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1 Re: S7-08-08 and proposed Rule 10b-21 Dear Chairman Cox and Commissioners, (The following text is something in between a “Comment letter” on steroids and my 5th book on naked short selling abuses; I haven’t decided which yet. The “SEC version” in front of you centers on the opportunity at hand in the form of the proposed Rule 10b-21. I apologize for some of the repetition as the May 20, 2008 deadline for submission snuck up before my final edit was completed. There is a “Bullet point” section at the end for those without enough time to read the text. I hope that you at the SEC share in my passion to allow Rule 10b-21 to provide the heretofore missing meaningful deterrence to the perpetration of these frauds while addressing some of the loopholes left in Reg SHO that were aggressively lobbied for by those benefiting from the “status quo” on Wall Street. We have one heck of a lot of work to do in order to restore a level playing field on Wall Street in the abusive naked short selling and delivery failure related abuse arena and Rule 10b-21 could provide some much needed traction in that direction if you only allow it to. The version of this text in front of you is the “SEC” version. There is a similar version designed specifically for each of the DOJ, The Department of the Treasury, The Department of Homeland Security and The Federal Reserve that adds quite a bit of information above and beyond this version in front of you regarding ANSS and DFRAs that apply specifically to their particular department’s specialty without the emphasis on the proposed Rule 10b-21. I can’t help but think that a joint effort is going to be necessary in order to adequately address these issues that the SEC has been dealing with but only with a limited amount of success. Unfortunately this abusive naked short selling pandemic has untoward side effects being felt well beyond the obvious monetary thefts from U.S. citizens and their retirement plans. This is a very, very important topic with repercussions involving national defense issues, health issues, financial systemic risk issues, job creation and sustenance issues, organized criminal behavior issues, etc.-Dr. Jim DeCosta Tualatin, Oregon) I thank you for the opportunity to comment on this proposed legislation dealing with Abusive Naked Short Selling (“ANSS”) and Delivery Failure Related Abuses (“DFRAs”) this time via the proposed Rule 10b-21. I’ve noticed after studying abusive naked short selling (“ANSS”) and delivery failure related abuses (“DFRAs”) over the last 28 years that what has greatly impeded progress in eradicating this crime wave is firstly a culture of unbridled greed on Wall Street insanely allowed to operate on a landscape strewn with massive conflicts of interest. Secondly is the lack of well-defined and standardized terminology in the ANSS and DFRA arena that can serve as a foundation for educational efforts. Thirdly I’ve noticed the lack of a thorough understanding of this particular variety of securities fraud by apparently everybody except the masters of deceit that design and perpetrate these frauds and fourthly is the absolute refusal of any SRO, 2 regulator, DOJ affiliate or Congressional Oversight Committee to provide any truly meaningful deterrence to the perpetration of these frauds. A fifth phenomenon that has impeded progress in eradicating these crimes is the fact that Wall Street is highly specialized and complex enough to obfuscate fraudulent activity especially when things move so fast in the trading arena that the resultant cloud of dust inhibits transparency. Oftentimes it’s the Wall Street intermediaries that are the only people with the working knowledge of the intricacies of the clearance and settlement system sufficient enough to detect fraudulent activity and they’re often financially incentivised to avoid creating any waves. BUILDING YOUR EDUCATIONAL FOUNDATION OF ANSS AND DFRAs BY APPRECIATING HUMAN NATURE, “REGULATORY CAPTURE” AND THE NEED FOR “IMMOBILIZATION” AND “DEMATERIALIZATION” “One cannot mention regulatory agencies without adding the observation that, of course, such agencies are likely to be ‘captured’ by the interests they are supposed to regulate. To suggest that matters are any different from this is to mark oneself as hopelessly naïve, or even disingenuous.” –James Q. Wilson (James Q. Wilson is the current Ronald Reagan professor of public policy at Pepperdine University and the former Chairman of the White House Task Force on Crime.) If one can incorporate Wilson’s truism with two others I’ll describe shortly and allow them to serve as your foundation for understanding abusive naked short selling (ANSS) and delivery failure related abuses (DFRAs) I firmly believe that climbing the steep learning curve of understanding this mode of securities fraud will be infinitely easier. In other words, let’s be neither “naïve” nor “disingenuous” in recognizing the role of “Regulatory capture” in this family of frauds. Once this foundation is established the puzzle pieces just seem to magically fall together and the actions of the regulators, the self-regulators (“SROs” like the DTCC-Depository Trust and Clearing Corporation and FINRA-the Financial Industry Regulatory Authority), the securities industry lobbyists, the “Registered Clearing Agencies”, the trade groups like SIFMA-the Securities Industry and Financial Markets Association as well as the securities fraudsters themselves become very predictable. All a student of naked short selling has to do is concentrate on three things. Firstly, one must concentrate on human nature especially when certain humans “Entrusted” with either administering or acting as “Participants” in both a “Self-Regulatory Organization” 3 (SRO like the DTCC) and a “Registered Clearing Agency” (RCA like the DTCC) are surrounded by trillions of dollars of other people’s money while being “Empowered” with distinct advantages bestowed upon them as part of this “arrangement of trust” knowingly choose to breach that trust in order to illegally gain access to the money of others. I like to refer to this concept involving trust relationships giving rise to advantages (leverage) with the mnemonic “DRAMA” i.e. when one is “entrusted” with a Duty as a (self-) Regulator and granted Access to the Money of those owed the duty being able to leverage a distinct Advantage associated with the very duty he was “Entrusted” with. Secondly, the concept of “Regulatory capture” and its predictable fostering of criminal behavior implied above by Wilson needs to be appreciated in regards to both the SEC and the DTCC and thirdly the immense opportunities for fraudulent behavior resulting from being (yet once again) “Entrusted” to administer the processes involving the “Immobilization” and “Dematerialization” of difficult to counterfeit paper-certificated shares into incredibly easy to counterfeit electronic book entries correctly deemed necessary to address the 1969 “Paperwork crisis” on Wall Street. If you lay your conceptual foundation on these three realities then you can easily get your arms around these frauds and even more importantly, as it pertains to this topic of the proposed Rule 10b-21, a feeling for what measures will and will not be effective in addressing these crimes. You can also get an appreciation for why the former Chairman of the White House Task Force on Crime cited above, James Q. Wilson, is commenting on a topic like “Regulatory capture”. It has to do with the Crime waves that are inevitable when a regulator like the SEC or a “Self-Regulatory Organization” (SRO) and “Registered Clearing Agency” (RCA) like the DTCC and its DTC and NSCC subdivisions become “Captured” by the interests of those whose “business conduct” they as an SRO are mandated to police rather than their focusing on providing the congressionally mandated “Investor protection” and “Market integrity” (the SEC’s mandate) and the mandated “prompt and accurate clearance and settlement of securities transactions” as per Section 17 A of the ’34 Exchange Act (the DTCC’s mandate). Abusive naked short selling (ANSS) and delivery failure related abuse (DFRAs) frauds and the lack of the SEC’s and DTCC’s willingness to deal with them in a meaningful manner isn’t really that complex. As Wilson aptly phrased it: It is human nature for regulators to be “Captured by the interests they are supposed to regulate”. We saw 4 recently how the Federal Aviation Association regulators allegedly got a little bit too “chummy” with a certain airline’s ground crew resulting in massive numbers of emergency examinations for structural damage on jets. Although the damages associated with a jet airliner going down as a result of this form of “Regulatory capture” would make the front page the day to day damages associated with abusive naked short selling frauds not only don’t make any headlines but absolutely no “ink” whatsoever is dedicated to this topic. It’s as if the financial media has their own “capture” issues. I’ll defer this topic to Mark Mitchell’s expose on the role of financial journalists in ANSS and DFRAs-“The Story of Deep Capture” at www.deepcapture.com/. Bad things are going to happen when the “Securities cops” and those with massive opportunities combined with strategic advantages to commit theft become too close. “Regulatory capture” is the rule and not the exception to the rule in a variety of “Regulated” industries and the DTCC-administered clearance and settlement industry and our SEC-regulated capital markets are certainly no exception. At the end of the day the pertinent question to ask might just be where is the DOJ and the Congressional Oversight Committees-the Senate Banking Committee and the House Financial Services Committee (and their legislative and statutory powers) with the ultimate responsibility for overseeing that the SEC does provide the congressionally mandated investor protection and market integrity? They as the “overseers” should be intimately familiar with this phenomenon often referred to as the “capture” of regulatory authorities.

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