Naked and Proud

One of the nicest things to come out of the Securities and Exchange Commission recently is a brand new website feature -- one can now engage in full-text searching of SEC filings. To test out this new feature, just for the heck of it I searched for that loaded phrase "naked short selling" and -- lo and behold! -- I found a bunch of nudity spreading all over corporate America.

Yessir, there are folks out there who are naked and proud of it!

Take, for example, FORM SB-2/A that was filed for China World Trade Corp., registering just under 17 million shares of common stock, that was filed on Jan. 13, 2006. I have a special place in my heart for this company, as I have received several lovely unsolicited emails boasting of its virtues as an investment.

After observing that sales of stock under a "standby agreement" with the underwriters might encourage short-sales that would drive down the price of this over-the-counter stock, we get the following:

In addition to the possibility of short selling described above, [an underwriter] Cornell Capital may, itself, engage in naked short sales in the market, which would have the effect of driving down the price of our stock. Cornell Capital can do so, pursuant to the terms of the Standby Agreement, as long as the short sales are not in excess of the amount of shares owned. Notwithstanding this ability, Cornell Capital has agreed that it will not engage in short sale transactions in our common stock for the duration of the Standby Agreement.

Good to know, wouldn't you say? But mind you, that is just one example of fully-disclosed nakedness in SEC filings, now instantly uncoverable thanks to Edgar's new muscle. While most of the "naked" disclosures are routine discussions of underwritings and such (underwriters often go "naked" in the ordinary course of business), we also have mutual funds proudly conceding that they engage in this practice.

Thus the May 1, 2005 "statement of additional information" for Janus Aspen Series says that "In addition, the Equity Portfolios may engage in 'naked' short sales, which involve selling a security that a Portfolio borrows and does not own. The total market value of all of a Portfolio's naked short sale positions will not exceed 8% of its assets. Transactions in futures, options, swaps and forward contracts are not deemed to constitute selling securities short."

So attention all you naked-shorting conspiracy buffs! Crank up your crackpot websites. The plot is thickening.

© 2006 Gary Weiss

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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.