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By Brandon Matthews

You won’t hear about it anywhere in the financial press, but CMKM Diamonds was just another victim of illegal naked short selling. As its share price tumbled from counterfeit shares flooding the market, the SEC turned a blind eye as investors in the company were wiped out. Ironically, the SEC used CMKM Diamonds as part of a sting operation in order to trap the perpetrators of the crimes, yet prosecuted no one.

In the end, the SEC itself decided not to prosecute any of the criminals and instead cut deals with them after the company had been wiped out. CMKM however, did not go away quietly. The company filed a $3.87 Trillion lawsuit against the SEC, Mary Schapiro and a host of former SEC commissioners. Sources close to the matter indicate to me that a settlement will be announced this week, which could result in radical changes in naked short selling laws and have a drastic effect on Sirius XM (NASDAQ:SIRI) going forward.

Sirius XM shareholders are all too familiar with naked short selling, which was the topic for the documentary “Stock Shock,” which I took part in. It is the primary reason that Sirius XM’s share price sits where it does today. The stock continues to be cellar boxed and the SEC continues to allow such illegal activities to persist. Just look at any equity listed on the Reg Sho list such as SNSS. That stock has lived on that list for some time now, as it continues to be counterfeited and sold. The SEC simply doesn’t get it.

Whether or not a company, any company, faces financial uncertainty does not give it the right to sell more shares of its stock than exist by unscrupulous groups. The lawsuit filed by CMKM Diamonds seems to prove beyond any reasonable doubt that the SEC is complicit in naked short selling activities.

Even today, hedge funds hire their own writers to report negative news on their naked short targets and help drive prices down. This type of media manipulation has slowed somewhat, and the results can be seen in the performance of hedge funds, many of which have gone “legit.” Without the ability to manipulate the press, most are under-performing. Still many continue to scoff at an SEC which balks at any real enforcement of securities laws on this issue.

As part of the settlement that will likely come later this week, I expect major reforms to accompany the settlement. Certainly they must, because what is anticipated to be one of the largest settlements in U.S. history, will set a precedent for any other companies and/or shareholders who were victimized by illegal naked short selling, to file similar actions. This potential includes the shareholders of Sirius XM Radio, of which there are many investors chomping at the bit to sue the SEC itself for the inaction to date with regard to Sirius XM naked short abuse complaints.

Disclosure: Long SIRI

Source: Sirius XM, Naked Short Selling and Market Reform