diminutive, easy-mannered ac countant with a soft drawl, S. Don Norris doesn't seem the sort of fellow to pick a fight. "I'm a little nervous about it. So is my wife," confesses the chairman and chief executive of Houston-based Commonwealth Financial Group. But the activities of his adversaries, he says, leave him no choice. "When I see something wrong with the system," he adds, "I try to do something about it." Norris' antagonists are professional short sellers. Members of this somewhat shadowy community seek out companies whose shares have been elevated to what they feel are unreasonable heights. In a short sale, an accepted trading strategy, a short will usually borrow stock from a current owner and sell it in anticipation of a price decline. The short will later cover his position, hopefully with stock acquired at a lower price. Almost from the moment the first se curities exchange opened, shorts have tangled with longs, mainly stock owners who anticipate price increases. Recently, though, the struggle has greatly intensified, particularly in the over-the-counter market, where trading rules give short sellers much more latitude than on the exchanges. As a senior executive of one Wall Street firm puts it: "Things have become very bitter, very personal, and very ugly." Norris is at the forefront of a group of longs mounting a campaign against shorts that could make dealings between the two even uglier. 'ABUSIVE TACTICS Longs, who include securities underwriters and public companies, as well as their major investors, allege that shorts, beset by the bull mar ket, are resorting to questionable practices to force down their targets' stock. "The shorts are using abusive tactics that I've never seen before," says a securities lawyer who has worked with both sides. Longs, for instance, say that shorts often evade rules requiring them to deliver promptly securities for the stock they sell short. This allows them to sustain intense selling pressure over extended periods. A rash of such "naked" selling-65% of the total short interest, according to a study by the Na110 BUSINESS WEEK/MAY 11, 1987 FINANCE Editorials 170 BUSINESS WEEK/MAY 11, 1987 SHORT SELLERS MAY HAVE T The shadowy struggle between Wall Street's professional stock buyers and its equally professional short sellers, a contest as old as stock markets themselves, has gotten out of hand. As the article that begins on page 118 sets forth in detail, the shorts, who make a living by driving down the price of target stocks, have moved beyond mere Street smarts into at least the anteroom of illegality. That means it's time for the securities industry to start paying attention and do something. Otherwise, aggrieved victims of bear raids almost certainly will look to Congress and the regulators for redress-and find it. Economic historians recognize that regulation doesn't pop up from nowhere. Someone persuades Congress that an abuse has reached crisis proportions, and once such a perception takes hold, laws get passed. Fortunately, things can be done to forestall that perception. For one thing, existing laws can be enforced more strenuously. It may not be illegal for aggressive operators who hold large short positions to bad-mouth a stock to its institutional holders, to its bank creditors, and to the press. But a campaign launched by several shorts working in collusion is another matter. Similarly, there are charges that the shorts put unendur able pressure on a stock by in effect selling more shares than they actually borrow-or indeed more shares than actually exist in the market. This may add up to fraud, a matter it may be time to test in court. And certainly the Securities & Exchange Commission should consider requiring the shorts to make public disclosure on the same terms as the longs: a position amounting to 5% of the target's shares. That at least would let some sunlight into the murky world. of short-selling. And sunlight is a wonderful antiseptic. By JONATHAN R. LAING sellers lot these days is not a happy one. For the rising tide of the bull market has succeeded in lifting the prices of even some of the randiest and most speculative stocks. A number of Wall Street's most accomplished bears admit to being hopelessly under water in many of the stocks they love to hale most. As they lick their wounds and count their losses, members of the short-selling fraternity have suffered the additional indignity in recent weeks of being the target of a spate of critical stories in various publications. According to the articles, a spontaneous revolt has erupted among a score or more overthe-counter companies tired of having their stocks savaged by the shorts. Among other things, the group supposedly plans to curb short-seller "abuses" by collectively pressuring the National Association of Securities Dealers, which watches over the OTC market, the Securities and Exchange Commission and Congress for regulatory and leg. islative changes. Moreover, those same articles report, the group is also considering the filing of suits against various short-seller cabals. And what sins have the short sellers committed to merit such retribution? The sorry list is long and terrible. Or so report the aforementioned stories. The evil shorts allegedly seek to destroy the ill-fated companies whose stock they have sold by bad-mouthing them to their bankers, institutional bolders and regulators, not to mention feeding obviously negative information to supposedly pliant financial publications such as this magazine. Most investors are suspicious enough of shorts, anyway. After all, it seems more than slightly disreputable to simulta- But the articles assert that hence can never deliver to the And finally, when all else The timing of this assault on the shorts is anything but random. The insider-trading scandals of Wall Street have fanned public distrust of stock trading in general. And some longs are attempting mightily to tar short sellers with the same brush. "Short-seller abuses are far more damaging to the nation's future than all the Ivan Boeskys because the shorts are destroying scores of viable companies that would be the major employers of the future," thunders Clinton Howard, president and chief executive officer of Carrington Laboratories Inc., in righteous anger. "It's Wall Page 13 culties and a skeptical view of the fervid claims for its drug. the paysayers on Carrington are comforted by the mounting red ink on its financial statements. The company has lost money three years in a row and seems an excellent bet to make it No.4 in fiscal '87. At the end of February, according to its lastest 100 report, Carrington had an accumulated deficit of $8.8 million, or nearly four times stated shareholders' equity of $2.3 mil lion. In any event, short sellers make an inviting target. Sure, short selling affords liquidity to the marketplace, tempers investors' exuberance, aids in determining stocks' intrinsic worth and all the other things that academics never tire of pointing out. Still, shorts are largely regarded as hyenas and vultures preying on the miseries and misfortunes of other creatures. Yet before waxing indignant over the presumed depredations of short sellers, several facts should be considered. First, the preponderance of stock manipulation and other shenanigans in both listed and unlisted stocks occurs on the long side. Price collapses are often the unhappy denouement of such ac tivities. What's more, there have been only a handful of actions taken by the SEC and NASD in recent years against shorts. Likewise, civil suits brought against short sellers have Continued on Page 20 |