This is amazing...on SO MANY levels. Unreal.



By Sarah N. Lynch

Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--The Securities and Exchange Commission's inspector general released a report Wednesday that found that the agency's enforcement division has brought very few actions against naked short-selling and suggests that the SEC must improve how it processes short-selling complaints.

David Kotz, who is also investigating the enforcement division for its handling of the Madoff fraud, said that between Jan. 1, 2007, and June 1, 2008, only 123 of the 5,000 naked short-selling complaints received by the SEC were forwarded for further investigation. The reason they were forwarded, he said, is because the subjects of the complaints were involved in other ongoing cases.

"Our audit determined that enforcement's existing complaint receipt and processing hinder enforcement's ability to respond effectively to naked short-selling complaints and referrals," the report says.

Naked short-selling involves selling shorts without having borrowed the securities to make a delivery.

Last year, the SEC took some actions to restrict short-selling and also tightened its rules to prevent abusive practices as well.

Kotz recommended the agency improve how it handles complaints by subjecting them to an "in-depth triage analysis" often used by the division to scrutinize other types of complaints it receives.

Kotz's report prompted strong negative reactions from the SEC division, which said in a release that it did not concur with most of the recommendations. While division officials said they are concerned with naked short-selling that results in market manipulation, they noted that some naked short-selling can occur for legitimate reasons.

"In recent months, a small but vocal cadre of advocates has emerged decrying the practice and suggesting it has damaging market effects," enforcement division managers said in a release. "But there is hardly unanimity in the investment community or the financial media on either the prevalence or the dangers of 'naked' short-selling."

The division further criticized Kotz's report, saying it cites no "bona fide studies or empirical evidence" to show the impact that naked short-selling has on the market.

It added that many of the complaints that come in "provide no support for the allegations."

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com