May 20, 2008
Thank you for the opportunity to comment on File S7-08-08, the "Naked" Short Selling Anti-Fraud Rule. My company, Portfolio Recovery Associates, Inc., appears on the Regulation SHO Threshold List.
I write to say that I support the proposed rule, but do so with little enthusiasm because I believe it is far too lenient. While organizing my thoughts for this comment and researching the many opinions on naked short selling that can be found on the internet, I was struck by the number of articles and news items that mentioned the SEC's efforts to "highlight" the problem of manipulative naked short selling. I would like to see the SEC stop highlighting the issue, and start enforcing strong measures to prohibit naked short selling.
When honestly conducted, short sales are a legitmate trading tool and I sometimes engage in them myself when I believe a company's stock is overvalued. Investors in long positions try to buy low and sell high to make a profit. Honest short sellers sell high and try to buy low to make a profit. I see nothing wrong with that.
But short selling, like any investment in an equity market, should be an attempt to profit from a well educated guess as to how a common stock will move in the future. Too often, professional short sellers are not guessing, but attempting to manipulate share prices to produce ill gotten gains.
I believe the SEC's reaction to naked short selling has been too tepid and its reform proposals too incremental. I recently read Overstock.com's press release marking its 500th consecutive day on the Regulation SHO Threshold List. That most abusive example of manipulative naked short selling ought to produce outrage from any interested reader. In fact, the very need for a threshold list ought to demonstrate to the SEC that naked short selling is not a minor quirk in an otherwise efficient market. While naked short sellers may not have the power to romp over the market like Godzilla over Tokyo, the SEC should better recognize the acute harm to individual investors and honest public companies when naked short selling occurs.
The SEC erred in eliminating the uptick rule, a long important tool in preventing naked short sellers from attempting to manipulate the downward movement of common stocks. It can ease the effects of that mistake with tougher prohibitions on naked short selling, like requiring actual possession of shares or a bona fide contract to purchase them prior to a short sale. The market needs togher rules on short selling and tougher enforcement from the SEC.
I support the proposed rule, but only in the hopes that the SEC will soon see that real action is urgently required.
Thank you again for the opportunity to comment.
Sincerely,
Donald W. Redmond