The U.S. Securities & Exchange Commission (SEC) last October 2023 seemed to endorse a double standard by allowing non-disclosure by those who can make big money by “shorting” stock and cashing in as the share values plunge but requiring disclosure by long investors seeking to benefit by enhancing the value of a company (such as when Elon Musk purchased large chunks of Twitter and was forced to disclosure his positions publicly).
For the uninitiated, a short seller organization makes money by committing to purchase a stock it does not own, and then forced to buying it back at a lower share value — i.e., the more the stock goes down, the more the short-seller makes.
You would think that, because there is an incentive for a short seller to put out misinformation about a company to drive the stock down and make big profits, the need for at least equal transparency requirements between longs and shorts would be obvious.
Yet in this 2023 recent rule, the SEC allowed the identity of short-sellers to remain confidential — thus, unaccountable to the public and the companies they are shorting for the criticism they are making.
I first began to campaign for equal transparency requirements for longs and shorts more than two decades ago. In 2003, I was part of an effort to form a “Full Disclosure Coalition” to apply an equal standard for longs and shorts.
I made enemies among some shorts at the time when I challenged them to endorse full disclosure — even to participate in a telephonic press conference with the CEO of the company under short attack to respond to our challenges to the short-seller’s accuracy in his criticism of the company’s accounting methods.
I also called on full disclosure by any short-seller who is testifying negatively about a public company. I wrote this column just before a congressional hearing during which a short-seller critical of the for-profit college sector (and, in many ways, for good reason since some of the bad apples were nothing but diploma mills feasting on federal funding on student loans) was testifying before a U.S. Senate committee.
But he also did not disclose his short positions in some of these colleges, owned by public companies, whose shares were declining during and immediately after his testimony — thereby, theoretically, profiting himself. All I wanted then and now is full disclosure.
I stressed then and now: There are many honest short sellers who are good and helpful to the market. They research and uncover financial fraud.
But there are bad ones too, who are threatened by transparency rules because they might have to justify publicly and factually the misinformation. These bad ones engage in what is called “shorting and distorting.”
That is a crime.
The good short sellers justifiably point out they are in a different position to long investors if their shorting is publicly exposed. They say, for example, they could be subject to what is called a “short squeeze.” This means allowing fraudulent companies to buy back large volumes of stock in a company with limited number of available public shares, possibly forcing the good-short sellers to close their positions at a major loss, even though they may have been right about their facts.
But the answer isn’t for less transparency, it is for more transparency.
Anyone on the long side attempting to execute such a manipulative “short squeeze” solely for purposes of harming short sellers should be required to immediately disclose what they are doing. And thus, they could be subject to SEC market manipulation charges, even criminal prosecutions, just as “short and distort” dishonest short sellers should be.
If the SEC doesn’t take another look at applying a similar standard to longs and shorts, then the U.S. congress should step in — soon.
Mr. Davis is a former White House Special Counsel to President Clinton. He is founder of the law firm, Lanny J. Davis & Associates and Co-Chair of Actum LLC, a global public affairs firm that has a client who agrees with the need for a single standard of disclosure between “long” investors and short sellers.
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