The subject of short selling tends to create controversy. Since at least the abolition in 2007 of the 1930s era uptick rule which was designed to curb abusive short selling, the debate has continued over the merits of short selling. The SEC’s temporary restrictions on the practice as the market crisis unfolded in 2008 for example, provoked strong opinions on both sides of the debate. Since then, the Commission has taken a number of steps regarding short selling.

The tradition of controversy continued this week at the Commission’s open meeting which resulted in the adoption of the “alternative uptick” rule by a 3-2 vote. The Chairman and other members of the SEC such as Commissioners Walter and Aguilar favored adoption of the rule. Commissioners Paredes and Casey on the other hand did not. Each side claimed that investor confidence supported their position. Neither side could definitively prove its point. The new rule, however, is in effect.

The new alternative uptick rule is well summarized in the open meeting remarks of Chairman Schapiro. Briefly, the rule would go into effect when a “circuit breaker” is tripped. That happens where the price of a security declines by 10% or more from the close of the previous day. In that instance, the “alternate uptick rule” goes into effect for the balance of the day and the next. The rule applies generally to all securities traded on a national securities exchange, as well as those in the over-the-counter markets. It also requires traders to establish and maintain certain procedures designed to aid implementation and enforcement of the rule.

Chairman Schapiro endorsed the rule as a product of the market crisis. While short selling clearly has benefits, it also can be destabilizing to the markets, she noted. The new rule will prevent manipulation and, when the circuit breaker is tripped, put long traders at the head of the line according to Ms. Schapiro. Commissioner Aguilar echoed Ms. Schapiro’s support for the rule while prodding Congress to move forward with market reform and fill the gaping hole in current regulation regarding swaps.

Commissioner Walter found the decision most difficult, but ultimately supported the rule as a measured response. After noting that she has been intensely lobbied by both sides of the short selling debate, Ms. Walter went on to state that while short selling can be very beneficial to the markets, it can also have detrimental effects. The numerous studies of those effects are, at best, “mixed” according to the Commissioner. Accordingly, she would not favor short sale restrictions on a market wide basis. Since the rule being adopted is measured and only applies in certain limited circumstances – when the circuit breaker is tripped – Ms. Walter favored adoption.

In contrast, Commissioner Tory Paredes offered a lengthy dissent from the adoption of the rule. In essence, Commissioner Paredes argued that there is no evidence that adopting the rule would bolster investor confidence in the markets, which is one of the main rationales offered in support of the rule. Rather, the Commission is being inconsistent at best with the adoption of this rule according to Mr. Paredes. On the one hand, it has lengthy studies which supported dropping the initial version of the uptick rule. Now, however, it is adopting a modified version of that rule despite the fact that little has changed since the old rule was disregarded. The market crisis, according to Commissioner Paredes, did not change this fact.

In sum, Commissioner Paredes argued: 1) short selling is essential to proper market functioning and price discovery; 2) there are already sufficient restrictions in place; 3) the prior empirical research which supported dropping the old uptick rule is still valid; and 4) the adoption of the rule will be costly in terms of its implementation and its potentially negative impact on proper functioning markets, price discovery and investor confidence.

By the end of the Commission’s open meeting two points were clear: First, the rule was adopted. Second, both sides claim that investor confidence is critical to their position, despite what Commissioner Walter called the “mixed” results of the studies. In the end, there is little doubt that the controversy regarding the impact of short selling will continue.

Ponzi schemes and investment fund frauds have become the new staple of the SEC Enforcement Division. Last year, the Commission brought over 100 cases involving these scams which at one time were thought hard to find. Almost all of the schemes had the same key characteristics: a pitch to investors about some kind of unique investment or trading scheme; returns that are next to impossible for anyone else to duplicate; and safety for investors. The schemes unfortunately fleece hundreds of investors of millions of dollars and typically collapse when the promoters cannot continue to repay withdraws because they have taken to much money for themselves. This pattern has become all too familiar.

Just when it appeared that every variation of scheme had been discovered, the SEC found a new one – the failed fund. Not failed because it collapsed, but failed because it failed to launch (with apologies to the film with a similar name). This is effectively the victimless investment fund fraud, except perhaps for the promoters. To be sure there were solicitations. But, nobody bought into the pitch. To be sure there were potentially billions of dollars involved. But, no investor funds changed hands or were lost.

The failure to launch scam, according to the complaint, goes like this: Samuel M. Natt controls Pacific Asian Atlantic Foundation, supposedly a non-profit humanitarian organization based in California. Mr. Natt, over a three year period beginning in 2009, creates billions of dollars in bonds supposedly issued by the company. The bonds are PAAF Oil and Gas Global Energy Bonds, 2006 Series A due December 2010, supposedly backed by oil and gas reserves which of course do not exist. Mr. Natt fortifies his bond offering with fraudulent offering memoranda, recording billions in assets. The memoranda are complete with CUSIP numbers.

Mr. Natt tries to launch his scheme by marketing the bonds to brokers. The idea is to deposit the bonds in accounts at brokers and then use them as collateral for bonds. Mr. Natt and his company tried First Dunbar Securities, offering to deposit $1.65 billion in bonds. No deal. The brokerage refused. Undeterred, Mr. Natt moves on to UBS with the same kind of deal and then Primevest Financial. Again, no sales.

A lack of success apparently did not deter Mr. Natt and his company. In a variation of the scheme, third parties were solicited. Those parties were suppose to take the bonds, deposit them with brokers and use them to secure loans and lines of credits. The third parties would get a cut of the profits. Again, no sales.

By the time the Commission found Mr. Natt and his company and put them out of their misery, they had failed at each solicitation. They failed to raise a single dollar. The SEC ended it all with a complaint alleging fraud. Mr. Natt and his company consented to the entry of permanent injunctions prohibiting future violations of Sections 17(a)(1) &(3) of the Securities Act. No disgorgement was ordered since there were no ill-gotten gains. Mr. Natt will pay a penalty of $50,000. SEC v Pacific Asian Atlantic Foundation, Case No. CV 10-1214 (C.D. Cal. Filed February 18 2010). See also Litig. Rel. 21417 (Feb. 19, 2010).