Macro Tsimmis

intelligently hedged investment

Dear Senator Hagan,

Posted by intelledgement on Fri, 23 Oct 09

Check out this post on Deep Capture detailing Senator Ted Kaufman’s efforts to recruit cosponsors for his efforts to require the SEC to reinstate the uptick rule and enforce other regulations against abusive short selling. Here is my letter to our North Carolina senators, Kay Hagan and Richard Burr (and please consider sending letters of your own; Deep Capture has a convenient link to all 100 senators’ e-mail interfaces):

Please consider becoming a cosponsor of SB 605: A bill to require the Securities and Exchange Commission to reinstate the uptick rule and effectively regulate abusive short selling activities.

Naked short selling is the generally illegal practice of counterfeiting and selling short shares of stock that the seller has not borrowed (as he or she is supposed to). This pernicious practice by aggressive traders has effectively frozen hundreds of U.S. companies out of the capital markets, making it impossible for them to borrow the money they need to grow—or, in some cases, even survive. It also contributed to the meltdown of Lehman, Bear Stearns, Citibank, Fannie and Freddie, and others last year. And of course it cheats investors who play by the rules and take long positions.

Here is a good summary of how abusive naked short selling works.

The SEC has the authority to enforce regulations limiting naked short selling but has turned a blind eye to the practice for years. I don’t know if this is because regulators are in thrall to the malefactors as some have claimed, or if they are merely incompetent. I do know that if we cannot count on our capital markets to operate fairly, then not only do we lose a significant competitive advantage, but faith in our entire system is undermined.

Senator Kaufman and three other of your colleagues are now seeking cosponsors for SB 605, and have sent you a letter soliciting you to join them. I hope to see your name added to that list.

Thank you for your attention to this matter.

Brad Hessel, Raleigh

One Response to “Dear Senator Hagan,”

  1. Received a snail-mail reply from Richard Burr dated 19 Nov 09 today (3 Dec 09) to my 23 Oct 09 e-mail:

    Dear Mr. Hessel,

    Thank you for contacting me about short-selling and the uptick rule. I appreciate hearing from you on this issue….

    During 2008, the SEC and several other securities regulators around the world instituted a number of measures to reign in short-selling, including temporary bans on selected and all short sales, banning naked short-selling, and requiring large investment managers to report their short positions. However, the SEC has not yet moved to reinstate the uptick rule as many have suggested.

    Rather than continue with these temporary measures, I am hopeful that the SEC will bring back the uptick rule. In April, the SEC voted to propose two approaches to restrictions on short-selling, including a proposed new uptick rule. The SEC is currently conducting a period of public comment on these proposals. The public comment period closed on June 19, 2009. Please know that I am following the actions of the SEC on this issue very carefully….

    LOL apparently not so carefully as to update his canned response on the topic written prior to last June. My tax dollars at work. I guess it beats Kay Hagan, who has yet to respond at all.

    Anyway, FWIW, here is my reply:

    Senator Burr,

    Thank you kindly for your 19 Nov 09 response to my e-mail of 23 Oct 09 on the subject of SB 605. I appreciate your expression of support for the notion of reinstituting the uptick rule. Howsoever, that is most definitely not a satisfactory response, in my view.

    First of all, I am much more concerned about naked short selling than the uptick rule. Selling short stock you haven’t borrowed is ALREADY banned with some very narrow exceptions, but in recent years massive flouting of the rules with respect to the securities of many companies has become rampant. In my view, naked short selling is nothing short of fraud, and it has clearly been employed for the purpose of destroying public companies by denying them access to capital in order to profit (when the value of the stock declined to zero). This activity effectively bans entrepreneurs from access to capital, defrauds and steals from shareholders, and denies your constituents access to goods and services that could improve—or in the case of biotech products such as Dendreon’s Provenge, even save—their lives.

    Illicit naked short selling is corrosive for our market, because if crooks can sell counterfeit shares and destroy companies with impunity, then the game is rigged and investors and entrepreneurs are fools if they play it. AND in the case of naked short selling of Bear Stearns, Lehman Brothers, AIG, Citi, et al last year, it has the potential to turn a bad situation into a catastrophe for all of us.

    Reinstating the uptick rule could slow down illicit naked short selling, but effective enforcement of the rules already on the books would stop it entirely. However, just as the SEC are dragging their feet on the uptick rule, they have neglected for years to enforce the rules against naked short selling. This is why it is critical that the Senate enact SB 605.

    Please reconsider your refusal to support this bill.

    Thank you for your attention to this matter.

    Brad Hessel, Raleigh

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