practices utilized by short selling cliques which are designed to create the appearance of downward stock price direction in those stocks in which the broker has a short position. Mr. Chairman, the hearings held by this Committee are, for the first time, shedding light on a little understood area of the securities business. Effective remedies for these practices will require time to formulate but the hearings of this Committee have been a valuable first step. The views expressed herein are my own, and do not necessarily reflect the views of Kidder Peabody and Co., Inc. Steven Elkman SECURITY TRADERS ASSOCIATION ONE WORLD TRADE CENTER, SUITE 4511, NEW YORK, NY 10048 (212) 524-0484 Merrill Lynch, Pierce, Fenner & Smith J. PATRICK CAMPBELL The Ohio Company JOHN R. DALFERRO JOHN P. HUGHES W. H. Newbold's Son & Co. HUGH J. QUIGLEY Merrill Lynch, Pierce, Fenner & Smith WILLIAM R. ROTHE ANDREW N. GRASS, JR. We are writing to furnish the Sub-committee on We are cognizant of the testimony presented to the We, SECURITY TRADERS ASSOCIATION -2 Many of our members are market makers whose firms commit millions of dollars of their own funds to develop and maintain honest, fair and liquid markets so that investors are able to buy and sell securities at the best possible price. This is accomplished by those market makers who provide liquidity by buying and selling securities for their own accounts. This, in itself, results in their taking, on many occasions, substantial monetary risks. While accepting this risk they may be, in the normal course of business, long or short securities. This lends depth to the market and makes for a more efficient market. Το help offset risk, they may also enter into hedging transactions by selling securities short. This form of short selling is one of the legitimate and historical uses of the short selling technique which inures to the benefit of the capital markets. With the foregoing as background, we offer the following observations and suggestions. We support the recommendation of the National Association of Over the Counter Companies, ("NAOTC") as proposed by its president, John F. Guion, to amend the Securities Exchange Act of 1934 ("1934 Act") to provide for disclosure of large short sales positions similar to the anti-takeover disclosure requirements of Section 13 (d) of the 1934 Act. Any aggregation of a significant short position in a publicly traded security demands disclosure so that the issuer, regulators and the market place is aware of this very vital information. As there is an exemption for bonafide market makers in the reporting of take-over long positions (Rule 13d-1(b)(1)) this exemption should be mirrored in the short side reporting requirement. We further believe that the Congress can take an additional step which could have a beneficial effect. The main thrust of the testimony before your sub-committee was related to the use by professional short sellers of false and misleading allegations and rumors. These deceptive practices are designed to drive down the price of a security in which there already is a substantial short position thereby creating a profit when that position is covered. This is deplorable. The framers of the 1934 Act sought to address the problem when they included Section 9 in the Act. In 1934, however, the markets were extremely different from what they are today. Then, the over-the-counter market was much SECURITY TRADERS ASSOCIATION -3 smaller. Thus, the provisions of Section 9 specifically were directed to the exchange or listed markets. Today, the over-the-counter market is equal to, and in some cases, more advanced and sophisticated than many of the exchange markets. There is no reason why the practices on exchanges which are prohibited by Section 9 should not also be prohibited for the over-the counter market. Accordingly, we recommend that the Congress amend Section 9 of the 1934 Act to provide for its application to the over-the-counter market. We are grateful for the opportunity to furnish you with our views on this important issue. If you desire any further information, please feel free to advise. This memorandum is provided in response to your request of October 19, 1989, for a brief analysis of whether a corporation has standing under federal securities laws to sue stockholders who have circulated false rumors about the corporation in an attempt to lower the price of the corporation's stock for the purpose of improving their short sale positions.' A company attempting to bring suit for short sale violations would likely use section 102 of the Securities Exchange Act of 1934. This section states: any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. A person shall be deemed to own a security if (a) he or his agent has the title to it; or (b) he has purchased, or has entered into an unconditional contract, binding on both parties thereto, to purchase it but has not yet received it; or (c) he owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange; or (d) he has an option to purchase or acquire it and has exercised such option; or (e) he has rights or warrants to subscribe to it and has exercised such warrants: Provided, however, That a person shall be deemed to own securities only to the extent that he has a net long position in such securities. 17 C.F.R. § 240.3b-3. Short selling is an investment strategy often used when an investor believes that the price of a security is likely to decline. An order will be entered to sell the security at the current price with the investor to fulfill that obligation at a later date by purchasing the security at a lower price. |