From: dpatch@inspex.com Sent: Thursday, June 24, 2004 2:52 PM To: rule-comments@sec.gov Subject: File S7-23-03 - Short Selling Mr Chairman, Commissioners, The SEC's adoption of Regulation SHO, as it pertains to Illegal Short Selling has reached it's long awaited release. The changes the SEC implemented are based on a concept release in 1999 that yielded some 3000 comment letters, an October 2003 Proposal for comments, and nearly a decade of abusive trading behaviors and stock fraud. So, with all this time and data gathering, how did the SEC perform? SHO - Glass Half Full Analysis: 1. The SEC finally admitted that abusive short selling was a reality. 2. The SEC identified that 4% of all listed securities have some level of settlement failures that exceed acceptable levels. 3 The SEC entered the 21st Century with regards to the abuse as they put in place rules that did not exist at their level before. SHO - Glass Half Empty Analysis: 1. The SEC Violated Section 17A of the Securities Act of 1934 by allowing settlement failures to exist indefinitely and defined an acceptable level of failures. 2. The SEC failed to address the NASAA comments regarding "Bear raids"by Market participants through their "Bona-Fide" exemptions. 3. The SEC failed to address the forced settlement of all outstanding long positions presently on the books of our Broker-Dealers. 4. The SEC failed to address the conditions pertaining to settlement failures associated with unfulfilled long trading. The SEC restricted future short sales in a short sale failure but what about the long sale failures that will continue to occur based on the magnitude of unsettled longs on the books? 5. The SEC failed to address the DTCC "Stock Borrow" program and the issue of the illegal loaning of shares to allow for the transfer of the monetary side of a trade. By Law, Settlement Failures cannot result in a monetary exchange until a share is transferred. 6. The SEC failed to address the lack of present enforcement to the laws in place at the SRO level. The SEC admits that SHO is merely an SEC level set of guidelines that presently exist at the SRO level. 7. The SEC failed to address the protection and the rights of all past and present investors who remain abused. Those who hold positions in these highly diluted stocks will only see the dilution come down through the slow process of Investor sell-off in frustration. Without forced settlements there is no other way to reduce the existing issues. 8. The SEC failed to put out the analysis that showed clearly the pedigree of the 4% affected companies. This analysis would, I am sure, show a tremendous lean towards the smaller issue stocks. A lean that would show the level of SEC bias by the SEC in protecting these companies. I guess, as you would imagine by the length of the two lists that this release was a failure in the eyes of the abused. It took the SEC this long to simply put out a reform package that is identical to the NASD's Rule 3370 and has now provided a 6 month window for implementation so that the Broker-Dealers can set up their computer systems. Didn't they already have to have these in place for Rule 3370? Didn't the SEC clearly state that they were simply putting in rules that pre-existed elsewhere? So what is this delay about? I thought settlements were already a mandatory part of trade executions. The SEC threw out a crumb to those crying fowl while they still feed the cake to the Wall Street elite. The SEC violated federal guidelines by creating a baseline of acceptable failures when the Securities Act never allows for that. The SEC violated the rights of the investors as their office of economic analysis determined the potential cost and liabilities to the Wall Street Members to be too great should they be forced to address their "Behavioral" issues. The SEC violated the trust of every investor as they put the rights of the elite above that of the common man. As you ask yourself whether this is simply rhetoric or reality, simply listen yourself to the live Webcast of the SHO approval. During the Webcast one of the SEC Commissioners I believe it was had the audacity to say "Lets see if this cuts down on the abuse" and?If not we will see if "additional measures" are necessary. This is hardly a singing endorsement of what was presented to those on the down side of the abuse. The SEC takes forever to move and when they do, they need to have a higher level of confidence in what they do than "Lets see? cuts down". Whatever happened to STOP IT? Heck, it took them more than 5 years to simply put NASD rule 3370 at the SEC level. Finally, read the comment letters sent in on this matter. The NASAA addressed "Bear raids" and the Market Makers cried for exemptions. Who won? The SEC Division of Market Regulation met with key Member firms to discuss this issue; did they meet with Issuers or Investors abused? In the end, the SEC took little by way of action, as they did not create any new laws but only re-issued existing laws at a lower level. The SEC put a Government Level speed limit on the highways our states are already supposed to regulate and they called it a great effort. The SEC, in my opinion took one step closer to criminal liabilities. They violated the rights of the investor for the specific financial benefit of the abusers. Wall Street was aiding in the abuse by not forcing settlement and now the SEC is protecting them by not forcing a clean up. Just stop and ask yourself - WHAT in SHO addresses the issues that are on the books today? When are those long failures going to become settled? Dave Patch www.investigatethesec.com