The nation’s top securities cop said yesterday that the Securities and Exchange Commission would hunt for and root out instances of “manipulative” short selling.
Linda Chatman Thomsen, the director of the SEC’s Division of Enforcement, said abusive short selling is “manipulative trading,” which she described as the “intentional distribution of negative information intended to draw a stock down” and thereby profit from short sales. The goal, she added, is “to look for [it], and if we find it, to root it out.”
Thomsen, who has run the Division of Enforcement since 2005, spoke yesterday at Fordham Law School in New York, where she delivered the annual A.A. Sommer Jr. lecture on corporate, securities and financial law. Previous speakers included SEC Commissioner Paul Atkins and Mary Shapiro, who now heads the Financial Industry Regulatory Authority.
Thomsen’s prepared remarks focused on the importance of the SEC’s mission to protect investors. Although many government agencies oversee and regulate various slices of the financial industry, no other government agency, she stressed, had as its core mission the protection of ordinary investors. Investor confidence that the securities markets are fair and orderly, she said, is the bedrock of the financial system’s capital markets.
Thomsen’s comments about short selling came in response to audience questions. Asked whether the SEC has a “grand master plan” regarding short selling or is gathering information about various aspects of short selling through next summer, Thomsen replied that “there is information gathering going on at lots of levels [at the SEC], including the enforcement level.” She added that if her division has a plan, “you’ll know it when we bring the case.”
In mid-September, as the current credit crisis intensified with the bankruptcy of Lehman Brothers, the SEC used its emergency authority to take a series of unprecedented actions “to minimize the possibility of abusive short selling,” as the agency put it. Over the course of two days, the Commission issued six emergency orders, including a temporary ban on short sales in nearly 800 financial stocks and a hard borrow requirement for brokers with fail-to-deliver positions resulting from short sales. The hard borrow requirement has been extended as an “interim final temporary rule” until next summer as the SEC gathers information and data about its impact on the market.
The hard borrow for short sales is seen as a powerful penalty for firms that do not deliver shares on time to settle short-sale transactions. The SEC’s emergency introduction of a penalty immediately drove down the number of outstanding fails as brokers tightened their requirements around customers’ short sales. The chief executives of Nasdaq OMX Group and NYSE Euronext said 10 days ago that they supported the SEC’s penalty for fails.
