audit on the SEC Division of Enforcement’s policies, procedures and practices for processing complaints about naked short selling.
An astounding 5,000 complaints about abusive short selling were sent to the SEC’s Enforcement Division between January 1, 2007 and June 1, 2008. There could be no mistaking the scale of the potential problem that that number of complaints reflected. Incredibly, a mere 123 complaints were referred for further investigation. Worse, and I quote: “none of the forwarded complaints resulted in enforcement actions …..” five thousand complaints, zero enforcement actions.
Not surprisingly, the SEC inspector general has concluded that the processes for dealing with such complaints need a fundamental overhaul.
Accordingly, the IG made 11 suggestions for improvements. And how did the Enforcement Division respond? It agreed to one of the IG’s recommendations, and declined to move on the rest.
I have been around Washington and the Senate for 36 years, but rarely have I seen an inspector general’s call for action so summarily dismissed.
In its comments to the IG report, the SEC Enforcement Division stated:
there is hardly unanimity in the investment community or the financial media on either the prevalence, or the dangers, of “naked” short selling.<p>
I ask my colleagues: Why would the SEC Enforcement Division want to wait until there is unanimity in the investment community and the financial media to enforce the law? Why would the SEC Enforcement Division in its comments to the IG report want to give a virtual “green light” to continued abusive naked short selling? That is an enforcement division that is not worthy of its name.
In the IG’s response to the Enforcement Division, the IG notes that it is “disappointed” that the Enforcement Division only concurred with one of the 11 recommendations in the audit report. The IG is “particularly concerned” that the Enforcement Division did not concur in its first three recommendations–that the Division should develop a written in-depth triage analysis for naked short selling complaints.
Moreover, the IG notes:
SEC has repeatedly recognized that naked short selling can depress stock prices and have harmful effects on the market. In adopting a naked short selling antifraud rule, Rule 10b-21, in October 2008, the Commission stated, `We have been concerned about “naked” short selling and, in particular, abusive `naked’ short selling, for some time.
Where does this leave us, Mr. President? We have an SEC that is ostensibly concerned about abusive naked short selling, but we have an enforcement division–after receiving literally thousands and thousands of complaints about naked short selling–that has brought no enforcement actions and doesn’t take seriously an IG audit and recommendations.
This is an outrage.
I want to be clear, this was the record from a review of last year’s examination of short selling complaints. This is an issue Mary Schapiro, the new SEC chair, has inherited. She just got to the SEC. But this is a strong indication of the need for real leadership at the SEC. Unless and until that happens, investors will have reason to worry that markets are not yet free of manipulation and abuse.
Of all the challenges confronting our financial system, none is more important than restoring investors’ trust and confidence in the market–the belief that the game isn’t rigged against them. After the disastrous and unprecedented losses of the past year, millions of Americans will refuse to put their resources back into the stock market until they believe the system is once again sound, fair and adequately overseen by the SEC.
In the not-so-distant past, a strategy of long-term buying-and-holding offered a roadmap for comfortable living in retirement and the ability to provide to our children and grandchildren that all-important economic head start in life.
Then, the market valued companies based on economic fundamentals and expected future profits.
Today, too many people view the stock markets as another gambling casino, dominated by volatility and susceptible to predatory short sellers who profit from false rumors and bear raids.
To restore faith in our securities markets, the Securities and Exchange Commission urgently needs to reflect a clear commitment to meaningful change.
It is time to restore the integrity, efficiency and fairness of our securities markets by preventing manipulative short selling, ensuring that the market fairly values the actual shares issued by a company, and outlawing the creation of “phantom shares” by abusive short sellers.
Let’s remember how we got here. The opaque derivatives market allowed some people to play a shell game by leveraging to the hilt and buying and selling synthetic instruments that ultimately crashed in value. The same thing happens through abusive short selling, when traders sell shares they do not own and have no ability to deliver at the time of sale.
It is like making copies of your car’s title, and then selling the title to the car three times, while hoping you can find other cars to deliver if the buyer proceeds.
In some cases, the short interest in a particular company’s stock on a given day has spiked dramatically after false rumors have circulated about the company. The data further show that “fails” to deliver are large and problematic.
That is evidence of manipulation. It distorts the market. It must end now.
Let me be clear: the problem isn’t short selling itself, which can enhance market efficiency and price discovery.
The problem is that, under current rules, short sellers can sell stocks they haven’t actually borrowed in advance of their short sale–and with no uptick rule in place as a circuit breaker. The current standard requires only a “reasonable belief” that a short seller can locate the necessary shares by the delivery date; that is no standard at all and subjects the market to rife abuse.
For the market to flourish again, the SEC must issue rules and enforce them in a way that convinces investors the system is not rigged against them.
One important step the SEC should take now is to reinstate the substance of its former “uptick” rule.
The uptick rule served us well for 70 years until the SEC rescinded it in July 2007. It required short sellers to take a breath and wait for a sale at a higher price before continuing to sell short in declining markets. According to one survey, 85 percent of CEOs, and professionals at NYSE-listed companies favor reinstating it. Fed Chairman Bernanke, bipartisan Members of Congress, and former regulators favor reinstating it. The SEC should do that now.
Restoring the uptick rule is necessary, but not sufficient, to rein in abusive short selling. If the SEC is to alter fundamentally the way stocks trade today, it must also require–and enforce–short sellers possessing at the time of the sale a demonstrable legally enforceable right to deliver the shares–a so-called “pre- borrow” requirement. We simply can’t tolerate a market that permits short sellers to create phantom shares that dilute a company’s value, erode the value of investors’ holdings and manipulate share prices downward.
A recent Bloomberg news report based on SEC data confirmed that so-called “naked” short selling contributed significantly to the demise of Lehman Brothers and Bear Stearns. Those companies took horrendous gambles and their share values had to reflect those serious missteps, but in the absence of “naked” short selling both might nevertheless have survived.
Abusive short selling is gasoline on the fire for distressed stocks and distressed markets. And the knowledge that it is still tolerated rattles small investors and shakes confidence in our markets.
Mr. President, I ask unanimous consent that this story be printed in the Record.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
[From Bloomberg.com, Mar. 19, 2009]
Naked Short Sales Hint Fraud in Bringing Down Lehman (Correct)
(By Gary Matsumoto)
[ Matsumoto’s story follows here ]
Sen. Edward Kaufman [D-DE]: The new SEC leadership has the opportunity to make the SEC a “can do” agency once more. The SEC is scheduled to meet on April 8 to discuss the uptick rule and abusive short selling. The Chair and commissioners should move quickly to adopt the uptick rule and a pre-borrow requirement.
If not, Congress should do its part and direct the SEC to do that quickly.
After yesterday’s IG report and the Enforcement Division’s response to it, I am even more convinced that SEC Chair Schapiro needs to grab the reins quickly at the SEC, and get back to standing up for investor interests to restore confidence in the markets. If the SEC won’t do it, Congress should require them to do it.
Mr. President, I yield the floor.
(Thank you, Senator Kaufman!)
Stop Naked Shorting!