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SEC Watchdog Faults Handling of Naked Short Complaints

A new report from SEC Inspector General David Kotz says the agency is not doing enough to address complaints about abusive, "naked" short selling.

The audit report issued Wednesday found that out of roughly five thousand complaints about the practice received between January of 2007 and June of last year, only 123 complaints --about 2 1/2 percent -- were forwarded to headquarters or regional enforcement staff for further investigation. And so far, not one of those complaints has resulted in an enforcement action.

Naked-short selling, which involves selling stock short but not borrowing the shares to cover the position, has come under growing scrutiny in recent years. The practice is illegal if it is used to manipulate the market, which critics say it typically is.

The Inspector General blames the SEC enforcement division's screening process for weeding out many potentially legitimate complaints. "Our audit determined that Enforcement's existing complaint receipt and processing procedures hinder Enforcement's ability to respond effectively to naked short selling complaints and referrals," the report says.

But in response, the Division of Enforcement says new procedures aimed at closer scrutiny of naked short selling complaints "are not optimal uses for Commission resources," in part because some naked short selling is legitimate, and there is no direct evidence the practice harms the market.

The response also notes that new SEC Chairwoman Mary Schapiro has already begun an agency-wide review of how complaints -- including naked short selling complaints -- are handled.

The full report and the enforcement division's response can be found here.

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