From: jcline Sent: Thursday, November 06, 2003 11:33 AM To: rule-comments@sec.gov Subject: Release No. 34- 48709; File No. S7-23-03 I am writing comments this day regarding Regulation SHO and specifically addressing the issue of naked short selling. Thank you for addressing this most pressing issue. It is apparent that due to investor awareness and in cases brought before the courts, the SEC is finally admitting this type of fraud exists. Years of abuse by the industry, coupled with neglect of regulatory agencies, has brought the marketplace investor to new heights of awareness which now forces revamping of 50 year old existing laws. The fact that this type of revamping of the Securities Exchange Act has not already taken place is puzzling at best. Failed trade settlements have virtually destroyed investors and companies in the OTCBB/Pink marketplace, and some other markets as well. Investors have been robbed of billions of dollars, despite years of complaints. Companies seek financing, sometimes rather dubious financing, then becomes the naked shorter's dream. Broker and Dealers are those who are responsible for insuring that shares can be borrowed prior to execution. Any new rules need to address the Wall Street Institutions (Broker/dealer/MM), and preventing them from allowing naked short selling abuses. The penalty should be imposed on the firm that allowed the naked short selling trade to be executed illegally. Any firm, under the Patriots Act, is required to know their client. If their client is about to do something illegal, they should not take the order. This should not be relegated to mere "ethics", but rather by specific rules and enforced regulations to prevent abuse. The 90 day banishment from shorting securities becomes a non-issue if the stock price remains manipulated. Under T+3+5, one could sell short for 5 days. At that point, they would be barred. In some illiquid stocks, that would be enough of a "scare tactic" to cause stock value to drop, instilling even more fear in the long holder, and causing a further sell off. One could then take that 90 day period to cover any short position. Any new rule needs to aim at preventing the abuse in any form. Much of the illegal shorting comes from financing packages called Convertible Debentures. In a finance deal such as this the "Bank" is allowed, under short selling rules presently in place, to short against fully hedged or arbitrage positions due them. As long as they do not short more shares than they are due under this deal, they can short the stock as a long trade on the shares due in the Convertible. Under this condition, the abusive nature of shorting the stock to yield a better converted value would not be covered under this reform as there are NO LAWS on trade settlement from the long side. The buyer and the companies should not pay the price for illegal broker actions in creating unregistered shares for the market to trade. Any penalty must be monetarily sufficient to prohibit further abuse. With present market abuses we see mistagging of trades. Many short sales are improperly tagged by the firms and short sales are tagged as long sales. A short seller can be working with one or more firms to manipulate the stock through shorting, while having the trades mistagged. Long trades would fail settlement, but they would not be flagged by the short sale settlement failure system proposed. It then becomes a reliance on the snail like pace of enforcement to catch the error and correct the abuse. In the mean time the manipulation is already done. Any mistagging must be viewed as illegal and stiff penalties must be enforced to prevent this type of manipulation. I tend to follow those recommendations to Congress on 10/21/03 (with some alterations) by Richard Altomare. He brings up several points which I feel would assist in preventing the abuses of illegal naked short selling. 1. First of all, enforcement of existing laws MUST be adhered to and strictly regulated, including rules prohibiting sale of Unregistered Securities. Use of whip calls, kiting, electronic counterfeiting and other such manipulations should be subject to racketeering laws. Any "new" laws need to be simply, yet specifically worded, with no room for misinterpretation of the law. Any law must be all inclusive of "all equities and in all markets." 2. Anyone outside the U.S. requesting access to U.S. Securities Markets must agree to comply in full with U.S. securities and market laws, rules and regulations. It is my personal opinion that all Hedge Funds need to report to the SEC and all short positions within them be reported every 5 days. If those funds are found in violation of existing laws, they should be barred from trading US Securities. 3. The DTCC must maintain the "identity type" of accounts for shares transferred to its custody. Shares held in Cash, Excess margin, ERISA and similar accounts not be lent under any circumstance. Brokers MUST report any new issuance of authorized shares by any company as registered vs. unregistered shares, and the DTCC must recognize them as such so as to prevent the sale of unregistered shares. 4. Broker-dealers, clearing firms and clients shown to be engaged in attempts to circumvent the laws should be formally sanctioned once, and lose their licenses for a second offense. The abuses in the marketplace by Brokers/Dealers and Market Makers have brought to light , at least for this investor, many reasons for the loss of investor confidence in our US Securities markets. The criminal activity must be stopped. The bully needs to be taken off the playground so that the players can once again win or lose "according to the rules"...not according to the abuses. Regards, Judy Cline