March 31, 2007
Before Regulation Sho, when the SEC first asked for comments on new regulations for shorting stocks, one law firm, which opposed any change, presented a strange argument against new regulations. The firm stated that selling unauthorized shares (naked shorts) allowed the stock price to remain affordable, and that the cheaper stock price was beneficial as it allowed more people to purchase the stock. The law firm tried to get the SEC to look at stocks as a commodity. Arguments like this (and other forms of self-justification by short sellers), though manifestly wrong, were only partially rejected by the SEC. Unfortunately, the SEC allowed unjust gains already made through the sale of unauthorized shares to be locked in through a grandfather clause.
It is time for the SEC to move forward on what was started when Reg Sho was enacted-- to cleanse the system of these short shares.
Authorized stock shares are not a commodity. These shares are pieces of a company's promise. They are purchased anticipating that the company will prosper, and the stockholder will prosper in turn. Unauthorized, false shares do cheapen in a way-- they cheapen the integrity of companies, the prospect of shareholders, and the belief that the stock market is a fair and honorable system. This is true of any stock holding, past or present. Unauthorized shares equal unjust enrichment. Unjust enrichment that the SEC has allowed to remain in place too long. It is time for the SEC to rid the system of these short shares and end the "grandfathering" of unjust profit.