Who’s Looking Out For You?

SEC Critics Seeking Investigation

By Mark Faulk
June 27, 2004

Editor's note: Up to now, the SEC has largely ignored the small investors and companies that have been brutally victimized in the naked short-selling scandal. However, in recent months, a groundswell of dissent has raised public awareness of the worldwide scandal, and the media has finally begun to cover the story on a regular basis. An online petition drive at http://www.investigatethesec.com/ which is asking for a congressional investigation into the SEC's actions has gained momentum in the past few weeks, and hundreds of individuals and small companies have joined a "stockgate activist" coalition aimed at bringing the fraud to the attention of the general public, major media, and government officials.

To Serve and Protect

The mission statement of the SEC is clearly worded and easy to understand: "The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities market."

Last Wednesday, they adopted new rules concerning short-selling that accomplished neither goal. Instead, they passed a watered-down version of their earlier proposed regulation SHO, a version that did absolutely nothing to "protect investors and maintain the integrity of the securities market". And unlike their mission statement, the new rules are neither clearly worded nor easy to understand. In fact, the only clear message was the "subliminal" one that the SEC sent to investors, which was, simply stated: "We don't care".

After over a decade of receiving complaints about the abusive practice of naked short selling, which has reportedly cost investors and companies in excess of over $1 trillion (that's right, over $1,000,000,000,000.00), the SEC finally took a tentative step - backwards. Instead of tightening short selling restrictions, they approved a "pilot" program that will lift short-selling restrictions on 1,000 of the most heavily traded stocks in the Russell 3,000 index for a one-year period, and allow unrestricted short-selling in after-hours trades as well. Then, in an effort to take yet another step backwards, they effectively postponed what little reforms were passed until 2005.

In statements that made it clear where the loyalty of the SEC lies, Annette Nazareth repeatedly referred to "overwhelming comments from the industry" and said, "The industry believed that the results of a pilot program would cause us to reduce the scope of the short-sell rule". However, there was no mention of comments from the investors that the SEC is pledged to "serve and protect".

In summary, this is what the SEC did in their decade-long effort to "stop abusive naked short-selling practices": In addition to making it easier to short a third of the Russell 3000 Index stocks, and allowing unrestricted short selling after hours, they passed a rule that was basically the same as the NASD rule that went into effect three months ago (which was held up for years by the SEC, then postponed by the NASD for another month just for the hell of it). Then, for good measure, they voted that even this stripped-down version "will become effective 30 days after publication with a compliance date of January 3, 2005, to permit firms to make programming and procedural adjustments."

If that last part sounds familiar, this is why: the NASD originally planned to implement their version of the rule on February 20, then postponed it until April Fool's Day, stating that "some members need to make significant technological changes to their systems to comply with the new requirements". In other words, the same brokers that were given an extra month to update their systems by the NASD are getting another six months from the SEC - to update their systems.

At Wednesday's meeting, one of the commissioners said "we'll see if this cuts down on the abuse", but was contradicted by another, who stated that he was "not sure if naked shorting really exists". A day later, an email from a staffer of the House Financial Services stated, "I was not denying that there were some serious problems and that SEC had not yet addressed them". And as for that real reform that the SEC has been promising investors since October, Nazareth told the Dow Jones Newswire "We'll just defer these bigger changes". This is in sharp contrast to an editorial in the Wall Street Journal in 2001, when SEC Chairman Harvey Pitt stated "by now it is painfully clear that preventing problems is infinitely superior, and far less damaging, than acting after investor funds, retirement accounts or life savings are dissipated."

Opposition Gaining Momentum

For years, critics have questioned the SEC's lack of accountability on the naked short-selling issue, and many have signed an online petition at www.investigatethesec.com calling for an "independent Congressional investigation into the Securities and Exchange Commission's actions regarding the manipulative and abusive trading practice of naked short-selling." What began as a crusade by a few individuals and a handful of small companies to push for reforms in the stock market system has escalated in recent weeks into a major effort by small investors and companies to, in the words of one concerned investor, "return integrity and accountability to the stock market".

Dave Patch of investigatethesec.com has been lobbying the SEC (and anyone else who will listen) since 1998, and started his petition drive late last year. Although there has been considerable interest from the start, they have had a significant increase in both interest and petition signings in the past two months. "We have set a goal of at least 15,000 individual signatures and two to three hundred company signatures. When we reach those numbers we will submit the entire package to Congress for review. Congress has told me that one of the primary reasons that our issue has not seen the attention we seek is because a lack of visibility on the issue, and this petition will help to provide that visibility."

A vocal critic of both the SEC and the DTC, Patch believes that a congressional hearing is the only way to put a halt to the current stock market scandal. "Evidence of naked shorting financing organized crime dates back to 1996 or before, and the SEC is working with Federal Agencies tracking naked short-selling money to terrorism. More recently, the SEC, in their proposal presented last October, admitted that the abuse had resulted, in some cases; with settlement failure dilution exceeding the entire public float of some companies. This is clearly more than just a few isolated incidents of abuse, it indicates a systematic pattern of widespread corruption."

Patch is not convinced that last week's regulations will have any positive effect on the problem. "In my opinion, on June 23, the SEC public ally went out and said to the criminals, 'you robbed the bank; we caught you; we will let you keep the money but we will deter you from doing it again'. They violated the rights of the investor for the benefit of the abusers, and put the rights of the elite above those of the common man. Wall Street was aiding in the abuse by not forcing trade settlement and now the SEC is protecting them by not forcing a clean up."

Critics contend that the SEC in violation of the Securities Exchange Act of 1934, which says, in part, "The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors."

According to the SEC's own website, "The Securities Exchange Act of 1933 and the Securities Exchange Act of 1934 were designed to restore investor confidence in our capital markets by providing more structure and government oversight. The main purposes of these laws can reduced to two common-sense notions:

Is The Stock Market Scandal A Political Landmine For Bush?

A recent CBSMarketwatch study revealed that "almost 50% of American households own stocks or mutual funds of some type, up from about 25 percent in 1990 and less than 6 percent in 1980." This increase has created what they refer to as "the rise of the investor-class voter", a constituency that could literally decide the election.

Many of the most vocal critics believe that one of the reasons that the SEC is dragging their feet on this is because of the damage it could cause President Bush in his campaign to get re-elected. According to Patch, "On April 1st White House staffers were briefed on this issue by small business leaders. What have they done since? Very little! The fact that the SEC is delaying implementation of Regulation SHO until after the election reeks of politics. The SEC needs to be investigated and investigated now."

To sign the petition to investigate the SEC and post your comments, go to: http://www.investigatethesec.com/ .

 Read more about the stock market scandal at: http://www.faulkingtruth.com/ .

To read the Securities Act of 1934 in it's entirety, go to: http://www.law.uc.edu/CCL/34Act/index.html

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