NovFrom: Kevin [pontiyak@telusplanet.net]
Sent: Sunday, November 02, 2003 3:05 PM
To: rule-comments@sec.gov
Subject: (s7-23-03) SEC comment letter 2003.doc

                                                                                                        Nov. 1/2003

To: Securities and Exchange Commission
Office of Trading practices, Division of Market regulation

Re: Proposed SHO rules
Release No. 34-48709, File no. S7-23-03 

From:  Kevin Cundy
Airdrie, Alberta, Canada.

Re: Comments to proposed SHO rules

To the members of the Office of Trading Practices and the Division of 
Market Regulation.

Please allow me to submit my personal comments as they pertain to the proposed 
SHO, or short selling rules as released by your members.

I will be confining my immediate comments to the specific areas of naked short 
selling, as I feel that

It is this area, that most affects, and concerns me.

Let me start first start off by commending your group in finally addressing this 
securities market problem, and to thank you for the opportunity to comment on same.

I shall start with the commission’s proposal to implement a uniform “locate” rule, 
applicable to all securities. First I find it quite disturbing than no such rule 
currently exists within the SEC, considering the issue of short selling was 
addressed as far back as 1934.Secondly, and if I’m not mistaken a similar rule 
# 3370,NASD (affirmative determination), is already in place. I think that the 
“locate “ rule is a great addition to help combat the problem of naked short 
selling, however, neither The SEC’s new rule, nor the existing rule at the NASD 
is of any use if neither rule is enforced, rigorously!

Is it not the Commission that stated in it’s own words that SRO’s have failed to 
address the problems of naked short selling, and failed to delivers?

Next is the proposal to require broker-dealers to “locate” and “annotate” 
certificates, in writing, before effecting any short sale. This rule is all well 
and good and should be implemented, but without an officer of the SEC standing over 
the shoulder of every broker-dealer’s trader, this rule will be ignored, just like 
all the other fail to delivers, and fail to receives. The commission must remember 
two things, one, that it is the same broker-dealers, and market makers that allow 
the problem of naked short selling to flow through their respective offices, and 
two,  as members of an SRO, these same groups have already failed in their mandate 
to police themselves. You must put in place an environment where by all members are 
forced to abide by both your rules and those of their own, under threat of stiff 
sanctions.

You current “locate” proposal puts the onus only on the seller, and/or the sellers 
broker-dealer, and it is in this area that there is no enticement for the SRO’s to 
police themselves. The annotate rule is a must for the seller’s broker, but I think 
that the rule to “locate” certificates should also be fine tuned so that some 
responsibility is taken by the buying broker-dealer to receive “good delivery” 
from the selling broker-dealer, and that the onus does not fall only on the seller.

The two-day settlement rule also lacks punch in that a seller could naked short sell 
aggressively and cause a panic sell off by other holders of that security. And even 
though that seller was locked into a 90 day no sell period, they would still be able 
to buy back their short position, lock in profits, all to the detriment of the 
company and its shareholders. By adding one more step in that rule that says that 
the selling broker-dealer is also locked out for 90 days from shorting that security 
you remove most of the monetary incentive for a broker-dealer or a market maker to 
partake in this sort of manipulative endeavor, and especially for them to allow this 
practice to flow through
their offices.

Your proposal to include additional safeguards in areas where there is evidence of 
significant settlement failures is one of the best proposals your are considering, 
as long as you also make it retroactive to include all current settlement failures 
that are piled up in the bottom drawers of broker-dealers all across this securities 
market.

This rule among all of the other IMHO reinforces the basic rule of supply and demand.

Which If I’m not mistaken is the fundamental and underlying principal of the 
securities market.

Also by including this very important provision, it will send a very strong message 
to those who would seek to circumvent the system, that their illegal activities will 
no longer be tolerated. It would also be a very efficient way to return stolen monies 
to those investors who have seen their portfolios decimated by the practice of naked 
short selling.

Clearly, current penalties and sanctions have no little or no effect on broker-
dealers who not only continue to allow this activity to go on but also profit 
from it , just from the commissions alone. 

As for whether or not all proposals should extend to the Over The Counter (OTC) 
and pink sheet securities, I would ask the commission this one basic question…

Is the color of the money being wrongfully taken from investors and companies of 
lower cap securities any less green than that of higher cap securities.? Are we not 
entitled to equal protection under the law?

You wondered whether the bid tick test should also extend down to the OTC market?

Of course it should, for the very reason that naked short sellers currently have the 
ability To flood the market with phony unauthorized shares, at ongoing prices below 
the last trade.

Improper tagging of short sales as long sales, and trade settlement of long sales 
that started out as a naked short sale. These are two areas that need additional 
scrutiny, in that they currently provide additional backdoors for unscrupulous 
short sellers to hide their activities from regulators. One , by tagging a short 
sale as a long sale or improperly posting a sale as a buy, as opposed to a sell, 
the broker-dealer or market maker, is effectively “painting the tape”. There is no 
other reason for this, than to hide something from discovery. Secondly, naked 
shorted stock that is resold becomes, effectively a long sale. Now we end up with 
the situation where by countless phony shares have been introduced into the market, 
illegally, and continue to bounce around unsettled, and suppressing the value of 
the company. This second point is an area where another SRO, the DTCC has utterly 
failed in its mandate, and I shall address this in a later comment.

Next I would like to try and answer some of the direct questions you are asking 
of us.

Q. What harms result from naked short selling? Conversely, what benefits accrue 
from naked short selling?

A.  Small start up companies and their respective investors, never have a fighting 
chance to grow, and are in fact beaten down and raped financially, Before even 
having the chance to prove themselves. This relates directly to the foundation 
and vitality of the economy which is born on the backs of small companies. I see 
no benefits what so ever in the practice of naked short selling.

Q. Are there negative tax consequences associated with naked short selling, in 
terms of dividends paid or otherwise?

A.  The negative tax consequences to naked shorting, comes from the undeniable 
fact that a significant portion of it occurs either through or from Canada, and 
offshore enclaves, where the reach of the IRS cannot follow. I would speculated 
that the current deficits of both Canada and the United States, might be somewhat 
less if this back door was closed.

Q. What is the appropriate manner by which short sellers can comply with the 
requirement to have "reasonable grounds" to believe that securities sold short 
could be borrowed? Should short sellers be permitted to rely on blanket assurances 
that stock is available for borrowing, i.e., "hard to borrow" or "easy to borrow" 
lists? Is the equity lending market transparent enough to allow an efficient means 
of creating these lists? 

A. I would think that through new transparency rules requiring broker-dealers to 
post a monthly list of their short positions, broken down by each security, and 
enforcement and cooperation by the DTCC, a suitable method could be constructed 
for short sellers to comply with the proposed rule changes. 

Q. Should short sales effected by a market maker in connection with bona fide 
market making be excepted from the proposed "locate" requirements? Should the 
exception be tied to certain qualifications or conditions? If so, what should 
these qualifications or conditions be?

A.  Of course market makers have an understandable need to effect short sales 
in order to make a market, and it would be detrimental to the flow of the markets 
to hamstring the market-makers with such a rule. But the market-makers must be 
made to comply with all current and proposed rules as they pertain to “naked short 
selling”, as it is through their hands that this problem flows, and they are at 
the very least complicit in that they allow this to continue as they stick their 
hands out for their commissions, while this persists.

Q. Should the proposed additional delivery requirements be limited to securities 
in which there are significant failures to deliver? If so, is the proposed threshold 
an accurate indication of securities with excessive fails to deliver? Should it be 
higher or lower? Should additional criteria be used?

A.  As for regular and legal short selling I believe the current rules with some 
minor changes to reflect the current trading times are adequate, and the proposed 
thresholds seem reasonable, in that it helps to stem “irrational exuberance” , and 
wildly over inflated prices . I think that the rule however, should extend to all 
securities , so that similar problems are not transferred to higher cap stocks, 
which by the way is an arena that most smaller companies aspire to be in. The 
threshold would appear to be high enough to trigger further enforcement, as far 
as naked short selling may be concerned.

Q. Are the proposed consequences for failing to deliver securities appropriate and 
effective measures to address the abuses in naked short selling? If not, why not? 
What other measures would be effective? Should broker-dealers buying on behalf of 
customers be obligated to effect a buy-in for aged fails? 

A.  Clearly the investing public will never be happy with the levels of fines, Or 
the current level’s of consequences that are levied at the broker-dealers that fail 
in their responsibility to serve and protect their customers. But the proposed rules 
are an excellent first step in curtailing the abuses that are prevalent in our 
markets. What needs to be done is bring in consequences that hit the guilty parties 
where it really hurts, and that is in the pocket book. And by that I don’t mean 
miniscule fines and sanctions. I’m talking about serious and severe measure’s that 
force the broker-dealers to cease and desist the ongoing activity, and ways in which 
will cause the market itself to reverse the flow of ill gotten gains, back to the 
victims, in such a way that it becomes a solid deterrent to Future violations. 
Broker-dealers buying on behalf of customers should be forced, under threat of 
serious consequences, to effect buy-ins on fail to delivers Immediately after finding 
out that “ good delivery” will not be forth coming. Otherwise we are back to paying 
our brokers for something that will never be delivered, does not exists, and will 
never be rectified. We need to be sure that we are receiving something of value, 
and not just an easily manipulated electronic notation in our accounts. Thin air 
is already sold at the gas station, thank you very much!

Q. Is the restriction preventing a broker-dealer, for a period of 90 calendar days, 
from executing short sales in the particular security for his own account or the 
account of the person for whose account the failure to deliver occurred without 
having pre-borrowed the securities an appropriate and effective measure to address 
the abuses in naked short selling? Should this restriction apply to all short sales 
by the broker-dealer in this particular security? Should the restriction also apply 
to all further short sales by the person for whose account the failure to deliver 
occurred, effected by any broker-dealer?

A. Unfortunately this is an area were one bad apple may have to spoil the whole bunch. 
Offshore shorters, and/or naked short selling cartels rarely operate under the rules 
and may have multiple accounts at the same broker-dealer, under different names. 
Unfortunately this rule may have to extend to all short sales in this security by 
both the broker and his selling customer, in order to deter future naked short 
selling abuses. It would of course be to the detriment of other bona-fide short 
sellers at that broker, and in that security.

Q. Should short sales effected by a market maker in connection with bona-fide 
market making be exempted from the proposed delivery requirements targeted at 
securities in which there are significant failures to deliver? If so, what reasons 
support such an exemption, and how should bona-fide market making be identified? 

A.  Further short sales in a security that is already clouded by significant fails 
to delivers, would only make the issue worse. Perhaps a rule could be proposed that 
would allow for the closing out, or clearing up of existing fails before further 
short sales would be allowed. 

Q. Under what circumstances might a market maker need to maintain a fail to deliver 
on a short sale longer than two days past settlement date in the course of bona 
fide market making? Is two days the appropriate time period to use?

A.  Under T+3, that we must all adhere to, I believe that the two day rule is 
appropriate. Why should we as the investing public, and the ones that sustain this 
market in the first place be forced to have our funds in our accounts within three 
days, or less in some cases, and yet our broker-dealers are allowed to stall on 
delivery of goods. Certainly in cases of death, accident, or emergency, Broker-
dealers need certain latitude in delivery, but current loopholes are being stretched 
far beyond their purpose already.

Q. Are there any circumstances in which a party not engaging in bona-fide market 
making might need to maintain a fail to deliver on a short sale longer than two 
days past settlement? If so, can such positions be identified? Should they be 
accepted from the proposed borrow and delivery requirements, and if so, why, and 
for how long?

A.  A party not engaged in bona-fide market making has no reason IMHO to maintain 
a fail to deliver. To fail to deliver in this case is clearly because the party 
never obtain certificates in the first place, was never entitled to them, and 
clearly is hiding something, in order to deceive and defraud. Positions can be 
clearly identified by transparency from the broker-dealer, and records from the 
DTCC, not to mention the state of incorporation and the company itself.

I hope that my answers to your questions help you to refine your proposals, but 
before I end I have a few proposals and general comments that you might find useful.

Proposals.

Some very basic and very effective proposals offered by others, which I’m sure 
you will read more than once, over the next 60 days.

    --  The SEC immediately enforce all existing laws pertaining to
        shorting in the 1933 and 1934 Securities

    --  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.

    --  Rules prohibiting Sale of Unregistered Securities must be
        rigorously enforced. Naked shorting is such a violation.

    --  Any short sale must be done only after an "Affirmative
        Determination" is made regarding the ability of the trader to
        borrow the shares sold short for delivery within 3 days.

    --  All trades must settle and clear within three trading days
        from trade date.

    --  Use of whip calls, kiting, electronic counterfeiting and other
        such manipulations be subject to racketeering laws.

    --  Shares may only be shorted on a zero or zero plus tick, except
        for registered market makers and recognized arbitrage traders
        for their own accounts only and not for client accounts.

    --  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. Already an existing rule, it is being ignored.

    --  Real penalties be imposed including interest charges and
        sanctions for any trades left unsettled after 3 days. A 10-day
        fail be immediately treated as a broken trade.

    --  Broker-dealers, clearing firms and clients shown to be engaged
        in attempts to circumvent the above guidelines be formally
        sanctioned once, and lose their licenses for a second offense.


General comments.

Next I would like to do my part to help clear up some biases and misconceptions 
that I keep seeing, one is that that the OTC and pinks sheets are thinly traded 
securities. Some of the securities I follow trade well over a billion shares a 
day. Mostly that is due to the fact that naked short sellers have decimated their 
respective PPS to the ground, and investors who still support the companies and 
those same short sellers are doing battle to preserve their respective positions 
and that causes the volume to skyrocket. I can only wish for a thinly traded stock 
and a fair PPS. Perhaps the definition of “thinly traded” comes from the lower 
market capitalization of some of these companies?, Fair enough, but it is the 
overriding attitude coming from within your own organization, that most of these 
OTC and pink sheet companies are “piece of sh__t” stocks, or “garbage” stocks, and 
that it’s even a waste of time to come to the aid of the ones that might have a 
legitimate complaint.

Also ask yourselves, or rather some of your counsel’s how it is that huge issues 
can be almost concluded within a relatively short time frame, Re: Enron, Arthur 
Andersen, Tyco, Global Crossing, Martha Stewart, WorldCom, ad-infinitem, yet a small 
and growing company, (PCBM) with a promising future for it’s employees and a very 
large and diverse shareholder base, is held up, almost to the point of total 
destruction, for 18 months, over a minor miscue in a PR?

Re:(SEC vs PCBM, et-al, # 8:02CV-822-T-17-EAJ)

The prevailing attitude that the OTC and pink sheets are the Wild West, or that 
it is a neighborhood to be avoided. It is only that way because of the lack of 
enforcement, or should I say selective enforcement, that has prevailed over the 
years past. I would submit that both the SEC and all SRO’s are as much to blame 
for the current environment, on the OTC, as those that would endeavor to circumvent 
the system for their own gain.

Another area of absolute failure is the oversight of our so-called SRO’s

These agencies have more than adequate rules and provisions in place, that this 
problem of naked short selling should never have grow to the proportions that it 
has. But instead it has been the greed and corruption that has pushed those same 
rules into the background, all in the favor of profits. I would expect that a 
country as great as the United States would have learned long ago that leaving the 
fox to guard the hen house, leaves no eggs for breakfast, nor chicken for supper. 
These SRO’s are clearly incapable of regulating themselves, therefore I submit that 
someone must step in and do it for them. Perhaps Mr. Eliot Spitzer?

The DTCC is one of the SRO’s that is clearly failing in it’s mandate to perform 
it’s function and protection of the investing public, It’s duty to proper and 
timely settlement of sales is a total sham! If the wider investing public really 
knew how much of a complete failure this old boys club, of thievery, and self 
interest really was, the entire system would collapse in a heartbeat as most would 
withdraw what little investment dollars they had left in the system. Why does it 
have to come to lawsuits (Re: Nutek vs The DTCC #CV-03-0321-JCM-RJJ, District of 
Nevada), in order to get the message across that the system is in failure?

It has become apparent that our SRO’s have no intention of self-regulation, self-
policing, or protection of the very people that trust them to protect, monitor, 
and regulate the flow of legally paid for securities. The list of the board of 
directors, at the DTCC, reads like a who’s who of the same institutions that appear 
almost daily in our papers as being under investigation for this fraud, or charged 
with that improper action. Transparency at the DTCC is as clear as a brick wall. 
What are they hiding? Their motto must be “for us, by us”.

Also I have a problem with what is commonly referred to as the blue sky agreement, 
which basically states that any country wishing to participate in the trading of US 
securities, must adhere to and observe all rules and regulations that are currently 
on the books in the US, Am I mistaken? How about throwing a little weight around and 
informing Canada and other countries that they are clearly allowing the abuse of the 
privilege of trading in US securities, and that they may be cut off if they do not 
enforce the rules. And yes, I am aware of the new union between the SEC and other 
countries in an effort to streamline market enforcement. Re: the IOSCO Multilateral 
Agreement on Enforcement Agreement (release # 2003-145). I fully support this new 
initiative, and I hope you use it to it’s full potential. 

 Why does it that an agency such as yours, which was developed under the words “buy 
 the people, for the people”, have such a hard time understand that very same concept? 
 Why is it that your agency has such a hard time enforcing existing rules, with all 
 the people and money at your disposal, yet an Attorney General bowls strikes with 
 far less?

I would submit that it may be time for the SEC to become more proactive, as opposed 
to reactive, in it’s handling of the securities markets, lest it find itself obsolete.

 I would still like to commend you for taking the first steps in eradicating the 
 scourge we all now know as naked short selling, and for having the courage to 
 starting to standing up to the big money firms of wall street, that are surely by 
 now crying out for you not to implement these proposals. I fully support any effort 
 to stamp out corruption and fraud, especially, that which is clearly financial 
 terrorism, of almost epic proportions.

But I implore you to take it just one little step further and put some serious teeth 
into your proposals, and close all escape routes and future inroads that the crooks 
are surely exploring, even now. I further implore you to use some of those millions 
of dollars that your budget was increased by, to become aggressively proactive, as 
opposed to sluggishly reactive. Although some of the fraud and abuses you are 
addressing may have taken years to accumulate and play out, it is quickly robbing 
honest, hard working people, of their dreams and their futures.

Thank you for the opportunity to comment

Kevin Cundy