Barnard, Hon. Doug, Jr., a Representative in Congress from the State of Georgia, and chairman, Commerce, Consumer, and Monetary Affairs Finn, Gene, chief economist and vice president, National Association of Securities Dealers, accompanied by John Pinto, executive vice presi- Flaherty, Robert J., editor and president, OTC Review, Inc...... Guion, John F., president, National Association of OTC Companies, ac- Marquez, Thomas J., chairman, Carrington Laboratories Russell, Michael K., president, American City Business Journals....... Spira, Robert A., chairman, Berkeley Securities, New York... Letters, statements, etc., submitted for the record by: 3-8 256-356 Letter dated January 1, 1989, to Chairman Doug Barnard, Jr., relat- Prepared statement.. 55 39-53 Hager, Edward B., M.D., chairman, IGI, Inc.: Prepared statement... 144-152 Ketchum, Richard G., Director, Divison of Market Regulation, Securities and Exchange Commission: Prepared statement..... Kwalwasser, Edward, senior vice president, regulatory group, New York 217-239 Marquez, Thomas J., chairman, Carrington Laboratories: Prepared state- 97-138 Pinto, John, executive vice president of compliance, National Association of Securities Dealers: Stock exchange regulatory budget and staffing Spira, Robert A., chairman, Berkeley Securities, New York: Letter dated July 13, 1990, to Chairman Doug Barnard, Jr., relating 56-77 Letters, statements, etc., submitted for the record by-Continued Page Spira, Robert A., chairman, Berkeley Securities, New York-Continued 16-31 Sturc, John H., Associate Director, Division of Enforcement, Securities and Exchange Commission: Prepared statement.. 394-507 APPENDIXES Appendix 1.-Selected company responses to subcommittee survey. Biotechnology Development Corp. letter, August 4, 1989. 546 Digital Microwave Corp. letter, May 31, 1989 548 SEC response to subcommittee inquiry, November 9, 1988 Michael Foods Inc. letter, August 8, 1989 qmed inc. letter, June 14, 1989 Appendix 2.-Correspondence with Securities and Exchange Commission Subcommittee letter requesting SEC consideration of an uptick rule for 554 558 564 564 571 NASDAQ trading, November 2, 1989 600 Subcommittee request for SEC testimony, November 3, 1989. 607 612 SEC response concerning an uptick rule for NASDAQ trading, March 5, 1990.. 619 SEC response to followup questions, May 24, 1990.. 627 Appendix 3.-Correspondence with National Association of Securities Dealers. 661 661 665 668 Subcommittee letter requesting NASD consideration of an uptick rule for 673 NASD response concerning an uptick rule for NASDAQ trading, January 10, 1990. 680 Appendix 4.-Other letters/statements received, selected 684 Leslie B. Clements letter concerning Carrington Laboratories, November 2, 1989. 684 Feshbach Brothers letter and statement for the record, November 27, 1989.. 3 Steven M. Elkman, Senior Vice President, Kidder, Peabody and Co., 686 690 693 "Brief Legal Analysis of Standing to Sue by a Corporation for Short Sale Violations" by Michael V. Seitzinger, American Law Division, CRS, November 3, 1989. "Ownership of Securities Held for a Customer in a Street Name Account" by Michael V. Seitzinger, American Law Division, CRS, April 13, 1990... Appendix 6.-Data tabulations 693 698 701 Table 1: Stocks With High Short Interest, 1987-89, By Maximum Short 701 Table 2: Stocks With High Short Interest, 1987-89, By Maximum Ratio of 707 Table 3: Stocks With High Short Interest, 1987-89, Alphabetical Listing.. Subcommittee inquiry letter to NASDAQ companies, May-June 1989.. 713 719 719 725 "Summary of company responses to subcommittee questionnaire survey regarding short selling experience," subcommittee staff memorandum, December 4, 1989.. 729 Appendix 8.-Outline and selected table of contents of SEC testimony before the subcommittee (prepared by the subcommittee). 732 Appendix 9.-Press clippings... 733 "Control Battle Revives Long-Buried Corner in Stock," Business Week, July 5, 1958......... 733 Appendix 9.-Press clippings-Continued "Stock Corners: An Analysis of Situations Arising When Delivery Cannot Be Fulfilled" by Robert E. Bedingfield, New York Times, August 20, 1958 Page 736 "Where Are the Good Guys" by Robert J. Flaherty, OTC Review, July 1984 "Serving Readers-or Sources?" by Robert J. Flaherty, OTC Review, January 1985... 737 746 "Selling short-why it works and why you probably shouldn't do it" by Susan Lee, Forbes, April 22, 1985. 749 “The Great Bear Raid On an OTC Trader” by Anthony Bianco, Business Week, May 27, 1985... 754 "Catnapping_Watchdogs: They're Sure No Help to These Customers" by Lawrence J. Tell, Barron's, July 29, 1985.. "SEC Investigates Keystone Trading" by Robert J. Flaherty, OTC Review, "Bear Raid! Bear Raid!" by Mark Levenson, OTC Review, August 1985. to Cry Foul" by Dean Rotbart, Wall Street Journal, September 5, 1985 .. "Market Hardball: A Reporter Who Doesn't Want to Be Used Must Consider the Sources of His Stories," Wall Street Journal, September 5, 1985 "Selling a Stock Short Is a Lot Riskier Than Buying, But the Way It Is Done Can Make It Very Profitable," Wall Street Journal, September 5, 1985 "Stock Wars: The Longs vs. the Shorts" by Chris Welles, Business Week, May 11, 1987. 755 757 761 764 770 771 772 "Short Sellers May Have Overstepped the Line," Business Week editorial, May 11, 1987. 775 "De-pressing Story: Read All About the Big Exposé That Wasn't" by Jonathan R. Laing, Barron's, May 18, 1987 776 "The Cutting Room Floor: OTC Company Rebellion" by Robert J. Flaherty, OTC Review, July 1987. 779 "Striking Back at the Shorts" by Robert J. Flaherty, OTC Review, July 1987 780 "Why Those Trees Had to Die" by Bob Flaherty, OTC Review, January 1988 "Naked came the short-sellers" by Phyllis Berman and Ronit Addis, "Are Short Sales on the Up and Up?" by David A. Vise, Washington Post, "Sham' Trades by Japanese Insurers May Boost NYSE Volume" by "The Short Symposium" by Robert J. Flaherty, OTC Review, July 1988. 786 52 792 794 797 799 801 806 "SEC Adopts Rule Covering Short Sales Just Prior to Certain Stock Offerings" by Thomas E. Ricks, Wall Street Journal, August 16, 1988..... "The shorts are coming! The shorts are coming!" by Debbie Galant, Institutional Investor, November 1988... 807 808 "Mr. Keating, meet Mr. Short" by Allan Sloan and John H. Taylor, Forbes, December 26, 1988.. 811 "Broker's Big Role In Chase Medical" by Floyd Norris, New York Times, January 16, 1989... 813 "SEC Proposes Rule to Curb Tendering Of Stock Being Held in 'Short' 814 815 816 "A walk on the short side," Institutional Investor, April 1989. 817 821 Appendix 9.-Press clippings-Continued "Eternal Limbo? The Amex Has Yet To Reopen Trading in Chase Medi- "Shorts Cry OUCH!" by William Cobb, OTC Review, August/September "You Gotta Believe: Otherwise, Carrington's Stock Price Is a Mystery" by Eric J. Savitz, Barron's, August 21, 1989. Page 824 825 826 50 827 "Stock-Loan Probe Eyes Years of Possible Abuse" and "Securities Lending Is Big Business" by William Power and Matthew Winkler, Wall Street Journal, September 8, 1989. 830 "The Business Nobody Wants To Talk About" by John Friedman, Business Week, September 25, 1989 832 "Spain Fund Falls, But Short-Sellers Can't Find Shares" by Michael Siconolfi, Wall Street Journal, September 28, 1989... 834 "How the Mortician Helped to Bury Ask" by William Cobb, OTC Review, October 1989.. 46 "Shorts beat odds in bull mart" by Steve Wilstein, Chicago Tribune, October 1, 1989.. 835 "Short on Patience" by Lee Schafer, Corporate Report Minnesota, November 1989....... 836 "Uptick' Rule Exemption Ticks Off Program-Trade Foes" by William Power, Wall Street Journal, November 16, 1989..... 842 "The Purpose of America's Capital Markets" by John J. Phelan Jr. (advertisement placed by New York Stock Exchange), Wall Street Journal, November 16, 1989 844 "Intermec, a Leader in Bar-Coding Business, Registers the Interest of Shorts and Longs" by John R. Dorfman, Wall Street Journal, January 2, 1990. "Maneuver by Arbitragers Sends Chase's Shares to a 52-Week Low" by John Evans, American Banker, February 13, 1990 .. "More Ado about Shorting" by Robert J. Flaherty, OTC Review, March 1990. 845 846 848 "Bulls, Bears Both Resort At Times to Dirty Tricks" by John R. Dorfman, Wall Street Journal, April 10, 1990.. 851 "SEC Is Warning Index Traders On Uptick Rule" by William Power and Kevin G. Salwen, Wall Street Journal, April 26, 1990.. 852 SHORT-SELLING ACTIVITY IN THE STOCK MARKET: THE EFFECTS ON SMALL COMPANIES AND THE NEED FOR REGULATION TUESDAY, NOVEMBER 28, 1989 HOUSE OF REPRESENTATIVES, COMMERCE, CONSUMER, AND OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, DC. The subcommittee met, pursuant to notice, at 9:35 a.m., in room 2247, Rayburn House Office Building, Hon. Doug Barnard, Jr. (chairman of the subcommittee) presiding. Present: Representatives Doug Barnard, Jr., J. Dennis Hastert, Chuck Douglas, and C. Christopher Cox. Also present: Donald P. Tucker, chief economist; Faye Ballard, clerk; Peter Vroom, minority professional staff, Committee on Government Operations; and Shirley Brothwell, GÃO detailee. OPENING STATEMENT OF CHAIRMAN BARNARD Mr. BARNARD. The subcommittee will come to order. Today we open 3 days of hearings into the short-selling mechanism in the stock market and how it affects small companies and individual investors. I want to take this opportunity to welcome all of the witnesses who have taken the time and trouble to be here today to enlighten the committee on what I think is a very important subject. Likewise, I want to express my appreciation to my distinguished colleagues for taking their time to come back to Washington to participate in these hearings, which we had scheduled some time ago. Today we will be hearing from witnesses who will describe the problems that can occur with heavy short-selling activity. We also expect to hear various suggestions about some regulatory changes that they feel are needed. Tomorrow we will hear from the New York and American Stock Exchanges and the National Association of Securities Dealers, whose job is to police the stock markets for trading abuses. We will also hear tomorrow from the National Association of OTC Companies, which represents many small companies. Next week-although possibly it could be postponed until a later time we expect to receive testimony from the Securities and Exchange Commission. The subcommittee has been studying short selling for over a year now. We have gathered information from a number of sources, in (1) |