§       Mr. Anka had a bona fide, pre-existing business or personal relationship with these prospective investors.
§       He reasonably believed those investors to be accredited.
§       He would not advertise, endorse or solicit investors.
§       He would have no personal contact with prospective investors.
§       Only officers and directors of the Senators would contact the potential investors.
§       Compensation paid to the Senators' officers and directors would comply with 1934 Act Rule 3a4-1 (governing compensation to issuer's agents).
§       He would not provide financing for any investors.
He would not advise on valuation
§       He would not perform due diligence on the Senators' offering.
He had never been a broker-dealer or registered representative of a broker-dealer.

See http://www.sec.gov/litigation/admin/2009/34-60149.pdf for the Commission's recent but infrequent enforcement of this issue where it also failed to clarify/distinguish the Anka fact pattern.
.
Peter J.Chepucavage
Executive Director,CFAW
General Counsel
Plexus Consulting LLC
1620 I St. N.W.
Washington,D.C.20006
202-785-8940 ex 108
www.plexusconsulting.com
www.iasbda.com
pchepucavage@plexusconsulting.com

Permalink | Leave a comment  »

http://www.washingtontimes.com/news/2010/jun/18/shining-a-light-on-the-naked-short-seller/ 

The attached discussion highlights and updates the current debate regarding abusive short selling by noting 3 remedies all of which Wall Street has opposed.The alternative tick test,the pre-borrow and more real time disclosure.But countries around the world are acting to prohibit abusive short selling while the financial press without fail refers to these actions as anti-short selling.There can be only two explanations for this;either the press does not understand or they want to deliberately conflate the two.We also do not believe the press recognizes that the whole world is concerned about this issue because you rarely see actions by other countries described in a positive light.The recent German action against naked short selling was described as if it were something radically beyond what is already illegal in the U.S.But the Germans simply added a pre-borrow. We don't see the Germans as radical regulators and we believe that like many issues,the U.S. can and should choose the best of world wide regulatory efforts.

 

JOHNSON: Shining a light on the naked short seller

It appears that U.S. political will for financial reform will fall short of requiring that short sellers first pre-borrow the stocks they sell short. Despite our own fears of banning so-called naked short selling, Germany banned the practice in May in some of its financial stocks. Germany is considering whether to extend the ban to all stocks, and other EU exchanges are eyeing similar initiatives.

True to form, many leading U.S. financial publications have railed against this approach to ending naked short-selling abuses, labeling it a "ban" on all short selling. Unfortunately, their efforts and those of Wall Street's lobbyists seem to be succeeding: U.S. politicians and regulators give no sign they are considering these sensible measures being adopted in the European Union. That's regrettable.

To be clear, while a ban on naked short selling is a good idea, a ban on legitimate short selling is not. Legitimate short selling - in which a short seller sells a share he has borrowed or at least located to borrow - is a critical component of efficient price discovery in the stock market. To ban legitimate short selling would be like banning left turns for cars. But naked short selling - in which a short seller sells a share he does not own, has not borrowed or even located to borrow - is something quite different. Because of the nature of the trade-settlement system in the U.S., current rules allow prime brokers and large institutional traders to sell stock short without first borrowing it.

A pre-borrow requirement in the United States would put an end to naked-short-selling abuses in the U.S. as it has in Germany with respect to the covered stocks. Absent a pre-borrow requirement, naked short selling no doubt will continue to plague American markets, as we saw in the dislocations of 2008 and as recently as the one-day minicrash on May 6.

Even with rule changes implemented by the Securities and Exchange Commission (SEC) in the fall of 2008, as recently as April the average net fails-to-deliver per day at the stock clearinghouse were 400 million shares - with a daily worth of $1.5 billion. Many of these fails are the result of naked short sales, and contrary to popular belief, they are not all in penny stocks or foreign stocks. While Russell 3000 stocks are 5 percent of the daily fail volume in the United States, they account for 20 percent of the value of these fails. Similarly, exchange-traded funds, or ETFs, account for roughly 5 percent of the volume of fails, but they are more than 50 percent of the average daily fails value.

Unfortunately, the SEC's 2008 rule changes cannot prevent a resumption of the huge and destructive fail-to-deliver volumes reached in the summer of 2008. On one day in July 2008, fails-to-deliver exceeded 2.2 trillion shares. These problems will persist and compound until naked short selling is eliminated from our markets through a pre-borrow requirement.

That said, if the political will only allows for something less than pre-borrow, then let's at least do something meaningful. One alternative under discussion deserves every consideration regulators and Congress can muster. I refer to the real-time reporting of short and long volume without disclosing the identity of the long or short seller.

Currently, U.S. exchanges report trading activity in real time but do not disclose whether trades are short or long. Real-time disclosure of actual short and long sales would allow investors and analysts to incorporate meaningful data into market- and security-specific analyses. Such disclosure also would add considerable support to the SEC's proposal to have a consolidated audit trail for all trades. Furthermore, public and instantaneous trade transparency would help legitimate short sellers and other Wall Street institutions dispel doubts about short selling. A real-time disclosure proposal also has the general support of many of the exchanges and the Financial Industry Regulatory Authority.

Finally, this real-time disclosure alternative is cheap, easy and efficient. Traders are already required to mark trade tickets short or long, so the technology is in place that would allow trades to be reported as "short," "market maker short," "buy" or "buy-to-cover" in real time through the Consolidated Tape electronic data system. Moreover, this subtle change wouldn't require a new regulatory apparatus. If the SEC (or Congress) amended the Regulation National Market System, this new disclosure rule could be implemented tomorrow.

When regulation fails (or when a lobby is too powerful), sometimes sunshine is the best disinfectant. It's time to open the windows on Wall Street and let in the sunshine.

Jonathan E. Johnson III is the president of Overstock.com.

© Copyright 2010 The Washington Times, LLC. Click here for reprint permission.

Page 1 of 1

Permalink | Leave a comment  »

We believe the enclosed proposal has great merit and ask that you support it by letter to the Chairman's office if you agree. We would also be interested in knowing what the downside if any would be. While progress has been made in abusive short selling we think this proposal is a winner for all. Thank you for your support.

June 14, 2010

The Honorable Mary L. Schapiro
Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Dear Chairman Schapiro,
While the SEC recently enacted a modified version of the so-called “uptick rule,” I believe that the SEC should do more to protect investors and issuers from abusive market manipulation.  I am particularly concerned about naked short selling and large and persistent fail-to-deliver positions which continue to harm issuers, investors and market integrity. When you directed an SEC working group to study how to improve the audit trail of short sale executions, you recognized that the revised uptick rule by itself is not enough. As you noted, improving the audit trail would establish the expedient tracking of short sale executions to origination.

I urge the SEC to adopt rules that require the exchanges and all trading platforms to report total short and long volume through the Consolidated Tape in real time as a simple and inexpensive means to promote needed transparency in the markets.  

This simple requirement would help the SEC to regulate by bringing sunlight to a dark area. As you know, aggregate volume is already reported in real time.  Prompt reporting of aggregate long and short trading volume by security will accomplish the following:

·       Congress, the SEC and other regulators will be able to monitor, assess, and respond to market events and discourage manipulative trading.

·       Investors and analysts will better understand stock activity and stock prices.
·       Issuers will be able to reply with more certainty to questions about the nature of trading in their stock. 
·       Wall Street firms and hedge funds will be able to use this short volume data to dispel any inaccurate myths regarding short sellers and short sales. 

·       Academics will have more complete and timely data with which to analyze market microstructure.

Importantly, this requirement would not reveal or compromise individual traders’ positions and strategies. 
This request can be accomplished without new legislation through the SEC’s existing authority by amending SEC Regulation NMS to require that all trades printed to the Tape be marked “short”, “market maker short”, “buy” or “buy-to-cover.”  It is critical that this requirement apply to trades on all exchanges.

The cost to implement real time reporting on the Tape is minimal because currently SEC Regulation SHO requires that all trades be reported  short/long, so this information is already collected by the exchanges at time of execution.  As Michael Gitlin of T. Rowe Price told the SEC short selling roundtable last year:

•  

  The real time tagging and display of short sale executions on the consolidated Tape would provide market participants with a more in-depth understanding of trading activities in any given security on any given day.  By marking short sale executions as short on the consolidated Tape, we are creating an equal and fair marketplace whereby long sales would necessarily be recognized as having been sold long . . . We believe the benefits of the Consolidated Tape reporting for short sales outweigh any additional costs.

Given the severity of the economic crisis that resulted from the emergence and manipulation of exotic and opaque trading practices, there should not be serious objections to more transparency and information for investors, issuers, regulators, Congress and academics.  Options activity, both puts and calls, is already disclosed to the market at the time of trade.  Retail trades (short/long) are known to brokerage firms at time of execution.  Real time tagging and disclosure of short and long sales by ticker would level the playing field for all investors.  Additionally, short and long sale disclosure by ticker is less onerous than short sale disclosure by firm (or client), a rule the SEC is currently weighing.

While some argue that opponents of abusive short selling wish to treat short selling differently than long buying, that is not my purpose. In fact, it is just the opposite.  I advocate short reporting be done the same as long reporting.  The SEC should require full transparency for both, especially in volatile or crash markets. The recent flash crash is troubling not only because of its size, but more importantly because neither regulators nor investors understand it. The possibility that short selling could have played a part in the flash crash requires the full and real-time transparency for which I am advocating.

Issuers who were severely impacted should know the dynamics of long and short selling. Investors should know whether large amounts of aggressive short selling are legitimate or abusive. The disclosure I am advocating would allow the private sector to join with the regulators in their enforcement efforts. It may also allow private sector issuers to alert the SEC to unusual patterns, including naked short selling coupled with rumor mongering. Those closest to a stock may be able to spot subtle trading pattern differences and inform regulators and/or initiate civil action. The Wall Street Journal reported on June 4th at page C1 the testimony of certain veteran traders at the recent SEC roundtable on high speed trading:

•  

  “Some fast-moving computer-driven investment firms are getting an edge by trading on market data before it gets to other investors, according to market players and researchers who have studied the trading. The firms gain that advantage by buying data from stock exchanges and feeding it into supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers. That lets these traders shave pennies per share from trades, which when multiplied by thousands of trades can earn the firms big profits.”  See also <http://abcnews.go.com/Business/wireStory?id=10808036>.

Some of these veteran traders went so far as to test and prove their theories by various bait and trap initiatives with counter parties. Clearly, the private sector can be helpful when it has information about suspicious trading patterns.

I therefore ask the SEC to initiate promptly a rulemaking proceeding to require real time reporting by the exchanges and all trading platforms of short and long sales through the Consolidated Tape.

Thank you for your consideration and your continuing efforts to address abusive short selling.

Sincerely,

Peter J.Chepucavage
Executive Director,CFAW
General Counsel
Plexus Consulting LLC
1620 I St. N.W.
Washington,D.C.20006
202-785-8940 ex 108
www.plexusconsulting.com
www.iasbda.com
pchepucavage@plexusconsulting.com

Permalink | Leave a comment  »

We have argued for some time that current short selling rules would be ineffective in a crisis and last week we seem to have had one. Much selling occurred very rapidly and we question whether the locate rule was the first priority for those involved in the high speed selling. Yet the reaction seems extraordinary to us when viewed in the context of past arguments that short selling should no more be limited than long selling. In other words if last week's spike was upward rather than downward would the SEC have scheduled today's meeting or the House subcommittee scheduled tomorrow's hearings. Indeed we had a huge upward spike at today's open and everyone was fine. We submit that downward plunges in today's environment are viewed very differently than they have been. A few months ago the Commission split on the application of a circuit breaker test for the imposition of an alternative tick test. But today the Chair of the Commission released the following statement;