By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, March 19, 2009
The Securities and Exchange Commission doesn't have the right guidelines in place to enforce laws surrounding a form of short selling that some investors blame for exacerbating the financial crisis, the SEC's inspector general said in a report yesterday.
The report focused on naked short selling, a technique in which traders bet against a company's shares in an unconstrained fashion that critics say can drive down the price of a stock until it is worthless.
The report says complaints about naked shorting have increased dramatically since December 2007, but the SEC's enforcement staff did not respond accordingly. Only 123 of 5,000 naked short-selling tips were forwarded for further investigation, and none led to enforcement, the report said.
"Complaint-receipt and processing procedures hinder Enforcement's ability to respond effectively," the report said.
"We determined that Enforcement's current policies and procedures appear to limit significantly the referral of naked short selling complaints, and its written policies and procedures result in naked short selling complaints being treated differently from other types of complaints of securities law violations," SEC Inspector General David Kotz said in the report.
New SEC Chairman Mary Schapiro is working to revamp the agency's system for collecting tips and pursuing investigations.
The report said the SEC should develop in-depth guidance for handling naked short selling complaints, similar to guidance the agency has for other types of complaints, such as insider trading. It also recommended that the agency develop more uniform practices for handling complaints at its Washington headquarters and at its regional office.
The SEC's enforcement division disagreed with most of the report's findings.
"There is hardly unanimity in the investment community or financial media on either the prevalence, or the dangers of, 'naked' short selling," it wrote.
The division added, "The people closest to the trading, with the deepest understanding of and access to the data, did not see and refer any of the large-scale, damaging 'naked' short sale abuse."