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Journalist sues SEC to get naked short selling files

CHICAGO — A lawsuit has been filed under the Freedom of Information Act against the Securities and Exchange Commission (SEC) to obtain the agency’s investigative files relating to more than a dozen aborted investigations and cases involving naked short selling.

The complaint was filed on behalf of Mark Mitchell, an investigative journalist who publishes on www.deepcapture.com, a website that offers in-depth reports on the extent to which naked short selling pervades the US capital markets.

According to the complaint, naked short selling has flourished over the past decade because of regulatory loopholes designed by Wall Street and embedded into law by the SEC. Although the SEC created a regulation in 2005 — Regulation SHO — that was supposed to stop the practice, Mitchell claims the SEC’s Enforcement Division rarely enforced the regulation.

“The SEC has opened multiple investigations and filed a few administrative cases focusing on naked short selling, but has released little information regarding its findings in those investigations,” says Mitchell. “The few cases which the SEC has filed for naked short selling involve minor market participants or trivial violations by major financial institutions.”

Regulators assumed that Reg SHO had contained naked short selling until the financial crisis fully blossomed in 2008. As the stock prices of the nation’s biggest investment banks, such as Lehman Brothers and Morgan Stanley, collapsed, their CEOs claimed that naked short selling — which had flooded the market with counterfeit stock — was to blame. Mitchell’s complaint tells how the SEC then frantically issued a half a dozen emergency orders and revisions to Reg SHO in 2008 and 2009 to stop naked short selling.

Mitchell says the SEC has never made public the results of its investigations of the naked short selling of Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley or Goldman Sachs, the big banks that collapsed or nearly collapsed during the financial crisis. The complaint also points to the massive violations of Reg SHO committed by UBS Securities and Credit Suisse Securities, which became public in 2011 when the Financial Industry Regulatory Authority (FINRA) released its settlements with those two banks.

The naked short sales by UBS were “in the tens of millions,” according to FINRA, and had the potential to undermine the integrity of the capital markets. The Credit Suisse violations of Reg SHO, according to FINRA were in the same ballpark, with approximately 10 million violations.

Although the releases of FINRA’s settlements confirmed that hundreds of other market participants were involved in these violations, none were identified. Nor did FINRA identify any of the public companies that were victimized by the naked short selling. FINRA also did not identify any executives or employees of the banks that participated in these violations.

“The complaint seeks the SEC investigative files relating to more than a dozen of its investigations or filed cases involving naked short selling,” say Mitchell. “I intend to cut through the veil of secrecy that surrounds naked short selling and to enable the public to understand just how great a risk this form of market manipulation poses to our capital markets.”

Mitchell is represented by Gary Aguirre, a former Senior Counsel in the SEC’s Enforcement Division. In 2006, Aguirre testified before the Senate Judiciary Committee that naked short selling was one of the types of market abuse plaguing the capital markets that the SEC was ignoring. Mr. Aguirre is being assisted by Hal Wood of Horwood Marcus & Berk Chartered in Chicago.

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