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Faulking Opinions - Apr 28, 2006 - Printable Version
- SEC Chairman Cox's Senate Banking Committee Testimony - April 25, 2006
by Mark Faulk
SEN. SUNUNU: Thank you very much. Thank you, Mr. Chairman.
SEN. BENNETT: Thank you. Several items.
Chairman Cox, thank you for being here, and welcome to your first experience. I hope we have a lot of subsequent ones and that they are pleasant.
I heard the conversation about Sarbanes-Oxley. My experience during the break was not the same as Senator Dodd's. I had some venture capitalists tell me flatly they no longer do IPOs. And Sarbanes-Oxley is the reason. And if it becomes necessary for them to take a company public or if it's the logical thing, they look to do it at some foreign exchange rather than in America. So, as you do your analysis of the reports you have, this is anecdotal, there's nothing scientific about it, but it's a different kind of constituent response than the one that Senator Dodd --
MR. COX: Well, I appreciate that it's anecdotal. On the other hand, I was speaking up at Harvard University recently, Harvard Business School to a group of venture capitalists who expressed precisely the same views.
SEN. BENNETT: Okay.
MR. COX: That is also anecdotal, as there are now two --
SEN. BENNETT: Right. Okay. Well, I -- I just -- I heard Senator Dodd say he found nothing but good comments about it, and I had heard some of the other kind.
Let me move to a subject that I've been on for some time and begin my remarks by saying that the SEC staff has been responsive. I've been talking about this for maybe a year or more, and they have -- staff members have been in and been in to see me. But the problem still exists. We're talking about naked short selling and the problems connected with that.
One of the things that I've been told that I want to lay down and say I think this is an immaterial excuse, when they say, but you get 99 percent settlement, the FTDs are only in 1 percent of the dollar volume, and therefore it's not really a big deal. You made the comment earlier with respect to Sarbanes-Oxley that you got 80 percent of the companies that might be made exempt, but if you look at a market cap, it'll be very large. That same dichotomy exists with respect to the naked short selling.
I got into this because I had constituents that had little companies, and for them, it's a huge deal.
And many of them insist that they've been destroyed by it -- that is, the naked short sellers keep hammering their stock until finally they can't raise any money, the company goes under, and nobody ever has to cover. And I don't know that that's the case; again, this is an anecdotal accusation that's made. But if indeed it is true, it's a demonstration of market manipulation that is not only clearly illegal, but devastating to people who form companies and then try to turn to the markets to raise money and can't because the shorts keep hammering them.
I want to make it clear also, I do not think short selling is improper. I have sold short in my investment life. Usually, I've been burned by it, but I've done it. And the broker that handled it gave me the old statement, "He who buys what isn't his'n" -- or "He who sells what isn't his'n, must buy it back or go to prison." And apparently, some of these people are not buying it back. I always had to when I sold short. And it's gotten into the news again.
I started doing this because, as I say, I heard from very small companies, who were my constituents, and their stocks were traded on the pink sheets, and it looked like nobody cared on the pink sheets. And they could hammer companies there all day long with naked short selling, and nobody'd look at it. And that's the thing that I raised with the SEC before.
Well, now, it's getting a little more current, see. There was a piece in the Wall Street Journal on the 13th of April. The headline said, "Despite SEC rules, a small amount of naked shorting appears to persist," and in that article, they talk about companies that have stayed on the list for months and months -- on the list where the FTDs have not been cleaned up. Overstock.com, Martha Stewart Living, Omnimedia and Krispy Kreme Doughnuts have been on the threshold list for months. Overstock.com happens to be located in Utah, and so that caught my eye.
Then, on the 12th of April, Forbes had a piece about short selling in hedge funds, and how they felt that they were being taken advantage of. The latest Bloomberg has a piece not specifically on short selling, but entitled, "Corporate voting charade," and says that the people who buy shares to sell them short, then get involved in proxy fights and that people end up voting shares they don't own. They have borrowed the shares for short-selling purposes, and then vote them when they really have no interest in the long-term health of the company.
And there's an interesting chart in the Bloomberg piece about how some close corporate elections were decided by the voters of the short sales. It says that Alaska Air Group, the short sales were 4 percent of the winning votes -- 4 percent of the voting, and the winning votes were 2.4. Mony Group 6.2 percent of the votes were in short proxies, and the winning margin was 1.7. And El Paso, 67 percent were short votes, and the winning margin was 17.2. And there are those who say this whole situation cries out for more SEC oversight and attention.
So let me, with that, ask you the question; if you can't answer it here, would like a response for the record. There have been a lot of companies -- well, a lot -- several, we'll say several companies have been on the Reg SHO Threshold List for a very long time, and one of them, as I say, is one of my constituents. Presumably, at least some of what has led to these companies to be on the threshold list for so long is illegal short selling.
So I would like to know, as you examine the list, are you willing to use your authority to have the SEC continue its pursuit of basic transparency by requiring the disclosure of the amount of FTDs?
(Pause.)
MR. COX: Well, you covered a lot of ground.
SEN. BENNETT: Yeah, and I apologize, maybe overwhelmed you here,
but --
MR. COX: I'm trying to keep track of all of it.
SEN. BENNETT: We'll be happy to provide you with pieces of paper
on all of this.
MR. COX: Of course I'll take advantage of that, as well.
SEN. BENNETT: Sure.
MR. COX: To start at the beginning and end at the end, the experiences that you describe, some of your own and many more that you've been apprised of by your constituents and others, are experiences that in some respects I've shared. When I first came to the Congress in 1989, I served on a subcommittee chaired by then- chairman of the Consumer, Commerce and Monetary Affairs Subcommittee, Doug Barnard of Georgia, that focused for several months on bear raids and short sellers and what was going on in that industry.
I share completely your approach to this problem that short selling is a component part, and -- of healthy markets and one that is perfectly respectable. And indeed it's an important check and balance in our system.
From the standpoint of orderly markets, it's vitally important that shares be delivered. These are contracts, and they have to be fulfilled. And there has to be a rule of law.
I also, moving to your next point, agree with you that it is faint comfort for someone with a micro-cap company to hear that statistically we're doing great, that we're reducing these failures to deliver, and that life is much better now than it's ever been before, because statistically we can prove it's so. I mean, in a thinly traded company, life is different. And so enforcing these rules in very different circumstances is also vitally important.
Having said that, I do think it is important to recognize the progress that has been made under Regulation SHO, which the commission, as you know, adopted in 2004, before I became chairman. That rule became fully effective in January of last year. It has a modest ambition. It is designed not to eliminate but to reduce failures to deliver on short sale transactions and to target potentially problematic short selling, abusive naked short selling.
What I can commit to now is that when we have internalized and understood the results of our examinations, which are now ongoing, of compliance with Regulation SHO -- and we've completed the examinations of some 45 firms that include comprehensive target exams of 19 clearing firms -- that I will recommend changes to our rules if those exams demonstrate that changes are necessary for the reasons that you describe.
SEN. BENNETT: Let me just conclude -- and I -- Mr. Chairman, I applaud what you're saying, and I'm sure you will go forward with that.
Picking up on what The Wall Street Journal had to say with these three companies that are listed, that have been on list for months, that might be one of the places to start. The company stays on the list for months.
That's an indication to me that there's something going on that is unusual. I can understand an FTD. I can understand a flood of FTDs for a variety of benign reasons. But when a company is on the list one month, that says, "Well, okay, there are just some problems." When they're on -- the same company's on the list for two months -- well, maybe something is going on. We need to pay -- when it's on for month after month after month and it catches the attention of publications like the Journal, I think that ought to be a rather informal but strong flag that says, "We ought to pay attention at least to these companies to see why they keep showing up on the threshold list."
Thank you very much.
MR. COX: Thank you very much, and I hope to be able to follow up with you on these things.
SEN. SHELBY: Thank you, Senator Bennett.
Senator Schumer.
SEN. CHARLES E. SCHUMER (D-NY): Thank you, Mr. Chairman.
And thank you, Mr. Chairman, for being here, and glad to see you're on top of all of these things.
I have a whole bunch of questions on cats and dogs here, but one I know you've been asked about -- I'd just like to underscore my concern here as a New Yorker that so many of the IPOs -- none of the top 10, one out of the top 24 -- haven't listed in the United States. In 2000, nine out of 10 listed in the U.S. And as I understand it, some people have asked you a little about that. But, you know, obviously I hear from somebody whose goal is to keep New York the financial capital of the world -- that troubles me.
What can we do about it? Does it worry you, I guess is the first question I have, and what can we do about it to try and change it? Is it temporary?
MR. COX: All right. Let me begin by saying that I share your objective.
SEN. SCHUMER: Thank you.
MR. COX: The United States capital markets are today, and certainly have been for some time, the largest, deepest, most liquid in the world. They are also -- and I believe not coincidentally --subject to the highest standards of quality in the world.
SEN. SCHUMER: Right.
MR. COX: It was remarked upon, I believe, by Senator Sarbanes earlier that some studies show that there is a quality premium that companies can demand when they list in the United States.
That is the way -- strategically, I believe -- the United States should continue to approach our role in the world's capital markets, rather than participate in a race to the bottom that surely, in terms of comparative advantage, we would lose. It should be our objective to work together with other high-standards countries to make sure that that's the way the world goes as increasingly there are more global markets.
It is a fact of life that the domestic markets of other countries are becoming rather rapidly more mature. And so I don't think that by birthright the United States can lay claim to every large issue by every foreign issuer. But we certainly are entitled to our share, and certainly if we are correct in our view that our markets are, in fact, the most liquid, deepest, largest in the world, we can expect that countries will want to come and list here for precisely that reason and to gain that premium --
SEN. SCHUMER: Right. But they're not coming now.
MR. COX: -- the price premium that they should be getting.
To read the commentary that accompanies this testimony, go to:
Faulking Truth recommends abolishing the SEC
http://www.faulkingtruth.com/Articles/Investing101/1056.html
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