From: hgbjr [hgbjr@hgbjrlaw.com] Sent: Thursday, March 06, 2003 9:21 PM To: rule-comments@sec.gov Subject: File No. SR-DTC-2003-03 Attn: Ms. Margaret H. McFarland, Deputy Secretary Ms. Margaret H. McFarland Deputy Secretary Division of Market Regulation Securities and Exchange Commission Re: File No. SR-DTC-2003-03 - Depository Trust and Clearing Corporation ("DTC") Request for Rule Change Regarding Withdrawal from DTC of Certificates by Issuers Dear Ms. McFarland et al.: This letter is in response to the above mentioned request for rule change by the DTC with respect to Issuers seeking withdrawal of their certificates from DTC. I appreciate the opportunity to comment on this request. I am an attorney duly licensed and in good standing in the State of North Carolina, and my areas of practice are corporate law and federal securities law. In summary, DTC should NOT be allowed to deny Issuers the right to withdraw their securities from the DTC system. The arrogance of the management of this "self-regulatory organization" of DTC is telling. DTC publicly announced in January that it had the right to prohibit Issuers from withdrawing from DTC, then in February DTC quietly goes to the SEC in an attempt to legitimize its pronouncement. And this AFTER a number of companies have withdrawn from DTC with no objection from DTC, with none of the delaying tactics currently utilized by DTC. Why should DTC care if a few small OTC: Bulletin Board listed companies withdraw from DTC? Whom is DTC trying to protect? As the SEC is aware, numerous publicly traded companies, mostly OTC: Bulletin Board and NASDAQ listed companies (though an ever increasing number of AMEX and NYSE listed companies as well) have alleged and do allege that their securities are being manipulated by unscrupulous broker-dealers and market makers, either for clients or for their own pecuniary benefit. With due respect, while the SEC aggressively prosecutes cases of improper inflation or "pumping" of an issuer's securities, and rightly so, it seems that to date little is being done to combat manipulative trading in the other direction, namely manipulative downward pressure on the securities of issuers. In this I am referring, of course, to the phenomenon of "naked" short selling, better described as counterfeitting shares to sell into the market in violation of the registration requirements of The Securities Act of 1933, as amended. As you probably know, with a "naked" short sale a short seller does not make any "affirmative determination" that shares are available, does not borrow shares, and does not complete the selling transaction by delivering securities to the purchasing party. Because there is no "uptick rule" for the OTC: Bulletin Board (though admittedly it would be easy for unscrupulous market makers to circumvent it anyway, as they routinely do on the NASDAQ), a broker with a reasonable capitalization can, in effect, COUNTERFEIT securities and sell them into the market, utilizing the DTC system, hitting posted bids again and again for the purpose of driving the price of a stock down. This is often done by these brokers when they see a Form 144 filing, a registration statement filing, such as an S-3 or an S-8, or when they read an 8-K or company release about an equity financing. These naked short selling brokers assume that they will be able to buy shares to cover at some point, and know that, because most buyers will not demand physical certificates anyway, they will not have to close the transaction. Whether through complicity, ignorance or incompetence, DTC facilitates these activities because they are lax in requiring ther "participants" to complete their sale transactions. No one is checking to see whether the selling firms have possession of the shares to sell. This "self regulatory organization" is not regulating itself, no one else is watching DTC, and its "participants" are taking advantage of the situation. Now that issuers are trying to withdraw, the DTC "participants" are realizing that their little party--a party had at the expense of the investing public--is in jeopardy. [An equally egregious mis-use of the DTC and the US equity markets as a whole occurs when Canadian and other "off-shore" firms, which are not NASD members, "naked" short sell into US markets without complying with US rules. This manipulation is more difficult and risky for these criminals when the victim issuer is not a DTC eligible security.] A clear example of the manipulation that occurs regularly is described in some detail in the recent SEC complaint against Rhino Advisors, Inc., and Thomas Badian, which was filed on February 27, 2003 (see http://www.sec.gov/litigation/complaints/comp18003.htm). While the $1 Million fine was small in relation to the damage done by these manipulators, I expect the trial lawyers will eventually exact a more painful penalty from Rhino and Mr. Badian. I have personally witnessed instances where corrupt financiers agree to purchase restricted securities from an unsuspecting issuer; "naked" short sell a sufficient number of shares to cover the purchase price plus, THEN purchase the securities, and then roll the short position until a registration is effective for the securities purchased or until the Rule 144 safe harbor exemption is available, at which time they cover the naked shorts and make a huge profit. Of course, their manipulative short selling drives the price of the purchased security down, giving them a better deal on the restricted securities they eventually purchased. Such manipulation is easy to detect by watching a security's trading the last few days of the calendar month, when you will see an impressively consistent group of market makers trading among themselves large blocks of shares without any significant movement in share price (or, you will see them drive the price down a few cents, then see the trades go through). I have an OTC: Bulletin Board listed client that submitted proxies and got TWELVE MILLION MORE VOTES than there were shares outstanding, when there were about twenty million shares outstanding. I have another OTC: Bulletin Board listed client that did a stock dividend of one new share for each 100 shares owned. After it had issued the appropriate number of shares based upon the total issued and outstanding shares, shareholders representing another SIX MILLION shares demanded to receive their dividend distribution. These are two examples, I can provide many more and my colleagues all over the United States can provide hundreds more. The bottom line is, unscrupulous market participants are counterfeitting publicly traded securities, illegally distributing them without registration as required by the Securities Act of 1933, as amended, making BILLIONS of dollars in the process, stealing this same money from legitimate buyers of the securities they are counterfeitting, and destroying the companies they manipulate to boot, and DTC is in large part making this not only possible, but easy. Again, look at the SEC's Rhino Advisors/Thomas Badian Complaint. It must be noted that, if the SEC continues to allow firms to "naked" short sell a security with the current impunity, then there will continue to be NO LIMIT to the number of shares such firms can create and dump into the market. No security can withstand unlimited dumping in such a manner. If the SEC would allow a purchaser to purchase unlimited shares, using the value of the shares already purchased to purchase more shares, such a purchaser could drive any stock price to $1,000.00 and keep it there indefinitely. Of course this is not permitted on the long side, but market participants do the equivalent on the short side routinely. If they can hold the price down long enough, the victim issuer will eventually go out of business, unless it was already profitable prior to the manipulation, because they can not raise equity capital. Issuers are doing what they can to stop this activity. One action many are attempting to take is to remove their securities from the DTC system, thus at least minimizing the incentive of these brokers (and the money behind them) and making it more difficutlt for them to manipulate their share prices. Why should DTC care if issuers take this action? More importantly, why should it be the right of DTC to decide who does and does not participate in DTC? Note that DTC wants the rules to read that it can deny issuers from withdrawing even if the shareholders of the issuer approve it. I quote: "Since this is a clarification of DTC's rules and procedures, DTC will continue to not honor Issuer Withdrawal Requests regardless of any purported approval of the Issuer Withdrawal Request by the shareholders or board of directors of the issuer." DTC claims it is a clarification, but of course it is not. They also call it a proposed "rule change" (see first paragraph of DTC's submission), which is closer to the truth. This "self-regulatory" arrogance should not be permitted. Note also the comment of DTC that "The securities at issue generally became eligible for DTC services at the request, or for the convenience, of DTC's participants who wish to utilize DTC's book-entry transfer system. The subject securities are held by DTC for the benefit of its participants." No consideration is given to the Issuers, or their shareholders. Is DTC or is it not a voluntary organization? If so, should not the issuers subject to DTC be able to decide whether or not they are to be "volunteered"? After all, alternatives exist, such as X-clearing, or issuer or transfer agent book entry systems. Alternatives that do not lend themselves as quickly to market manipulation. I would wager that an independent audit of DTC's records would reveal that DTCdoes not even know who has what, or who has borrowed what from whom. Has an independent audit of DTC's holdings EVER been done by ANYONE? As the SEC is no doubt aware, the trial lawyers are now taking up the issue of market manipulation by brokers, market makers, corrupt financiers, and their respective co-conspirators, including DTC. At some point the SEC will have to step in and deal with the issue of "naked" short selling, a/k/a counterfeitting securities, because juries in the U.S. will undoubtably take a dim view of these activities and their depressive effect on the U.S. equity markets, and financially crush the market makers, brokers, traders, financiers, and other assorted criminals involved. I understand that Congress will be considering this issue as well in the near future. Until the SEC (or Congress) does deal with this issue, issuers must be able to protect themselves from predatory market activities. Withdrawal from DTC is one available protective mechanism, and the SEC owes it to these issuers and their shareholders to keep the option available, and further, to ENSURE that the option is readily available. Please do not hesitate to contact me for further information or to discuss the above. I hope that the SEC will consider not just DTC's desire to hold on to its virtual monopoly, but also the countless shareholders of issuers that would continue to be harmed by permitting DTC's proposed "rule change." The issuers and their shareholders deserve a "level playing field," something that does not currently exist. Best Regards, H. Glenn Bagwell, Jr., Esq. Raleigh, North Carolina U.S.A.