The Short Selling Hysteria Continues

Readers of New Jersey's largest newspaper, the Star-Ledger, read today that the scourge of naked short-selling has descended on Wall Street. Word of that came from a man in a position to know -- New Jersey's next state treasurer, Bradley Abelow, at his confirmation hearing before the state senate Judiciary Committee in Trenton.

Abelow is a former board member of the Depository Trust and Clearing Corp., and as anyone who has followed the issue -- at least from the perspective of the anti-naked-shorting conspiracy cult -- can tell you, the DTCC is up to its eyeballs in that horribleness. Abelow confirmed it thusly, according to the newspaper:

Abelow acknowledged the problem of "naked short selling" is "endemic." He said he personally never engaged in the abusive practice and, as an executive and a director of the corporation, took extensive precautions to try to minimize it.

Terrible isn't it? According to the dictionary, "endemic" means "prevalent in or peculiar to a particular locality, region, or people" -- the locality or region in this case being "Wall Street."

The only problem is that Abelow didn't say that. As a matter of fact, according to the archived audio feed of the hearing, he said the exact opposite: "The issue of fails to deliver of securities are endemic and occur as a matter of course and that my experience is that everyone at the DTCC and its participant firms work diligently to clean them up."

As Abelow had patiently explained to the committee, "fails" occur for a whole bunch of reasons. They are routine. Happen as a "matter of course." Nothing. Sometimes, he explained, FTDs happen because the transaction is off by a penny. It's something that anyone who knows a blessed thing about the subject, including the regulators, have explained again and again and again.

Now, I don't mean to beat up on the Star-Ledger, which is a damn good paper that regularly takes awards away from the big guys in New York. If I had covered the hearing for a daily paper and if I hadn't been writing about this stupid "naked shorting" issue for the past ten years, I probably would have gotten confused about the subject myself. What was particularly confusing to the uninitiated was that Abelow was preceeded by four "witnesses" who spewed sheer baloney on the subject without contradiction.

See, what you have here is not really a regulatory issue but a kind of hysteria, cynically promoted by stock promoters and CEOs of cruddy companies seeking to take the heat off their own lousy performance. The stock-clearing system is complicated, and they've exploited the complexities of the system to conjur up a "scandal" out of nothing, to divert attention from real investor issues such as the unfair arbitration system and real stock fraud.

DTCC has the thankless task of overseeing the stock-loan system that is at the center of the naked shorting non-scandal, so it has been regularly a subject of screwball lawsuits that have been monotonously tossed out of court. The stalking continued in Trenton yesterday, with Abelow hounded by the aforementioned four witnesses, and by some particularly brainless questioning by one state senator. "Have you ever, for your own account, engaged in naked short selling?" a legislator named Gerald Cardinale asked the dumbfounded Abelow.

One of the "witnesses" who came to serve up baloney was Gary L. Valinoti, former CEO of a sad, blameless company called Jag Media Holdings that he claimed was an innocent victim of naked short-selling. Valinoti forgot to mention that he too is a victim -- of SEC charges that he engaged in "unregistered sales and transfers of securities of [Jag Media Holdings] in violation of Section 5 of the Securities Act of 1933." He settled the charges last September without confirming or denying the allegations.

None of the press coverage mentioned Valinoti's little run-in with the SEC, while providing a forum for the idiotic nonsense spewed at the hearing by the naked-shorting cultists.

Meanwhile, in another example of short-selling hysteria, a tough and smart reporter who would not have been bulldozed had he covered the hearing -- Herb Greenberg of Marketwatch -- reported this morning that he was slapped with an SEC subpoena that's been served upon him as part of an investigation of Gradient Analytics.

Herb says "the subpoena seeks 'all' unpublished 'communications,' including emails and phone records, between me and people and organizations I've quoted -- and at least one I've never quoted -- regarding five stocks. Never mind that I have never written about one of those companies. And never mind that the other four (yes, including Overstock) deserved every word I wrote -- and then some." He and Dow Jones (which owns Marketwatch) are, of course, fighting it.

That's how nutty things have become. Think about it. An innocent guy who used to be a paper-pusher on Wall Street gets grilled over a non-scandal, and a tough reporter who is the bane of cruddy companies gets an SEC subpoena.

If that isn't hysteria, I don't know what is.

UPDATES:

SEC Chairman Elaborates on "Never Mind." (Feb. 27)

The SEC's Keystone Kops in action. (Feb. 25)

Naked shorting cultists smear Greenberg. (Feb. 26)

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