Exactly Who is Chairman Cox Protecting?

During a period where questionable stock promotion schemes have become increasingly deep and sophisticated, thus more harmful to capital markets, the Securities and Exchange Commission’s (“SEC”) Chairman, Christopher Cox, has taken a position that inhibits the flow of information and capital that is the only solution to preventing investor abuse. The SEC’s primary charge is to protect investors.
Yesterday, lawmakers questioned the SEC Chairman about naked short selling and other topics. Below is a quote from Mr. Cox’s testimony about short selling at Tuesday’s hearing before the Senate Banking Committee:
“Short selling is a component part of healthy markets, one that is perfectly respectable. [But] from the standpoint of orderly markets, it is vitally important that shares be delivered. These are contracts, and they have to be fulfilled. […] What I can commit to now is that when we have internalized and understood the results of our examinations, which are now ongoing, of compliance with Regulation SHO […] I will recommend changes to our rules if those examinations demonstrate that changes are necessary for the reasons you describe.”
The Chairman’s statement is wrong. In fact, the opposite is correct. It is vitally important that the rule that short sellers are required to borrow and deliver shares be eliminated entirely. There are sufficient rules to preserve the financial integrity by both sellers and buyers. There is absolutely no need to require short sellers to deliver stock they sold short. This requirement does nothing to assist the market in functioning as a pricing mechanism of risk or potential returns. It merely increases the barriers of protection that those that abuse the capital allocation system use to their benefit.
The Chairman is not necessarily ignorant of the facts. His testimony is merely a reflection of the nation’s inherent political bias against short selling, which is a forgone conclusion. After all, short sellers don’t have a lobbying group or buy ads in the Wall Street Journal.
Recently, we have seen how a company with a long track record of questionable accounting and business practices, Biovail, hood-winked the nation’s top two news outlets, The New York Times and CBS’ 60 Minutes, on the same Sunday and with lead stories. Both not only ran major stories on an event that normally goes without comment of any kind by even the business press, that is a public company suing an investor who made money shorting its stock scheme, but both ended up taking Biovail’s side. Biovail managed to make these experienced reporters believe that one of the nation’s largest and most profitable investment funds, with arguably Wall Street’s most formidable buy-side research capacity, SAC Capital, unjustly picked on lily-white (and wholly immaterial in the broad scheme of things and to an entity the size of SAC) Biovail to make a few bucks.