Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, September 18, 2008

Short-Sellers, John McCain and Chair Cox

Everyone's blaming the short sellers.  Yesterday the SEC announced emergency rules to curb short-selling abuses, and today the Wall St. Journal reports that New York Attorney General Andrew Cuomo has undertaken an investigation into short selling of the stock of the financial services companies.  WSJ, Cuomo Plans Short-Selling Probe.

In addition, John McCain has called for SEC Chair Cox's resignation for failure to crack down on short sales and repealing the uptick rule.  Here is Chair Cox's response (which addresses reform efforts beyond short-selling):

"While I have great respect for Senator McCain, we have sometimes disagreed, and this is one such occasion. The SEC has made plain that we have zero tolerance for naked short selling. In this market crisis, the men and women of the SEC have responded valiantly as they always do—with the utmost dedication and professionalism. Addressing the extraordinary challenges facing our markets, the independent and bipartisan SEC has taken the following decisive actions:

We adopted a package of measures to strengthen investor protections against naked short selling, including rules requiring a hard T+3 close-out, eliminating the options market maker exception of Regulation SHO and expressly targeting fraud in short selling transactions.
We issued an emergency order to enhance protections against naked short selling in the securities of primary dealers, Fannie Mae, and Freddie Mac.
We announced emergency plans for a rule to ensure public disclosure of short selling positions of hedge funds and other institutional money managers.
We have undertaken sweeping enforcement measures against market manipulation.
We provided guidance to banks about how to account for credit support of money market funds.
We've written rules to strengthen the regulation of credit rating agencies, and performed examinations that have led to new rules to reduce rating agency conflicts-of-interest.
We brought a landmark enforcement action against a trader who spread false rumors designed to drive down the price of stock.
We have initiated exams of the effectiveness of broker-dealers' controls to prevent the spread of false information intended to manipulate securities prices.
Our Enforcement Division announced what will be the largest settlements in the history of the SEC for investors in auction rate securities who bought auction rate securities from Merrill Lynch, Wachovia, UBS and Citigroup.
We entered into a Memorandum of Understanding with the Federal Reserve, to make sure key federal financial regulators share information and coordinate regulatory activities in important areas of common interest.
"There is much more work to be done, and the current crisis is presenting new challenges on an hourly basis. What America and the world needs now is steadiness and reduction of uncertainty. History will judge the quality of our response to this economic crisis, but now is not the time for those of us in the trenches to be distracted by the ebb and flow of the current election campaign. And it is precisely the wrong moment for a change in leadership that inevitably would disrupt the work of the SEC at just the wrong time. I have long made clear my intention to leave the SEC after the end of this Administration. The next President will have an opportunity to look at the major structural questions so important to the regulation and oversight of our financial markets.

"I very much appreciate the strong and immediate support of the President. As someone who has been in public life for over 20 years, I know as well as anyone that occasionally this sort of thing can come with the territory. The best response to political jabs like this is simply to put your head down and not lose a step doing the best job you can possibly do on behalf of those you serve. For my part, I plan to do just that. I leave the political campaigns to pursue their own course."

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