Selling America Short
A former SEC lawyer on naked shorting and the fights around it.
Summary
Richard Sauer worked as an enforcement lawyer at the Securities and Exchange Commission for over a decade and then moved to a hedge fund that took short positions in companies it believed to be frauds. The book covers both halves of that career.
The regulatory material is the more useful. Sauer describes how enforcement cases were selected and resourced, the institutional preference for cases that could be won cleanly over cases that mattered, the effect of resource constraints on investigating complex financial fraud, and the way political and industry pressure operated on the agency. He describes specific investigations he worked on and what happened to them.
The short selling material covers his work at Kingsford Capital and the specific companies he researched, and it makes an argument about the function short sellers perform: they have a financial incentive to investigate fraud, which regulators and sell-side analysts do not, and they are consequently the first to identify many frauds. He covers the hostility short sellers face, including litigation, investigator harassment and regulatory scrutiny directed at them rather than at their targets, and the 2008 short selling bans. Sauer writes as an interested party defending a practice he profited from, and readers should weigh that. The account of the regulator's internal constraints is well informed and is the reason to read the book.
Key takeaways 7
- Short sellers have a financial incentive to investigate fraud that no other market participant possesses.
- Enforcement staff select cases partly on winnability and resource cost rather than on the harm involved.
- Complex financial fraud requires investigative resources that enforcement agencies do not allocate to individual cases.
- Companies accused by short sellers respond with litigation and with regulatory complaints against the accuser rather than with disclosure.
- Sauer argues that regulatory attention frequently falls on short sellers rather than on the companies they identify.
- Sell-side analysts and auditors have commercial relationships with the companies they cover, which removes their incentive to find fraud.
- Short selling bans during market stress protect the companies most likely to be insolvent.
Who should read it
Investors interested in short selling as a research discipline and in how securities enforcement actually allocates its attention.
Where it sits in the reference 2
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