Former Securities and Exchange Commission chairman Harvey Pitt has been invited once again to be securities sheriff. This time, his work will be on the state level, and will involve only one investigation.
On Tuesday, Pitt was appointed deputy attorney general for the state of Alabama to investigate a case involving Colonial BancGroup, a bank holding company based in Montgomery whose stock value plummeted earlier this year. The bank believes it was a victim of naked shorting. The Alabama Securities Commission has already issued subpoenas in the case.
The act of shorting — where traders sell a security they don’t own, believing that the stock price will fall before they buy back the stock — is legal. However, in a naked short, the trader sells a stock in this way without borrowing it first. The practice has the potential to lead to a rapid decline in a stock’s price because the traders aren’t constrained by the supply of shares they have to borrow.
“Naked short selling, combined with false rumors, can artificially and illegally lower the value of a company’s stock, causing a loss to investors and damage to the targeted institution for the purpose of generating gains for short sellers,” said Alabama Securities Commission director Joseph Borg.
Pitt told CFO.com that because he has been opposed to naked shorting for many years, Colonial BancGroup contacted him to get involved in Alabama’s investigation. The work is voluntary and the title of deputy AG was technically necessary in order for the state to be able to accept Pitt’s expertise, according to an Alabama Securities Commission spokesman. Pitt will continue to work as CEO of consultancy Kalorama Partners, which he founded.
He’s also working on the business side of helping short sellers keep their trades legal. Last month, Pitt and two other businessmen announced a Web-based service, RegSHO.com, that will help brokers and hedge funds comply with new SEC rules to curb naked shorting.
The SEC’s most recent emergency order put a temporary hold on the short-selling in the stock of Fannie Mae and Freddie Mac and Wall Street brokerage firms. Pitt’s RegSHO.com helps short sellers comply with the rules but also have access to illiquid, hard-to-borrow stocks.
In 2003, Pitt resigned after less than two rocky years as SEC chairman. During his tenure, he made several political mistakes and was constantly accused of pandering to business interests because he had previously worked with the large accounting firms and investment banks. Enron’s collapse in the middle of his SEC leadership certainly didn’t help his career in the federal government.