Richard Sauer is a former ranking administrator in the enforcement division of the SEC. Investigation of improper trading by hedge funds would have fallen under Mr. Sauer's division. After putting in his time with the SEC, he entered private practice doing law work for David Rocker and other short hedge funds.

After his SEC career, Mr. Sauer authored an article that appeared in the Oct 6, 2006 New York Times. It provides insight into his mindset and presumably that of the division of the SEC he administered. Certainly the tepid prosecution of stock manipulation cases by the SEC would indicate that Mr. Sauer's view of the shorts was widely held by SEC enforcement.

He, not surprisingly, views shorts as the “good guys,” who keep the bad corporate guys in check. He further claims that the good work of the shorts has unjustly been hobbled by recent additional regulation, i.e. Reg SHO, designed to stop abusive shorting. He goes on to say “as an enforcement lawyer at the SEC, I received from short sellers early warnings on certain companies that led to the capture and return to investors of hundreds of millions of dollars taken by stock fraud… But if the short sellers are friends to the SEC, the commission has been no friend to the short sellers. The agency has saddled them with trading restrictions and looked the other way when companies have taken potentially illegal actions to silence short seller's criticism”.

Based upon these comments, it appears that Mr. Sauer either condones or denies the existence of massive counterfeiting of stock that usually accompanies a short attack. Is the trading restriction he alludes to the lawful requirement that a real share be borrowed?

Mr. Sauer rails against “pump and dump” schemes as illegal stock manipulation — which they are. Yet no mention is made of flooding the ask side of the board with short and counterfeit shares to drive the price down. This is particularly destructive now that the SEC removed the up tick rule which prohibited short selling on a down tick.

His view that the stock manipulations that drive down stock prices are not the problem, it is bad companies, has been echoed by other SEC officials. In 2005, SEC commissioner Annette Nazareth said there isn't a problem with naked shorting — there are just bad companies. This attitude would explain why there is little meaningful enforcement against the short hedge funds and the broker dealers for stock manipulations.

The disturbing part is the SEC has the authority and the tools to determine whether shares have been counterfeited and markets manipulated. If the assertion by the SEC that there are only bad companies is correct, then why do they make the evidence completely unobtainable? Every company, whether poorly run or superbly managed, is entitled to not have their stock counterfeited and its price manipulated.

Patrick Byrne of Overstock, when a short suggested he spend less time being concerned about the massive counterfeiting of his company's stock and more time running the company, replied, “Are you telling me if I ran a better liquor store you would stop robbing it?”