The SEC Green-Lighted Naked Shorting of IPOs in 2015
Forbes published a piece surrounding Uber’s ‘troubled’ IPO stating that the SEC green-lighted naked shorting of IPOs in 2015.
“A curious thing happened during Uber’s troubled initial public offering last week: naked short selling of UBER shares by the banks involved in placing Uber’s IPO, according to several sources who confirmed this to CNBC.
Normally, naked short selling is illegal.
But it was legal in this case, and it gave the banks a chance to profit–as investors lost money–when the IPO traded down 18% in its first two days.
Naked-shorting of IPOs by banks, which the SEC green-lighted as recently as 2015, has changed IPO market dynamics by altering the relative power between banks, issuers and investors.
To the detriment of investors, banks now have less fear of incurring major losses from pricing an IPO too high because banks now have a tool (naked shorting) to protect their downside risk.”
Forbes said that thanks to the SEC’s explicit statement allowing naked shorting during IPOs, banks have a chance to win regardless of what the IPO is priced at, a fear they had prior to getting the green light on naked shorting.
In a space call with Genius Group ($GNS) CEO Roger Hamilton, a user had stepped up to question the proof of naked shorting discussed about in sort of media or case.
As you can imagine, speakers on the panel were quick to give the user the information they lacked to research in the first place.
But it’s there, and this is just one case on the proof of naked shorting in the market.
GNS Shares Plummet After IPO
Genius Group CEO Roger Hamilton said he suspected naked shorting was happening in his company stock after shares had gradually plunged after their IPO date.
Roger Hamilton has been leading the fight against naked shorts by not only raising awareness on social media but also by taking legal action.
The company just launched phase 2 of their legal battle against naked short selling.
One of the topics discussed in the space call with Roger was of dual listing using the blockchain.
My thoughts on the blockchain are that it provided accountability and less stress on investors when dealing with manipulative shorting tactics.
It’s still a very new innovation, especially when discussing a tradable blockchain exchange.
A great effort to fight naked shorting nonetheless.
“Naked shorting is impossible to do when securities are issued natively on a blockchain. Had Uber’s shares been issued on a blockchain rather than through legacy systems, banks simply would not have been able to issue more UBER shares than the quantity of shares outstanding. The price-suppressive impact of the naked shorting–however large or small it was in the Uber case–simply could not have happened,” said Forbes.
Related: Citadel Said in 2004 Payment for Order Flow Creates Conflicts and Should Be Banned
A History on Naked Short Selling
What is naked shorting?
Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed.
Naked shorting was enabled legally by UCC Article 8 in 1994, owing to a combination of two features: (1) indirect ownership of publicly-traded securities and (2) a special exemption that obviates the normal requirement that the seller prove in advance that it actually owns the property it is selling to a buyer.
“What we actually own is an IOU from our broker-dealer–a contractual right to the shares instead of the real thing. Your broker, in certain circumstances, has the right to conjure and sell you IOUs to more shares than actually exist,” says Forbes.
The US legal system made a policy decision to favor liquidity over solvency–to favor negotiability of securities over keeping accurate and timely records of who really owns what.
Patrick Byrne brought naked shorting to the attention of regulators but was ridiculed and eventually paid off with a winning settlement to lay low.
After the events of the ‘meme stock’ frenzy in 2021, retail investors came together and scrutinized the SEC, DTCC, and FINRA for allowing blatant market manipulation to occur.
Retail investors were momentarily prohibited from trading shares of AMC and GameStop due to liquidity concerns within several market makers and brokers including Citadel and Robinhood.
The DTCC waived billions of dollars in collateral to reset the game for the big players, cheating retail investors out of their money.
“The problem is that “overissue” of securities suppresses market prices. This is one of many subtle ways that value is skimmed from Mom and Pop investors in securities markets.” – Forbes.
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The SEC has allowed market manipulation to continue in today’s market. Is the agency in need of new leadership? Leave your thoughts below.