Friday, April 28, 2006

The SEC Fouls Up (Again) on Naked Shorting

Lots of misinformation out there on naked short-selling, much of it spread by the misinformationmeisters, the Baloney Brigade anti-shorting crackpots.

Well, it seems that the SEC is getting into the misinformation act.

A reader points out that the Securities and Exchange Commission has issued a "definition" of naked short-selling. Apparently it's been there a year, and nobody -- except this reader, apparently -- seems to have noticed this goof.

This definition is nice. It is spiffy. It is also wrong.

It is as follows:



In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known as a "failure to deliver" or "fail."

This definition gives the distinct impression that "fails to deliver" are equivalent to "naked short sales."

However, that is not true, as is stated elsewhere on the SEC site, in a link in the definition I quoted above.

As you can see by going there, all naked shorts are fails, but fails are not necessarily naked shorts. In fact, the Depository Trust and Clearing Corp., which -- despite all the blather but out by the baloneys -- has zero reason to lie on the subject, maintains that "There are literally dozens of reasons for a 'fail to deliver,' and most of them are legal."

Might have been nice for the SEC to say that, and also to point out that the entire issue has been blown out of all proportions and used as a scapegoat and/or diversion by money-losing companies. (Speaking of which, Patrick Byrne of Overstock.com was in full-diversion mode at a conference call today, as he laid out horror-show quarterly results. Hat tip: Dealbreaker.)

With all the confusion being deliberately spread about short-selling by the con men of the Baloney Brigade, you'd think that the SEC wouldn't contribute to it. But it's really not surprising. As I point out in Wall Street Versus America, the SEC's record on this subject is really pretty disgraceful.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

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