1 April 28, 2007 Via Electronic Mail: [email protected] Nancy M. Morris Secretary Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-1090 I thank you for the opportunity to once again comment on these proposed amendments to Reg SHO. Since the topic of rescinding parts of Rule 10 a-1 which along with NASD Rule 3350 have historically outlawed abusive “Bid-banging” by the short selling community (The “Bid” and “Tick” tests) is also on the table currently I will address this issue also as it is inextricably linked to any proposed amendments to Reg SHO in general. EXECUTIVE SUMMARY “On Wall Street one can make money by betting for or against U.S. corporations. Abusive DTCC participants illegally accessing the exemption from borrowing before making short sales accorded to “Bona fide” market makers only have merely noticed that whether it pertains to building corporations or sandcastles it is much easier to destroy one than to build one”. (JAD-2005) Until at least three events occur on the regulatory landscape I wouldn’t recommend removing ANY protective measures from your arsenal against naked short selling crimes including the “Bid test” and the “Tick test”. The first event that would need to occur would be the immediate rescission of the “Grandfather clause” which in relative terms is a hundred times more important in the provision of “Investor protection and market integrity”, the Congressional Mandate of the SEC, than Rule 10 a-1 ever was. As you at the SEC well know, this “Grandfather clause” was one of the biggest “Sandbagging” events in the history of securities legislative efforts and U.S. investors are not about to readily forgive and forget this obvious acquiescence by a “Captive” and “Conflicted” regulator to the desires of the securities industry after their intense lobbying efforts. What was your response at the SEC when you learned from Dr. Leslie Boni’s 2004 research done at your behest revealing the DTCC’s widespread refusal to perform their Section 17 A of the ’34 Act Congressional Mandate to “Promptly settle” all trades? Was it to provide “Investor protection and market integrity” by making the DTCC management and their abusive participants IMMEDIATELY settle those trades that “Accidentally” never got “Settled” in a “Prompt” manner like any unconflicted regulator would have ordered? No, it was more along the lines that since these DTCC participants 2 already missed their “Prompt settlement” and “Prompt delivery” deadlines on previous trades then somehow ordering them now once and for all to “Promptly” settle those obviously abusive trades from the past that have now come to the attention of the SEC and to do it “Immediately” wasn’t the appropriate route to take. It’s almost as if there was some sort of invisible statute of limitations issue involved or that the SEC now has the power to grant “Presidential pardons” for behavior that has been irrefutably proven as being fraudulent due to the timeframes and the congressional mandates involved. Did the DTCC of their own accord jump into action to finally “Settle” the involved trades? Of course not, instead the DTCC management proffered to the investment community that there is no problem at the DTCC in regards to delivery failures and even if there were any then they were “Powerless” to buy-in these archaic delivery failures held by their abusive “Participants”/bosses. The second event needing to occur would be for the SEC to finally realize that they have not only a congressional mandate but all the authority in the world to break up the criminal network involved in intentionally setting up Ex-clearing “Arrangements” and “Repurchase agreements” between co-conspiring DTCC participants in order to cleverly postpone, often indefinitely, the “Good form delivery” of previously sold shares and therefore circumvent the congressionally mandated “Prompt settlement” of trades. All of this while strategically keeping these “Delivery failures” out of any “Registered Clearing Agency” like the DTCC that the Reg SHO “Threshold list” as well as other protective measures target abuses in. The excuse that some of you at the SEC have proffered over the years that you have no “Authority” in this field due to the “Contractual” nature of these illegal “Arrangements” just doesn’t fly any more. You have “Plenary authority” over all short selling matters as well as a congressional mandate to provide “Investor protection and market integrity”. That’s why you were created in the first place; to “Purge the markets of abusive short selling crimes”. Can you recall that little incident back in 1929 that short selling abuses involving those administering “Dark pools” of money similar to today’s hedge funds were partially causative of? Are you not sensing an element of déjà vu with all of these delivery failure issues being exposed as these unregulated and highly leveraged hedge funds allowed to operate in the dark come into their prowess? Irregardless of the intent or results of the “Pilot study” undertaken by the SEC in regards to Rule 10 a-1 the investment community is appalled that you would even consider the “Removal” of ANY protective measures against naked short selling ahead of these far more important issues dealing with the “Addition” of protective measures via the amendment of Reg SHO. Please don’t concentrate on “Housekeeping” measures as the very foundation of our financial system, our clearance and settlement system, morphs into nothing more than a self-serving personal fiefdom. The third event would be to address the rampant abuses occurring in regards to options market makers being allowed to hedge their positions by making “Proxy” naked short sales unencumbered by these “Anti-bid banging” rules. This clever methodology allows criminals to use the options market maker to do the dirty work involving the actual naked 3 short selling of the equity underlying an option. Now how clever is that especially in the cases we see now where the hedge fund attacking the targeted corporation actually owns the options market maker? Particularly heinous is the selling of “In the money” calls or buying “In the money” puts with their extremely high delta which can literally result in the intentional evisceration of the targeted issuer and the investments made therein. It’s not a very difficult concept to force any hedging maneuver related to an underlying option to be closed out when the option expires otherwise you’ve built a “House of cards” weighing down on the prognosis for the equity underlying the option. It’s high time that you at the SEC and the DOJ recognize the fine line between “Cleverness” and “Criminality” as the “Intent to defraud” issue is crystal clear in a fairly large percentage of these Ex-clearing “Arrangements”, “Repurchase arrangements” and options market maker hedging policies. As far as the timing involving this need for yet another look at possible amendments to Reg SHO and the issue involving the rescission of Rule 10 a-1 specifically I’m not really sure what meaningful information you at the SEC can extract from a “Pilot study” involving only a select group of stocks none of which included the issuers typically on the receiving end of these “Bear raids” i.e. the yet to be cash flow positive development stage issuers. The fact that there wasn’t apparently much manipulative “Bid banging” misbehavior occurring while Wall Street participants were acting under a regulatory microscope that everybody was well aware of shouldn’t be that surprising. Legitimate short sellers and investors selling shares held “Long” just don’t repeatedly knock out bid after bid nor do they actively promote legislation permitting it. They want to receive the maximum amount of money for their “Short” or “Long” sales. Abusive naked short sellers needing to collateralize huge preexisting naked short positions on a daily marked-to-market basis however, find manipulative “Bid banging” a wonderful criminal tool to psychologically “Shake the tree” to induce selling by weak- kneed investors, to illegally trigger “Stop loss” orders that they and not the investors have clear visibility of and to create low “Prints” usually near the close of a trading session made in an effort to decrease the collateralization requirements associated with maintaining astronomic levels of naked short positions/delivery failures. Removing these protective measures before filling the other holes in the dyke is pure insanity and removing them after these other loopholes are plugged would only provide yet another loophole to access. As the initial Reg SHO taught us legislating against naked short selling abuses takes on an “All or none” aspect because if you don’t close all of the loopholes involved SIMULTANEOUSLY then you’re only going to see the mass migration of this activity to any remaining loopholes. Can you recall the “Berlin Bremen Exchange debacle” recently involving hundreds if not thousands of development stage issuers learning that their shares were now suddenly trading on the Berlin Bremen Exchange literally within hours to days of when several of the loopholes within the old NASD Rule 3370 were closed up? In a sense only the “Bad guys” want permission to mercilessly knock out bid after bid during short selling. What was the terminology used in the Badian naked short 4 selling case evidence? Wasn’t it something to do with the order to “Mercilessly” knock down the share price of the targeted issuer with “Unbridled” levels of aggression? A cunning market maker in trouble on a naked short position can make the selling of 1,000 bogus shares look like and have the market effect of 1 million shares of legitimate selling when his superior visibility notices that there aren’t many bids in a market and/or that there are “Stop loss orders” within reach underneath the market.