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The following article from WSJ was seen on another board:

 

Naked short selling (finally) in lawmakers sights

By MICHAEL R. CRITTENDEN and KARA SCANNELL

June 5, 2009

 

WASHINGTON -- The Securities and Exchange Commission needs to take further steps to crack down on "naked" short selling, U.S. lawmakers said Wednesday, after government auditors recommended more aggressive action to prevent market manipulation.

 

In a short sale, traders sell borrowed stock with the expectation they can buy it back later at a lower price. In a naked short sale, traders sell stock they haven't borrowed. Some executives argue naked short selling allows market manipulators to drive down shares artificially.

 

One idea is to require that traders borrow shares before they try to sell a stock short, known as a preborrow. Last summer, the SEC issued an emergency rule requiring preborrowing for certain financial firms' shares, but the industry said it was too expensive, and the requirement was abandoned.

 

A bipartisan group of senators said the SEC needs to consider new restrictions to help quell naked short selling. "Unless the SEC can develop an appropriate alternative, a strict preborrow requirement may be the only way to adequately protect shareholders' rights," Sen. Chuck Grassley (R., Iowa) said in a joint release with Sen. Carl Levin (D., Mich.) and Sen. Arlen Specter (D., Penn.).

 

The statement came after the Government Accountability Office found that SEC regulations issued earlier this decade only temporarily slowed cases of "failure to deliver," which occurs when the seller of a security doesn't deliver the security to the buyer during a required period. These cases can occur for a variety of reasons, including naked short selling.

 

An SEC spokesman said the SEC appreciates the GAO's recommendations and is focused on short selling, including examining a preborrow requirement.

 

Write to Kara Scannell at kara.scannell@wsj.com

 

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