WASHINGTON, DC – Senator Hillary Rodham Clinton today called for a temporary moratorium on the most abusive stock transactions, many which involve the “short-selling” of stocks. Recent findings by the Securities and Exchange Commission (SEC) indicate that some of these transactions constitute abusive market manipulation that regulators say may have contributed to the current market crisis. In a letter to the SEC Chairman Christopher Cox, Senator Clinton applauded the Commission’s move to tighten the rules governing short-selling, but urged additional, stronger action.

“The abuses that disrupt the markets today will impact the broader economy and the lives of middle class Americans tomorrow,” Senator Clinton wrote. “Time is of the essence as just a few days of delay could be ruinous for both institutions and confidence in our markets.”

Investors who “short” a stock borrow shares from another investor, sell them at the current price anticipating that the stock price will fall. If the price falls then they buy them back at the lower price, making a profit on the difference. In many instances the short sales are a coordinated and deliberate effort to drive down the price of a stock.

Senator Clinton said the practice has opened the door to market manipulation and contributed to the recent volatility on Wall Street. She said a temporary moratorium on the worst practices would provide breathing room for the markets to recover, for investors to make accurate assessments of companies and for regulators to assess what trading practices should be permanently banned.

Earlier today the SEC announced new regulations on short-selling, especially targeting so-called “naked short-selling,” in which investors sell shares before they have actually borrowed them.

The text of Senator Clinton’s letter follows or click here for a PDF.

September 17, 2008

The Honorable Christopher Cox
Chairman
Securities and Exchange Commission
450 Fifth Street, NW Room 6100
Washington, D.C. 20549

Dear Chairman Cox:

I commend the Securities and Exchange Commission’s actions today tightening rules against manipulative short selling. The SEC’s rulings are a positive step in curbing the market manipulation and heightened volatility that casts uncertainty on our domestic markets and financial institutions.

However, the Commission’s actions today do not go far enough to maintain investor and consumer confidence in the fairness and integrity of the markets. Abusive transactions such as “naked short selling” practices could further undermine the integrity of the markets.

As a Senator from New York, I have special duty to the workers in the financial services industry I represent and to ensure that New York City remains the financial capital of the world. And the abuses that disrupt the markets today will impact the broader economy and the lives of middle class Americans tomorrow.

I believe that it may be necessary for the SEC to take additional steps similar to the emergency rule it imposed this past July when the Commission, “concluded that there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets”. I believe that conditions now pose a greater threat than the conditions in July which triggered the Commission’s emergency actions. Several of the institutions the Commission sought to insulate from abuse do not exist in the same form as they did less than two months ago.

I urge the Commission to take immediate steps to enact rules that would impose a temporary moratorium for all of the abusive and manipulative short sales practices associated with “substantial financial firms” like those the Commission identified in July. A temporary moratorium would allow the marketplace to take a step back and get a fuller and more accurate picture of the conditions of the stocks involved in these short sales, and allow the Commission and other regulators to identify and weed out the sources of those abusive transactions. At the very least a semblance of order and rationality could be restored to the marketplace.

Moreover, the Commission should give close consideration to the many calls for the immediate restoration of the uptick rule whose repeal has been linked to the recent market volatility and proliferation of abusive short sale transactions.

Time is of the essence as just a few days of delay could be ruinous for both institutions and confidence in our markets. Thank you for your consideration of my concerns.

Sincerely,

Hillary Rodham Clinton

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