Controversy Over Naked Short Selling
Several companies have sued the DTCC, without success, over delivery failures in their stocks, alleging culpability for naked short selling. Furthermore, the issue of the DTCC's possible involvement has been taken up by Senator Robert Bennett and discussed by the NASAA and in articles. disagreed with by DTCC—in the Wall Street Journal and Euromoney Magazine. The DTCC contends that the suits are orchestrated by a small group of lawyers and executives to make money and draw attention from the companies' problems.
Critics blame DTCC as being in charge of the system where it happens, say that DTCC turns a blind eye to the problem, and that the Securities and Exchange Commission has not taken sufficient action against naked shorting. DTCC says that it has no authority over trading activities, cannot force buy-ins of shares not delivered, and suggests that naked shorting is simply not widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said. The U.S. Securities and Exchange Commission (SEC), however, views naked shorting as a serious enough matter to have made two separate efforts to restrict the practice. The DTCC says that the SEC has supported its position in legal proceedings. DTCC General Counsel Larry Thompson calls the claims that DTCC is responsible for naked short selling "pure invention."
In July 2007, Senator Bob Bennett, Republican of Utah, suggested on the U.S. Senate floor that the allegations involving DTCC and naked short selling are "serious enough" that there should be a hearing on them. The committee's Chairman, Senator Christopher Dodd, indicated he was willing to hold such a hearing. However, no hearing was ever held, and both Sen. Bennett and Dodd are no longer in the Senate, so any possible investigation seems moot at this point, and no further action on naked short selling is anticipated. The North American Securities Administrators Association, representing state stock regulators, filed a brief in a suit against the DTCC, arguing against federal preemption as a defense to the suit. NASAA said that "if the Investors’ claims are taken as true, as they must be on a motion to dismiss, then the entrepreneurs and investors before the Court have been the victims of fraud and manipulation at the hands of the very entities that should be serving their interests by maintaining a fair and efficient national market.". The Whistler suit was later dismissed by the courts.
Critics also contend that DTCC and SEC have been too secretive with information about where naked shorting is taking place. DTCC says it has supported releasing more information to the public.
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