| Revision as of 05:04, 21 February 2006 editTomstoner (talk | contribs)252 edits →Its Effects← Previous edit | Revision as of 05:12, 21 February 2006 edit undoTomstoner (talk | contribs)252 edits identifying criticsNext edit → | ||
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| They say that it has been used as a scapegoat for the market forces, and for the inevitable decline of stocks involved in pump and dump manipulation schemes. | They say that it has been used as a scapegoat for the market forces, and for the inevitable decline of stocks involved in pump and dump manipulation schemes. | ||
| One alleged effect of naked short-selling, according to opponents of the practice, is that it results in "counterfeit shares." The SEC has denied that this effect occurs and maintains that shareholders are retain all their rights even if their broker fails to obtain delivery of the shares. Other critics have maintained that the "counterfeit share" allegations are little more than a paranoid conspiracy theory. | One alleged effect of naked short-selling, according to opponents of the practice, is that it results in "counterfeit shares." The SEC has denied that this effect occurs and maintains that shareholders are retain all their rights even if their broker fails to obtain delivery of the shares. Other critics have maintained that the "counterfeit share" allegations are little more than a paranoid conspiracy theory. Critics such as ], investor and owner of the ], and author and investigative journalist Gary Weiss, contend that the naked short-selling has been so grossly exaggerated as to be a "nonexistent scandal." | ||
| == Regulators Respond == | == Regulators Respond == | ||
Revision as of 05:12, 21 February 2006
Naked short selling, or naked shorting, is a controversial form of selling shares of securities short. Some forms of naked short-selling are legal and some are not. The controversy has surrounded naked short-selling aimed at profiting from share price declines. The U.S. Securities and Exchange Commission has issued a regulation seeking to curb naked shorting abuses.
The Practice
Short selling is the practice of borrowing stock, then selling it in hopes that the price will go down and it can be bought back at a lower price, generating profit and allowing one to return like shares for the borrowed ones.
"Naked shorting" refers to "shorting" a stock for sale without first borrowing it. . When one sells short a non-borrowed stock, one is selling something that they do not possess. The risk, that one may not be able to then acquire the shares needed to deliver on the sale, is a contributing factor to the controversy surrounding this practice.
Its Effects
The pervasiveness of naked short-selling, and its impact on the market, is subject to sharp dispute and has spawned much controversy. Lawsuits have been filed against regulators and others by companies claiming to be affected by the practice. These suits have been largely unsuccessful. In a few instances, the SEC has penalized brokers and hedge funds for alleged naked short-selling. However, regulators deny that the practice is widespread and say its prevalence has been exaggerated by critics.
Some alleged targets of naked short-selling include Overstock.com and Martha Stewart Living Omnimedia. However, critics of the anti-shorting campaign maintain that the prices of those shares fell because of other corporate events, not because of naked short selling.
Opponents of naked sorting maintain that existing rules require a forced buy-in of shares that fail to deliver(FTD). They claim that buy-ins are not occurring, and that unsettled trades are harmful to shareholders. Overstock CEO Patrick Byrne has also contended that a criminal mastermind or "Sith Lord" controls naked short-selling of his stock. He has failed to name the alleged "Sith Lord," and his claim has been derided as an effort to deflect attention from his company's problems.
The allegarions of the anti-naked shorting forces -- including a massive conspiracy involving journalists, regulators and traders -- are vigorously denied by the affected parties and by the Depository Trust & Clearing Corporation (DTCC), which manages the stock-loan program alleged abused by naked shorts. Regulators point out that the vast majority of FTDs are unrelated to abusive naked short-selling, and that shareholders are not disadvantaged when a fail occurs.
In an article on TIME.com, Robert Shapiro estimated that naked short selling has cost legitimate investors $100 billion and caused the failure of 1,000 companies. . However, critics of the anti-naked shorting campaign maintain that there is no evidence to substantiate these and other allegations of the anti-shorting forces. They say that it has been used as a scapegoat for the market forces, and for the inevitable decline of stocks involved in pump and dump manipulation schemes.
One alleged effect of naked short-selling, according to opponents of the practice, is that it results in "counterfeit shares." The SEC has denied that this effect occurs and maintains that shareholders are retain all their rights even if their broker fails to obtain delivery of the shares. Other critics have maintained that the "counterfeit share" allegations are little more than a paranoid conspiracy theory. Critics such as Mark Cuban, investor and owner of the Dallas Mavericks, and author and investigative journalist Gary Weiss, contend that the naked short-selling has been so grossly exaggerated as to be a "nonexistent scandal."
Regulators Respond
The allegations of the anti-naked shorting movements are denied by Securities and Exchange Commission and the self-regulatory organizations(SROs) that regulate the U.S. markets. The allegations have also been criticized by journalists and market commentators.
In a forum sponsored by the North American Securities Adminatrations Association in November 2005, some regulators, including a high official of the National Assn. of Securities Dealers (NASD), denied that naked short-selling is a signficant problem.
Cameron Funkhouser, NASD's senior vice president of market regulations, told the forum that NASD had found no evidence of widespread naked short selling. He decried "this fear mongering that there's this rampant naked shorting that's gone unregulated."
Funkhouser also noted that although a number of companies have in the past alleged their shares have been manipulated through the listing of their stocks on the Berlin stock exchange, he had found no evidence of naked short selling there. "We took (these allegations) very seriously," Funkhouser said. "We have seen not one instance of naked short selling or any abusive short activity" at that exchange.
At the NASAA Forum, the head of the Connecticut Securities Agency and current head of the NASAA, Ralph Lambiase, delcared his disapointmen in how the industry was handling this issue as a whole.
Controversy
Some investors defend the practice as just another tool of the market, and caution against federal regulation. Naked short-sellers claim that they are enacting market pressure against overpriced and undertraded small-cap stocks. In the bubble of the 1990s, they argue that regulations against short-selling would have caused an even greater boom and bust.
Critics contend that the naked shorting is fraud, and that it constitutes "taking a buyer's money and not delivering the product." However, the SEC denies that occurs, saying that a fail to deliver "does not mean that the customer's purchase is not completed."
In recent years, however, the SEC has acted against naked shorting in part due to pressure from a handful of small and microcap companies. This campaign has drawn criticism. Financial columnist Floyd Norris of the New York Times observed that "Investors who own shares might do better to try to understand why some think the shares are overvalued, rather than simply rail about unfair short selling."