From: Terry E. Cohen [riter@writebyte.net] Sent: Monday, January 05, 2004 12:25 AM To: rule-comments@sec.gov Subject: Comment on Proposed Regulation SHO - File No. S7-23-03 Dear Members of the SEC: RE: Proposed Regulation SHO - File No. S7-23-03: Thank you for the opportunity to comment on Regulation SHO. I wish to specifically address the area of "naked short selling," the short selling of stock shares and their accompanying rights without having first borrowed the shares. Naked short selling MUST be stopped, and it must be stopped on the OTC/OTCBB/pink/grey market micro-cap stocks as well as on larger companies on the AMEX, NYSE and NASDAQ. 1. Naked short selling is theft, period. It is selling shares that do not exist. It is the allowance of shorting without the backing of real shares, authorized by the company and documented by certificate. Opponents of Regulation SHO will try to tell you that regulating against naked short selling will do incredible harm to the market, to market makers, to investors, etc. -- especially with OTC/OTCBB/pink/grey stocks -- because it will a) interfere with liquidity, b) allow microcaps to become grossly overvalued, and c) allow scam companies to hype their own worth at investor loss. This argument is clearly designed to keep ill-gotten gains in the pockets of those who oppose the regulation and the short sellers they represent. a) Enough with the liquidity argument -- the market should run as a business. If demand is high for a product, for example, do car manufacturers sell you just a title without the car? Do legitimate dealerships take car trade-ins without the titles? b) If a microcap becomes grossly overvalued and I buy it without having researched its real worth, OR if I researched it but STILL purchased it at an inflated price, that is perhaps my error as an investor. If I pay $2,000 too much for a car at a dealership, do you close down the dealership if it has not misrepresented the car's worth other than to ask a high price for it? Which leads me to... c) Legalized THEFT is NOT an answer to dealing with scam companies. You do NOT correct a wrong by invoking another. Further, by allowing naked short selling to go unchecked, especially on the OTC/OTCBB/pink/grey stocks, you actually INCREASE the likelihood of scam companies by giving them another ruse to play on investors: "We've been naked shorted...we're trying to bust the short." 2. While there may be OTC/OTCBB/pink/grey companies falsely alleging that they have been naked shorted, I believe there are many that truly have been. The Royal Canadian Mounted Police raided a number of Canadian firms that had illegally naked shorted U.S. companies. The OTC/OTCBB/pink/grey companies make great targets for foreign/overseas hedge funds and short sellers who easily work around U.S. regulations to naked short sell these stocks -- pocketing funds the companies and the U.S. treasury will never see, diluting stockholdings that are not theirs to decide to dilute thereby stealing from U.S. investors, and often actively working to drive these companies bankrupt so that they will never have to cover their short sales. For U.S.-based naked short sellers, this means not having to pay taxes on their gains. I purchased stock in a pink sheet company called Pinnacle Business Management (PCBM) which I believed was naked shorted as of February 2001 when I made my first purchase. It issued a dividend for which 10 million shares in certificates were requested when only 4.57 million shares would have been available, based on the PCBM shares authorized, issued and outstanding at that time. The company and its principals have gone through great turmoil since that time, including trading patterns that my broker admitted were bizarre for a non-marginable security. The stock has traded billions upon billions of shares, primarily buys based on the trades shown at ask. Although the company's last 8k in August 2003 showed 25 billion shares issued, the trading still indicates the possibility of more shares bought than are authorized. On Oct. 21, 2003, billions of shares were traded in a single day. Some attributed it to electronic malfunction, yet no correction of the volume or explanation for it has been issued. It remains to be seen if the billions of shares of dilution were authorized to 1) raise funds to cover expenses (the ask has been at .0001 for months), 2) put money in the pockets of insiders, or 3) create an environment by which to "bust" the purported short first indicated by the dividend of February 2001. All I know as an investor is, had there been regulation against naked short selling WITHOUT LOOPHOLES for OTC/OTBB/pink/grey stocks, this issue would have been over and done with in short order back in 2001. For had there been such regulation, if there were a short, there would have been a "cover," an ordered buy-in to cover naked shorted shares. If there were no short, then that would have become evident by the lack of a regulatory- mandated buy-in. 3. Regulation SHO MUST be applied to the OTC/OTCBB/pink/grey companies as well as the NYSE, AMEX and NASDAQ companies. The concept that it cannot be done because OTC and OTCBB companies do not have "reliable consolidated prices" is ridiculous. This is the same type of argument against SHO as the liquidity argument. If the market is moving too fast for monitoring and regulation, then either the monitoring and regulation system must be sped up, the market slowed down, or a combination thereof. If electronic quoting can keep up with the market ticks and pps of these companies, then surely a system is feasible for applying SHO to companies without "reliable consolidated prices." 4. The loopholes within the currently proposed SHO regarding naked short selling MUST be closed. Define in measurable terms the concepts of "reasonable" and "bona fide." Define audit concepts more clearly that would expose open naked short sale positions and require their immediate rectification by mandated buy-in. Impose penalties such as the 90-day restriction against short selling not ONLY against the account and individual, but also the responsible broker, market maker AND the brokerage firm, as well as monetary penalties of consequence for committing a naked short sale. Finally, implement stiff monetary and criminal penalties to these and to the brokerage firms for FAILING to rectify a naked short situation within 30 days with a mandated buy-in called by the brokerage. I believe there is industry pressure on brokerages not to order buy-ins, but brokerages MUST be held accountable to their fiduciary duties to their investing customers. There are many fine attorneys and industry experts who understand what wording will be necessary to close these loopholes, should the SEC require such assistance. 5. Finally, I would ask that ANY open naked short position in ANY company that exists as of the date Regulation SHO was proposed - even before SHO's actual implementation, which I hope will be swift even given necessary revisions - will be covered and rectified by SHO, REGARDLESS of WHEN the naked short position was established. Further, I would recommend that, despite the administrative headaches it would entail, a "grandfather" period be in place for reviewing previous claims of naked shorting. Perhaps this could be handled by a division set up for this purpose. I am aware of acquaintances who brought this issue to the SEC's attention five years ago; therefore, I would recommend five years as the grandfathered period for investigation and resolution. In conclusion, naked short selling is theft. It is the sale of shares that are not the sellers' to sell. Naked shorting is NOT something the average investor can do, so it creates an incredibly unlevel playing field, one heavily slanted against the honest investor. We are talking billions upon billions of dollars being funneled out of U.S. investors, the U.S. treasury, U.S. companies and the U.S. economy. This is incredibly damaging to our country, and if some of these funds are making their way into the hands of enemies of our country, which I believe they are, then we are looking at true horror. It does not matter whether these funds were obtained by naked short selling an NYSE company or a lowly OTCBB company. Thank you for considering my comment on this aspect of Regulation SHO. T.E. Cohen, Maryland