Thursday, June 14, 2007

Chris Cox OD's on Baloney

SEC members preparing for well-catered meeting

As I pointed out a few days ago, the SEC's meeting yesterday resembled a cheaply stocked delicatessen more than it did a regulatory agency, with half the agenda devoted to baloney -- the nonexistent "naked short selling" scandal, promoted by a handful of crackpots and corporate losers in the Baloney Brigade.

What the SEC actually did (involving a market clearing technicality of no importance called "fails to deliver") was less consequential than the irresponsible rhetoric emanating from the SEC chairman, Christopher Cox. The low point of the proceedings was this nonsensical comment by Cox: according to the New York Times, he contended that naked short selling is “a fraud that the commission is bound to prevent and to punish.”

OK, so where's all the punishment? Where are all the SEC enforcement actions? Where are all the customer complaints of genuine harm committed by genuine naked shorting of genuine, sound, non-money losing companies?

Why is naked short selling the only "fraud" that has no victims and no perpetrators, only a bunch of crackpots yammering about conspiracies?

The SEC has not commenced a single case concerning stocks being driven down by naked shorting, as has been alleged by the anti-shorting conspiracy theorists such as CEO Patrick Byrne and his fellow-traveling websites. Compare that to the thousands of cases involving long-side manipulation.

Yes, the SEC has filed a grand total of three suits involving naked shorting, and neither involved the "stock counterfeiting" or "massive manipulation" alleged by the Baloney Brigade.

One involved a hedge fund's complex manipulation scheme, which included shorting into PIPEs via a Canadian broker, where such trading was legal. But as you can see from the SEC complaint, that shorting was done to hedge the firm's positions, not to drive down the shares.

In the most recent case, Goldman Sachs got a rap on the knuckles for shorting in advance of an IPO without borrowing. Ditto -- hedging, albeit in violation of SEC rules. Cox called this "an important case and it reflects our interest in this area," but that's bull. "Important cases" don't warrant measly $2 million fines and "no admission or denial" settlements. "Important cases " don't involve situations where not a single investor was hurt.

Only one case involved naked shorting depressing share prices, the SEC suit against Rhino Advisors and Thomas Badian. That involved transactions involving "death spiral" convertibles, and again was a far cry from the systemic "stock counterfeiting" that naked shorting conspiracy nuts have claimed. As with Goldman, the suit was settled with a consent decree and a knuckle-rap fine of $1 million.

That's it as far as enforcement cases are concerned. The rest is regulatory wheel-spinning and pandering statements that have done nothing to satisfy the Baloney Brigade.

Either the SEC is turning a blind eye to a real life "fraud" on the market, as the Baloney Brigade claims, or Cox is behaving more as a politician than a regulator, pandering to what Seth Jayson of Motley Fool aptly calls a "squeaky wheel." Squeaky, shrill, and dishonest.

And insatiable. Since the Baloney Brigade is on a crusade against a nonexistent problem -- one that, since it does not exist, has no solution -- it will be never satisfied. Remember that the entire purpose of the Baloney Brigade is not to correct a "stock market problem," but to divert the attention of regulators and investors, and to provide excuses for inept CEOs and the brokers pushing their stocks.

Wall Street is no doubt ecstatic about the meeting yesterday. That's because the SEC eliminated the "tick test" for short-selling of securities. Since the 1930s, shares could not be shorted when prices are falling, but that's now out the window.

The "tick test" was a genuine protection against downward manipulation, and it is gone. And that's a good example of the Baloney Brigade's damaging effect on the regulatory process. By taking meaningless action against the nonexistent problem of naked short selling, the SEC had political cover to remove a safeguard against genuine manipulative short-selling.

I don't fault the media for being weary of this issue, as well as wary of falling afoul of the anti-shorting crackpots-- they've spread lies, mostly via Phil Saunders' "sanitycheck" website, about every single reporter who has written unfavorably about them. Several members of the media have told me that they avoid this issue for that reason, and I don't blame them.

However, I think the SEC's pandering to the Baloney Brigades requires more scrutiny. Media coverage of the SEC is notoriously flabby, and I think the failure to cut through the bull and fully analyze the SEC's actions in this area is a good example of that.

© 2007 Gary Weiss. All rights reserved.


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

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