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September 16, 2008Today the SEC Must Step UpIt has been just over one month since the SEC allowed its Emergency Order tolapse without putting in place an alternative means to address heightened market volatility andillegal short selling practices. This was a huge mistake. Under the Emergency Order, traderswere not able to short a security without borrowing shares or entering into “bona fide” agree-ments to borrow them. In today’s markets, short sales continue to be at record levels, there arefalse rumors in the marketplace about the demise of financial firms, bear raids and abusive shortselling are taking place, and there is significant disruption in the fair and orderly functioning of the securities markets. The markets are in a crisis.Immediate bold measures by the SEC today are needed to constrain the abusiveshort selling and rumor mongering, to dampen volatility and to restore confidence in the markets.As the Federal Reserve Board and Treasury Department have done, the SEC must act now to en-sure the stability and integrity of the markets. First, the SEC should heed market participants’calls to immediately reimpose under its emergency powers the “Uptick Rule” (see our memos of July 1, 14 and 16). The Uptick Rule was effective for over 70 years in addressing abusive shortselling and manipulative conduct. The decision to eliminate the Uptick Rule, after a pilot pro-gram, was prompted by the SEC’s view that market changes had rendered the Rule less effective.The limitations of the SEC’s pilot program, which was conducted in a period of a rising marketand unusually low volatility, are painfully clear. The risks associated with unrestricted short sell-ing in these periods of high volatility and large market declines were necessarily beyond the pi-lot’s scope.Second, the SEC must today adopt a marketwide rule similar to the EmergencyOrder that recently lapsed. This was an effective measure to temper heightened market volatilityand address abusive and manipulative short selling and should be reinstituted.In July, the SEC announced that it, FINRA and NYSE Regulation would immedi-ately begin examinations of brokerdealer and investment adviser supervisory and compliancecontrols, with the goal of stemming the spread of false rumors intended to manipulate securityprices. Shockingly, nothing further has been heard from the securities regulators. The SECshould promptly issue a public report of the results of those examinations and provide clarity onthe extent to which abusive and manipulative short selling and spreading of false rumors is tak-ing place (see our memos dated July 1, 14 and 16). Moreover, the SEC should promptly bringenforcement actions against those who are engaged in abusive and manipulative short selling.All these measures are vital to any attempt to maintain investor confidence in thefairness and integrity of the markets. It is a time for action.Edward D. HerlihyTheodore A. Levine
 If your address changes or if you do not wish to continue receiving these memos, please send an e-mail toPublications@wlrk.com or call 212-403-1487.
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 If your address changes or if you do not wish to continue receiving these memos, please send an e-mail toPublications@wlrk.comor call 212-403-1487.
September 17, 2008Too Little Too LateThe SEC today announced three actions addressing short selling. Its actions aretoo little too late.First, the SEC adopted a rule requiring short sellers and their broker-dealers to de-liver securities by the settlement date (three days after the transaction date) and imposing penal-ties for failure to do so. In addition, the SEC eliminated the option market-maker exception tothe three day delivery requirement. Finally, the SEC adopted a new anti-fraud provision makingit unlawful for sellers to deceive specified persons about their ability or intention to deliver secu-rities by the settlement date. This last rule is not necessary and will not help eliminate abusiveshort selling practices.The measures adopted by the SEC today fall far short of the type of bold meas-ures needed to constrain the abusive short selling and rumor mongering taking place. The securi-ties markets continue to be in a crisis and there continues to be a significant disruption to theirfair and orderly functioning.As we have previously said, the SEC should immediately re-impose, under itsemergency powers, the “Uptick Rule.” In addition, the SEC must now consider other verystrong measures such as using its emergency powers to place limitations on short sales for a pe-riod of time to restore a fair and orderly market. Also, it is essential for the SEC to scrutinizeshort sellers and their related transactions, including options and credit default swaps to deter-mine whether these strategies are contributing to the severe dislocations taking place in the mar-ketplace.Finally, the SEC should promptly make public the results of their examinations of the short selling activities and take immediate enforcement action against those who are engag-ing in this abusive manipulative conduct.Time is of the essence and the SEC must act now.Edward D. HerlihyTheodore A. Levine
 
 If your address changes or if you do not wish to continue receiving these memos, please send an e-mail toPublications@wlrk.comor call 212-403-1487.
September 18, 2008Bold SEC Action is NeededLast evening, the SEC announced two initiatives to address short selling abuses.First, Chairman Cox announced that he was asking the SEC, on an emergency basis, to adopt anew disclosure rule that would require hedge funds and other large investors to disclose theirshort positions in order to provide transparency in short selling. Specifically, managers withmore than $100 million invested in securities would be required to promptly begin public report-ing of their daily short positions. The SEC also announced that its Enforcement Division wouldbe subpoenaing from “significant hedge funds and other institutional traders” information, in-cluding e-mails, concerning their past trading positions in specific securities.The SEC most recent announcements, while important steps, do not go nearly farenough. Immediate and stronger SEC action is necessary.The SEC needs to consider the following measures:
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The SEC should use its emergency powers to halt short selling in the securi-ties of financial services firms and banks for a 90-day period. This action isconsistent with the action taken by the FSA today. The SEC needs to do thisnow. The FSA announced that it is prohibiting the “active creation or increaseof any short positions” in publicly quoted financial companies from this eve-ning until January 16, 2009 (although the ban will be reviewed after 30 days).The FSA also announced that a complete review of the rules on short sellingwill be published in January, 2009. Hector Sants, chief executive of the FSA,said:“While we still regard short-selling as a legitimate investment tech-nique in normal market conditions, the current extreme circum-stances have given rise to disorderly markets. As a result, we havetaken this decisive action, after careful consideration, to protect thefundamental integrity and quality of markets and to guard againstfurther instability in the financial sector.”
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The new disclosure rule the SEC is considering should be modeled afterRegulation 13D and should issue the rule immediately. It should requirehedge funds and other institutional investors to publicly report their dailyshort positions if those positions exceed
¼
of 1% of the outstanding shares of a public company and should also disclose publicly whether the short sellershave any oral or written contract, arrangement, understanding or relationship(legal or otherwise) with respect to those securities. The short sellers alsoshould be required to report to the SEC on a next-day basis if they fail to de-liver securities by settlement date.
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