CMKX - CMKM Diamonds - SEC Enforcement Blows Off Inspector General's Recommendations

Business As Usual At The 'New' SEC...

SEC Enforcement Division Ignores Recommendations From Inspector General On Stopping Naked Short Selling.

"We have recently alleged such behavior in the widely-discussed CMKM Diamonds litigation."

Practices Related to Naked Short Selling Complaints and Referrals

March 18, 2009
Report No. 450
Appendix VI

OIG Response to Management Comments

We are disappointed that the Division of Enforcement (Enforcement) only concurred with one of the 11 recommendations in this audit report. We are particularly concerned that Enforcement did not concur with the report’s first three recommendations that it develop written in-depth triage analysis steps for naked short selling complaints, as it has for other complaints; that it revise its written guidance to the Enforcement Complaint Center staff to ensure that naked short selling complaints are given a proper level of scrutiny and referred for further investigation; and that it add naked short selling to the list of categories of complaints on the Commission’s public webpage and develop an online complaint form specifically tailored to naked short selling complaints.

As we discussed in our report, the SEC has repeatedly recognized that naked short selling can depress stock prices and have harmful effects on the market. In adopting a naked short selling antifraud rule, Rule 10b-21, in October 2008, the Commission stated, “We have been concerned about ‘naked’ short selling and, in particular, abusive ‘naked’ short selling, for some time.” In this report, we determined that Enforcement’s current policies and procedures appear to limit significantly the referral of naked short selling complaints, and that its written policies and procedures result in naked short selling complaints being treated differently from other types of complaints of securities law violations. Notwithstanding the Commission’s previous statement and our findings, Enforcement responded to our report by stating that “there is hardly unanimity in the investment community or the financial media on either the prevalence, or the dangers, of ‘naked’ short selling,” and references the view held by some that “the threat posed by ‘naked’ short selling is wildly exaggerated . . . .” Accordingly, Enforcement concludes that the report’s recommendations, which are intended to allow for more thorough investigations of naked short selling complaints, are not optimal uses of Commission resources. We would hope that Enforcement reconsiders this position in light of the Commission’s stated concerns about the effect of naked short selling on the market.

We are also disappointed that Enforcement does not intend to implement immediately our specific recommendations (Nos. 5-11) designed to improve its complaints, tips and referral process. We understand that the SEC’s new Chairman has announced the enlisting of a contractor to conduct a comprehensive review of internal procedures used to evaluate tips, complaints, and referrals for the entire agency, and we will certainly work closely with the contractor to assist with this review. Nonetheless, we believe that implementation of our recommended improvements should begin now, in coordination with the contractor’s review, to ensure that the implementation of necessary improvements to Enforcement’s complaint system is not unduly delayed.

Practices Related to Naked Short Selling Complaints and Referrals March 18, 2009
Report No. 450 - Page 44

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