From: Edward Dunn [edwarddunn@hotmail.com]
Sent: Sunday, November 30, 2003 11:55 PM
To: rule-comments@sec.gov
Subject: File No. S7-23-03

To the United States Securities and Exchange Commission:

 

I am writing to express my concern about widespread abuses in short selling 
by hedge funds and other professional speculators, in particular the practice 
of naked short selling.  The SEC's proposed Regulation SHO is a step in the 
right direction, but I believe even stronger enforcement and penalties are 
needed.  It is not enough to sanction those speculators and money managers 
who violate short selling rules, I believe that the brokerage firms and 
clearing agencies who assist and abet in such practices should themselves be 
sanctioned.

Naked short selling has the effect of creating an unlimited supply of stocks, 
since the short sales are executed without actually borrowing the securities, 
and the short positions are not covered since no share loans actually exist.  
In such a situation, the "number of shares outstanding" of a firm becomes 
meaningless.  When the supply of shares becomes infinite, it then follows that 
fundamental measures of a company's valuation, such as price-to-earnings ratio, 
price-to-sales ratio, among other financial ratio measures, are also rendered 
meaningless.  An investor is no longer able to make rational investing decisions 
based on objective economic analysis.  Investing in the equity markets then 
becomes a casino-like game of chance at best, and outright manipulation and 
fraud at worst.

In light of all the Wall Street scandals that have been uncovered in the past 
2 years, it is imperative that the SEC takes its responsibilities to enforce 
securities laws and protect investors seriously.  Capitalism cannot survive 
without an effective capital market.  Trust and integrity are the only bases 
upon which an effective capital market can be maintained.

 

Sincerely,

 

Edward Dunn