Does SEC Give Naked Short Sellers a Pass?

CHICAGO (CN) - A financial journalist claims the SEC presides over a system that encourages naked short selling in counterfeit stock, endangering the very system the SEC is supposed to protect.

Mark Mitchell sued the SEC in a federal FOIA complaint.

He demands information on SEC inquiries, and enforcement actions, regarding SEC Regulation SHO, involving naked short-selling of stock of public companies.

He claims the information, which the SEC has not released, would show:

"A. the inherent flaws in regulations created by the SEC to stop naked short selling;

"B. the lack of transparency in the regulatory system relating to the processing of short sale trades;

"C. the SEC's lax enforcement of the securities acts and related rules, including Reg SHO, against those who engage in naked short selling, and, most importantly;

"D. how these factors combine to create a dangerously high and unacceptable level of risk to the integrity of the nation's and the world's capital markets."

Mitchell claims: "the SEC has sponsored, supervises, and presides over a regulatory system that has allowed and in fact encouraged broker-dealers and other market participants to create billions of shares of counterfeit stock in hundreds of millions of trades which collectively put the integrity of the capital markets at risk. The counterfeit stock has been and continues to be created through a practice commonly referred to as 'naked short selling.' Naked short sales share no properties in common with lawful short sales, except both involve a purported sale of stock.

"In a lawful short sale, the seller borrows the stock from a third party and makes real delivery of the borrowed stock to the buyer. In a naked short sale, the market participant neither owns nor has borrowed the stock, but nevertheless purports to sell genuine stock of the public company to the buyer. In substance, a market participant who engages in a naked short sale delivers counterfeit stock to the buyer.

"Once the counterfeit stock is sold through a naked short sale, it continues in circulation in the securities markets much like counterfeit bank notes continue in circulation after they are introduced into the monetary system. It has the effect of increasing the supply of stock available on the market for sale, which generally has a depressing effect on the price of the genuine stock of the public company whose name the counterfeit stock bares. The naked short sales of counterfeit stock harm investors holding genuine stock, investors who receive the counterfeit stock, and the public company whose stock is diluted with counterfeit stock. The aggregate creation of counterfeit stock creates high and unacceptable risks to the integrity of the nation's and the world's capital markets."

Mitchell is a reporter for DeepCapture.com, an online financial news service. He says he previously worked as an editorial page writer for The Wall Street Journal in Europe, chief business correspondent for Time magazine's Asia Edition, and assistant managing editor for the Columbia Journalism Review's online business journalism section.

The 61-page complaint specifies the particular records Mitchell wants to see regarding the SEC's enforcement of naked short selling. He is represented by Gary Aguirre of San Diego with local counsel Hal Wood of Horwood, Marcus & Berk.

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