SHORT-SELLING ACTIVITY IN THE STOCK MARKET: THE EFFECTS ON SMALL COMPANIES AND THE NEED FOR REGULATION HEARINGS BEFORE THE COMMERCE, CONSUMER, AND MONETARY OF THE COMMITTEE ON GOVERNMENT OPERATIONS HOUSE OF REPRESENTATIVES ONE HUNDRED FIRST CONGRESS FIRST SESSION NOVEMBER 28, 29, AND DECEMBER 6, 1989 Printed for the use of the Committee on Government Operations 36-736 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 1991 For sale by the Superintendent of Documents, Congressional Sales Office COMMITTEE ON GOVERNMENT OPERATIONS JOHN CONYERS, JR., Michigan, Chairman CARDISS COLLINS, Illinois STEPHEN L. NEAL, North Carolina ROBERT E. WISE, JR., West Virginia JOHN M. SPRATT, JR., South Carolina JOE KOLTER, Pennsylvania BEN ERDREICH, Alabama GERALD D. KLECZKA, Wisconsin MATTHEW G. MARTINEZ, California NANCY PELOSI, California DONALD M. PAYNE, New Jersey GARY A. CONDIT, California FRANK HORTON, New York RICHARD K. ARMEY, Texas DONALD E. “BUZ” LUKENS, Ohio J. DENNIS HASTERT, Illinois CHRISTOPHER SHAYS, Connecticut STEVEN SCHIFF, New Mexico ILEANA ROS-LEHTINEN, Florida JULIAN EPSTEIN, Staff Director COMMERCE, Consumer, and Monetary AffaIRS SUBCOMMITTEE DOUG BARNARD, JR., Georgia, Chairman December 6, 1989. Barnard, Hon. Doug, Jr., a Representative in Congress from the State of Georgia, and chairman, Commerce, Consumer, and Monetary Affairs 381 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: Barnard, Hon. Doug, Jr., a Representative in Congress from the State of 3-8 ......... 256-356 Letter dated January 1, 1989, to Chairman Doug Barnard, Jr., relat- 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. 537 Adobe Systems Inc. letter, June 7, 1989 537 Advanta Corp. letter, August 9, 1989...... 540 Biotechnology Development Corp. letter, August 4, 1989. SEC response to subcommittee inquiry, November 9, 1988. America West Airlines, Inc., letter, June 16, 1989. Digital Microwave Corp. letter, May 31, 1989 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 543 546 548 554 558 564 564 571 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 Subcommittee letter on issues of short sale regulation, August 10, 1988 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., "Brief Legal Analysis of Standing to Sue by a Corporation for Short Sale "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 686 690 693 Table 3: Stocks With High Short Interest, 1987-89, Alphabetical Listing.. Subcommittee inquiry letter to NASDAQ companies, May-June 1989... "Summary of company responses to subcommittee questionnaire survey Appendix 8.-Outline and selected table of contents of SEC testimony before the subcommittee (prepared by the subcommittee)... 729 732 Appendix 9.-Press clippings.... 733 "Control Battle Revives Long-Buried Corner in Stock," Business Week, July 5, 1958... 733 693 698 701 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 707 713 719 719 725 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..... 754 755 "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. 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. 785 "Naked came the short-sellers" by Phyllis Berman and Ronit Addis, Forbes, February 8, 1988.. "OUCH 52 792 "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. "SEC Adopts Rule Covering Short Sales Just Prior to Certain Stock "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 |