Securities Law Prof Blog

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

Wednesday, March 25, 2009

SEC's Inspector General Recommends Improved Procedures for Handling Complaints about Naked Short Selling

The SEC's Office of Inspector General recently released a report on Practices Related to Naked Short Selling Complaints and Referrals, in which it examines the SEC Enforcement Division's procedures relating to naked short selling.  The Report explains that Enforcement has received a great deal of complaints during the past several years from issuers and investors about “naked” short selling, which has become an issue of increasing concern to both issuers of securities and investors. Many complaints requested that Enforcement investigate specific instances of naked short selling. Other complaints concerned the perceived failure on the part of the Commission and others, including Enforcement, to address the harmful effects of naked short selling.  In addition, the the SEC’s Office of Inspector General (OIG) has also received numerous complaints, particularly since December 2007, alleging that Enforcement has failed to take sufficient action regarding naked short selling. Many of these complaints asserted that investors and companies lost billions of dollars because Enforcement has not taken sufficient action against naked short selling practices. These complaints further indicated a lack of confidence on the part of some members of the public in Enforcement’s ability to protect investors.

In light of these complaints and based on our audit plan, we conducted an audit to assess whether Enforcement:
Established policies and guidelines that enabled Enforcement to respond appropriately to complaints and referrals, including those involving naked short selling; and
Followed existing policies and procedures for responding to complaints and referrals, including those pertaining to naked short selling.

Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling.

...during the period of our review we found that few naked short selling complaints were forwarded to Headquarters or Regional Office Enforcement staff for further investigation.

The Report concludes with a series of recommendations to improve Enforcement's procedures in handling complaints about naked short selling.

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