Short-sellers need more transparency, says former SEC commissioner

Jun 26, 2020
Robert Jackson discusses short-selling, fraud and the role of the commission

Former SEC commissioner Robert Jackson says he is troubled by the ‘increasing evidence of manipulation through short-selling’, and calls on his former colleagues at the SEC to consider a proposal for greater transparency for short-sellers.

Speaking earlier this week at Fraud Fest – an event organized by UC Berkeley School of Law – Jackson acknowledged that short-sellers cause animated debate, which can cloud decisions about how they should be treated by regulators.

‘There’s good short-selling and bad short-selling,’ Jackson said. ‘The job of the regulator is to encourage one and try to stop the other.’

Jackson was unanimously confirmed by the Senate to serve as an SEC commissioner in 2017. He left the SEC in February this year, and now serves as professor of law, co-director of the Institute for Corporate Governance & Finance and director of the Program on Corporate Law and Policy at NYU School of Law.

He championed a petition that was filed with the SEC earlier this year by Columbia Law School professors John Coffee and Joshua Mitts, which he said would lead to greater transparency. The suggestions Coffee and Mitts filed with the SEC in February are that:

  • The SEC should require short-sellers to be truthful and accurate when voluntarily disclosing their position
  • The SEC should clarify that rapidly closing a short-position after publishing or commissioning a short-report, without having specifically disclosed an intent to do so, can constitute a fraudulent scalping.

‘Short-sellers are incredibly valuable to price discovery and preventing the formation of asset bubbles,’ Jackson said. ‘There’s also increasing evidence of manipulation through short-selling. Jack Coffee and Josh Mitts have put a petition in front of the SEC about how someone can be short in a company, put out negative news about the company, and then reverse the position, quickly manipulating the price to make gains. That’s a very troubling situation… The question isn’t whether short-sellers are good or bad, but how the SEC can encourage good short-selling while not rewarding manipulation.’

Earlier this year, Walied Soliman, global chair and Canadian chair of Norton Rose Fulbright, told IR Magazine that regulators need to take a closer look at the behavior of short-sellers. ‘In an era where a lie goes around the world before you can get your shoes on in the morning, our regulators need to not only carefully monitor the activities of abusive short-sellers, but also actively prosecute to ensure that this type of behavior is prevented in the future,’ he said.

In the same article, investor relations professionals were encouraged to work with their sell-side analysts to counter information put out about their company, but to think carefully before taking a frivolous short-seller to court for misinformation because it could lead to a more public airing of the short-seller’s thesis.

The role of the SEC

During his remarks, Jackson said he was surprised when he first joined the SEC by the scale of fraud that occurs in the US. ‘The kind of plain, vanilla, basic fraud – of people stealing other people’s money – that occurs across this country is astonishing,’ he said.  

He praised the work of his former colleagues in the enforcement division, but said he feels the SEC plays a more influential role in preventing fraud occurring in the first place, rather than in identifying and prosecuting fraud that has occurred – because of the constraints of being a publicly funded institution with limited resources.

‘In my view, with all respect to the enforcement division, the ex post work we do will never compare with the ex ante signals the SEC sends,’ he said. ‘What lawyers hear from that building affects more potential fraud than our staff can ever investigate because they are incredible people but there are only 3,000 of them and there are limited resources… It’s sort of like measuring the cops based on the number of crimes, which I don’t think is quite right. I measure the cops by the number of crimes that didn’t happen.’

Jackson also said he thought carefully during his tenure as a commissioner about how to make the work of the commission relatable and understandable. ‘If I could change one thing about the commission, I would take the very complicated questions we face and try to boil them down in a way that gives the American people confidence that there are people protecting them in the markets.

‘That erosion of confidence during the last decade has been one of the generational shifts I would love to reverse. I would love for people to feel about the market the way my parents felt when they invested years ago in a way that enabled me to go to college. The idea that the markets are a casino or a game… worries me about the long-term future of young people in particular.’

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