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Naked Short Selling: A “Wall Street Conspiracy”?

Posted by Larry Doyle on April 17, 2012 7:54 AM |

Do readers recall Dick Fuld, then CEO of Lehman Brothers, railing against hedge funds that were attacking the once venerable firm by aggressively shorting its stock? Fuld maintained that these aggressors were engaged in a practice known as ‘naked short selling’ and that they brought Lehman to its knees in the process.

The last four years have brought us plenty of intrigue and innuendo about a host of illegal and illicit practices on and off Wall Street, but we have heard and seen little about this practice. Why? What questions need to be addressed on this topic? 

1. How widespread was this practice?
2. Was the SEC totally ill-equipped or merely unwilling to address naked short selling?
3. Can the SEC go back and reconnect the dots to expose the practice and the practitioners? Will they?
4. Can the American public stomach the blatant assault on basic rules of capitalism?
5. Will naked short selling be another nail in the coffin of those who view Wall Street as a rigged game?
6. Might this all be about to change?

This topic clearly deserves front page coverage. I believe Wall Street, Washington, and the media controlled by both centers of power view this topic as too explosive. Let’s navigate past the front page and we see that the FT writes today, SEC Charges Broker in Short Selling Scheme:

US regulators accused optionsXpress, an online futures broker, and five individuals of engaging in sham options transactions as part of a naked short selling scheme.

In an administrative proceeding, the Securities and Exchange Commission charged optionsXpress, which is now owned by Charles Schwab, four executives and customer Jonathan Feldman, a top executive with Eastern Savings Bank, a private Maryland savings and loan operation, with violating short selling rules.

Mr Feldman is accused of trading shares of Sears and American International Group, among others, from October 2008 to March 2010 that involved billions of dollars in trades.

Under short selling rules, known as Reg SHO, an investor who sells borrowed securities is required to replace them within three days of the trade. Failing to deliver the securities violates the rule and makes it a naked short sale. The SEC has cautioned that abusive naked short selling harms the market because it creates the impression that traders believe the company’s securities will drop.

I have no confidence that the questions I pose above will be addressed in the midst of the SEC’s pursuit of this individual case. I am hopeful, though, that my questions will be advanced if a documentary on naked short selling gets the attention it deserves. What documentary is this?  Wall Street Conspiracy. Take the 3-minutes to view this clip:

I ask again, will we get the truth we deserve? We can if we demand it.

Can we promote the transparency necessary to expose what really happened and who was involved in this practice? We can if we demand it.

Were they merely individuals at selected hedge funds and small broker dealers, or were the very titans of Wall Street at Goldman Sachs, JP Morgan, and every other shop also involved in naked short selling? What do you think?

I commend Kristina Leigh Copeland for producing this documentary. Please share it so this story gets the attention it deserves and our virtues of truth, transparency, and integrity have a fighting chance against those who would abuse capitalism and America.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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