The Work

March 11, 2009 6:10 PM

Wachtell Waits on Uptick Rule Reinstatement

Posted by Brian Baxter

Wachtell, Lipton, Rosen & Katz is waiting.

The SEC voted to scrap the "sale tick test" in July 2007 after concluding that the rule was outdated and ineffective.

Then, with the onset of the credit crisis last summer, Wachtell began urging the SEC to take action against short sellers. Firm memos on the subject penned by executive committee cochair Edward Herlihy and others took on increasingly anxious tones as they urged the SEC to reinstate the rule.

While the SEC did adopt short-term restrictions on short sales, many, including Wachtell, thought they hadn't gone far enough.

But recent reports seem to show that the SEC and other regulators might finally be listening to Wachtell's pleas.

Reuters reported on Tuesday that Federal Reserve Chairman Ben Bernanke and House Financial Services Committee chair Barney Frank were in favor of reinstating the rule.

"I've spoken to [Chairwoman Mary] Schapiro of the SEC," Frank said. "I am hopeful the Uptick Rule will be restored within a month."

That was music to Wachtell's ears.

"For over eight months, we have called on the SEC to reinstate the 'Uptick Rule,'" write Herlihy and counsel Theodore Levine in a Wachtell memo released on Wednesday. "Despite recent calls to do so by [Bernanke], Warren Buffett, Christopher Dodd, [Frank], and widespread consensus by market participants and knowledgeable observers, the SEC has failed to act."

While an SEC spokesman told Reuters that the commission would conduct a public meeting next month to consider reinstating the Uptick Rule and "other measures related to short sales," Wachtell's Herlihy and Levine write that such an action would be an "unacceptable delay" given the SEC's "traditional rule-making process with a prolonged comment period."

Both urge that the SEC should use its emergency powers to "immediately reinstate the [Uptick] Rule on a temporary basis." The commission can use the time in the interim to evaluate the effect of the reinstatement on the markets.

"This action is required to combat the abusive short-selling, bear raids, and spreading of false rumors which continue to undermine the markets and adversely affect investor confidence," write Herlihy and Levine.

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While I applaud Herlihy’s sustained campaign, there remain plenty of further troubling corporate behavior and public policy enigmas and riddles with respect to what happened at Bear Stearns and Lehman which prevent us from understanding what was going on, cloud prudent judgment, undermine a principled approach to solution-formulation, and require an answer sooner rather than later. If we pass muster and evaluate these happenstances, developments and market trends, it leaps to mind that private corporate behavior intermixed and intermingled with public policy (SEC) attitudes in a fashion that further aggravated negative effects so that, viewed from the result, Wall Street spiralled out of control, taking down much of the rest of the world within a few days after the Lehman disaster unfolded. I have no answers and can only contribute making these unpopular observations as a service to a cleansing debate without taboos and attempt at public policy response-formulation without blinders. But it seems to me that the mere reinstatement of the “Uptick Rule” doesn’t capture the following trading pattern we have observed over time during 2008:

Traditional short-seller tactics have been replaced by new devastating bear raid and trading techniques that burst the capital structure and incidentally disfigure the stock price as a mere corollary - short-seller tactics such as writing ISDA-based CDSs, acquiring position-limiting puts, exerting pressure on a target's capital structure and incidentally dislocating its stock-price, getting the restless press and even the rating agencies involved, which steps, taken together and jointly, represent some among the most hideous, maligned and reprehensible money-making tactics on earth I've ever come across phenomenologically. It's too early to evaluate them, there is just barely time to state some of these troubling issues. Jim Cramer in one of his many smart market-takes has made comments to this effect. Noted U Penn and Oxford economists have come out with insightful pieces on such shifting “bear raid”-tactics in Knowledge@Wharton.

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