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Now that Regulation SHO is in the final stages of being doctored up and submitted into the Federal Register I would like to pass along some points you all should consider. Points the Securities and Exchange Commission may have missed in their efforts.

According to several public meetings Annette Nazareth identified that Regulation SHO will address the naked shorting issues. Did she mean past as well as future or just future?

Regulation SHO, as presented on Wednesday June 23, 2004 never addressed the present settlement problems on the books. How are they to be handled?
Regulation SHO, as presented Wednesday June 23, 2004 never addressed specific timelines in which settlement failures would be forced to settle even after SHO is implemented.
Regulation SHO, as presented Wednesday June 23, 2004 never addressed the handling of settlement failures associated with unfulfilled longs selling where their trades had not settled from the long side. (These are not short sales). Will longs be restricted from selling when their trades fail settlement after 10 days as well or will this simply maintain a higher threshold of failures? Restricted because their Broker-Dealer never forced the settlement.

The Securities and Exchange Commission, on June 23, 2004 publicly went out and said to the criminals (in my own words), you robbed the bank; we caught you; we will let you keep your money but we will deter you from doing it again.

Present unfulfilled longs and settlement failures have artificially depressed the values of the securities affected. Nothing in SHO will address this artificial price structure.
Depressed stock values will create a higher level of new share distributions in Convertible Debenture financing deals as the number of shares issued is directly related to share value. The importance of this is that more shares than necessary enter the stock structure of the issuer affecting the investor’s investment and, the additional shares assist the abuser in providing more shares into circulation for trade settlements.
The SEC, on June 23, 2004, never addressed the commissions paid to the Broker-Dealers or the fees paid to the Commission on every trade the buy-side failed to receive. The broker-dealer was not penalized for their in-activities nor was the SEC for failing to enforce securities laws the SEC admits was already in place. Everybody got paid while the buyer was abused.

The SEC’s performance in this matter is questionable on several fronts. First is where does the money trail lead and second, did they address all issues.

Money Trail. Herb Brooks of the Division of Market Regulation identified that the SEC is working with Federal Agencies tracking this money to terrorism. If this is true, failing to call in these shorts allows the continuance of this money trail.
Trade commissions. With each trade that had a settlement failure both the selling broker and buying broker received a commission. The buying broker did not pursue forced settlement because they received their commission in full. The selling broker did not pursue settlement because they not only received full commission; they maintained a happy client that will generate future commission trades. Wall Street made money and the investor lost.
Open issues. In an e-mail on June 25, 2004 from a staffer of the House Financial Services came this comment; “I was not denying that there were some serious problems and that the SEC had not yet addressed them”. This from a staffer on the oversight committee to the SEC. So who then addresses the issues if the oversight committee allowed serious problems to remain? Where was their oversight?

Now, what questions should be asked of the SEC?

What rationalization was provided by the Broker-Dealers with regards to why they did not settle these trades? I have heard my own reports; “These are Piece of S--T Companies and I am not going to Buy-In their stock”. Is that a legal response? Was that the response the SEC received and if so, did they accept that? Can Wall Street decide the fate of our small business?
What is the SEC’s formal plan to address the present accounting problems on the books of the Broker-Dealers? It appears that the SEC plans on addressing the massive settlement issues with some companies by slow attrition. Instead of forcing all issuers to be below a baseline within a fixed timeline, the SEC appears to be willing to let additional dilution and frustrated long investors sell offs work through the issue. This, in my opinion, is sacrificing the investor to protect the abuser and the industry. Make the investor pay for the sins of our inactions.
How did the SEC, with years of investor and issuer complaints and NSCC settlement records, allow companies to achieve a greater than 100% unsettled trade level? Where was the ‘short sale restriction’? Where was the “Red Flag”?
How long have the SEC been tracking this to terrorism without taking action? How much money was diverted during the “investigation period”? Evidence of naked shorting financing organized crime dates back to 1996 or before; Ref. Pacific International and Phil Gurian. Has the links to terrorism dated back this far as well?
Finally, why won’t the SEC simply tell the industry to settle up the trades according to the mandates of the Securities Act of 1934? Would that not pass the responsibility of the fraud back to the originating seller who overly diluted the stock in the first place? Isn’t that the best protection to the investor and issuer? Wouldn’t that lead back to the criminal elements? Or, is the real answer that the selling broker was taking order flow for criminal elements they can no longer find and thus the selling broker would be left holding the bag (Patriot Act).

There are serious concerns about this recent reform package because it has no meat behind it. Putting SEC level regulations in place that are merely mirror images of pre-existing rules presently not being followed by the industry is “smoke and mirrors”. The real issue the SEC was mandated to address is the abuses imposed on investors by an indifferent industry. The demographics of the abused companies themselves will show the line of prejudice. The SEC failed to respond to that prejudice and in fact had similar prejudice. The SEC again failed to protect the present investors from future abuses. Future abuses associated with the stock dilution of Convertible Debenture Financing the issuance of shares based on an artificially depressed value. A $1 million loan at a stock value of $1.00 is 1 million shares of dilution. If the stock is artificially depressed to $.50 it will be 2 million shares of dilution and not 1.

This reform package thus feeds directly into the hands of the abuser simply because addressing them also addresses the Broker-Dealers who assisted in the crime itself. Some will be held liable for the clients they chose to operate for.

I hope that these issues and questions can roll through the halls of Congress, Pressrooms, and the SEC building while I am away. Who really did the SEC protect when they spoke of Regulation SHO on June 23, 2004? Follow the money! The investors got nothing, the issuer is still oversold. Who benefited? What is the fear of forced settlements in an industry that frequently addresses the perils of settlement failures?

Where are President Bush and John Kerry on this issue? Both are aware of the issue but in an election year votes ring louder than the financing of terrorism. On April 1st White House staffers were briefed on this by small business leaders. What have they done since? Very little! Senator Kerry’s office likewise is fully aware of the issue but highlights the lame duck status of the Senator in Congress today and thus elects to remain quiet on the issue.

David Patch

Posts: 22 | Registered: Dec 2003  |  IP: Logged | Report this post to a Moderator

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