From: dpatch@inspex.com Sent: Thursday, November 06, 2003 12:25 PM To: rule-comments@sec.gov Cc: Squawk@CNBC.com; special@foxnews.com; rwherry@forbes.com; pmaidment@forbes.com; PowerLunch@CNBC.com; ontherecord@foxnews.com; oreilly@foxnews.com; Nightly@NBC.com; news-tips@nytimes.com; Neal.Lipschutz@dowjones.com; msoto@seattletimes.com; msnbcinvestigates@msnbc.com; mmcclearn@canadianbusiness.com; mingram@globeandmail.ca; mdentandt@globeandmail.ca; loudobbs@cnn.com; jwaggoner@usatoday.com; jseper@washingtontimes.com; John.Labate@FT.com; john.emshwiller@wsj.com; jmccaslin@washingtontimes.com; Jim Cramer; jelsen@nypost.com; jdaw@thestar.ca; jcrudele@nypost.com; jaffe@marketwatch.com; InvesTrend; hardball@msnbc.com; hannity@foxnews.com; gfarrell@usatoday.com; GMORGENSON@NYTIMES.com; Foxreport@foxnews.com; forbes@foxnews.com; fcoombs@washingtontimes.com; executive-editor@nytimes.com; evening@cbsnews.com; erosen@DemocratandChronicle.com; erin.arvedlund@barrons.com; EDROBINSON@bloomberg.net; editors@barrons.com; editor@globe.com; editor@DemocratandChronicle.com; djnewsletters@dowjones.com; dgraham@washpost.com; DDecloet@nationalpost.com; dcolarusso@nypost.com; Davidcayjohnston@aol.com; Dateline@NBC.com; colmes@foxnews.com; christina.meyer@foxnews.com; cbyron@nypost.com; Cavuto@foxnews.com; capreport@cnbc.com; Bullsandbears@foxnews.com; bmudry@stockwatch.com; bizday@nytimes.com; bizcenter@cnbc.com; BillM@fool.com; bernsteinmichael@msn.com; beltway@foxnews.com; awillis@globeandmail.ca; 60II@cbsnews.com; theNews@cnbc.com; 48hours@cbsnews.com; bailey@globe.com; janderson@nypost.com Subject: SEC File No. S7-23-03 November 6, 2003 Chairman Donaldson and SEC Commissioners: Re: File No. S7-23-03 To initiate this letter, I would like to thank each of you for finally taking a step in the proper direction with regards to "Illegal Shorting". I am dismayed that it has taken so long based on the losses incurred while you have "Investigated" a well-known abuse but must commend you on trying to move forward with progress. Now, however, lets discuss the proposal presented. In the late 1990's, the SEC sought the advice and comments of Investors and Institutions regarding shorting abuses. This comment period yielded better than 2000 comments addressing a common issue of illegal "Naked" shorting. In response to this, the SEC took meager actions and is again, 4-5 years later, seeking additional comments this time admitting those 2000+ letters were correct and illegal "Naked shorting" exists. The SEC went so far as to call it Manipulative, Abusive, and Problematic. The SEC fails, however, to address how and why it is manipulative, abusive, and problematic and as such fails to drive to the root of the issue. The SEC has failed in using 5+ years of data to seek out the root and to cut it off. For any abuse in trades to occur it starts with the basic principles of a trade. Settlement! A share in a company is transferred between a buyer and a seller based on a basic principle of a cash transfer for delivery of a certified share (Electronically or Physical). The Securities Industry has elected the Depository Trust (DTCC) to undertake the task of controlling trade settlement and the proper accounting of a trade. If this activity is being monitored for abusive activities like "Naked shorting" as was proposed in September 2000 Organized Crime Session with the House Finance Committee they would never be the abusive vehicle they are today. The Trillions in Unsettled shares that exist would never have taken place because there would be a control over trade settlement. This is an area of reform that the SEC fails to get to and an area that propagates the abuse. Failed trade settlements cost issuers and investors billions each year and only benefit the Broker-Dealers taking in Commissions and those buying and selling shares they have no access to. The SEC Regulation SHO has protected the DTCC in their failures and fails to address the Trillions in unsettled trades on the books today. Regulation SHO is in some instances nothing more than a regurgitation of the existing NASD and NYSE regulations with slightly different spins in some areas. Regulation SHO fails, however, to consider todays evidence and to stop todays issues from manipulating tomorrows reforms. Every Month the NASD reports Fines and Sanctions being placed on our Brokerage Firms and Market Makers for failures in conforming to regulations. In most months, if not all, you will see fines imposed for what is called "Failing to make Affirmative Determination prior to executing a trade" or Improperly tagging a short sale by putting a long sale modifier on the trade. Both of these are actions that represent abuse to a security. Failure to perform affirmative determination is implying that the stock cannot be borrowed to settle. Hence, dilution to that security. Dilution reportedly having a negative impact on a security and those holding it. The improper tagging of a trade is a well known offense on Wall Street and also allows these trades to skirt certain securities rules. Long sales do not require affirmative determination so a failed settlement can take place on a long trade and not be caught. Likewise, Regulation SHO would not ensnare this trade into it's trap of failed settlement because the trade was not a "Short Sale" on the books even though it was in reality. Relying on the NASD to catch and enforce this is allowing a period of abuse to take place before getting caught. The real security in thwarting these potential means of side-stepping regulation SHO is to properly create reforms that address FIRM settlement requirements on all trades. Present SEC Regulations use the phrase "Best Attempts" and "Reasonable Time". These are ultimately phrases that make excuses for failures and allow abuses to become simply overstepped excuses that the SEC and SRO's ignore. These are the excuses being used today when "Best Attempts" to trade settlements is afforded a term of 1 year because these firms cannot find guaranteed shares AT PRESENT PRICE best on present day conditions. Therefore, they wait out the shareholders until they sell into the "Best Interests" of the abusive. The SEC must define very rigid timelines for Trade Settlement on all securities and then, if there are justifiable reasons to miss these deadlines, the SEC must define those justified events and define secondary timelines. "Best Attempts" in an industry rampant with greed and deceit is not in the best interests of the investor. It is in the best interest of those looking to take advantage for revenues. The SEC Regulation SHO must also carry the weight of future deterrents to abuse. It is our Wall Street Institutions that we place our investments with as it is these Institutions (Broker Dealers) that we contract out to properly execute our trades. We cannot trade ourselves and have no means of validating the behind the scenes actions of our brokers. Therefore, these firms must be tightly controlled to meet their contractual obligations to us. Regulation SHO lacks any type of deterrent to Broker Dealers playing an active role in fraud. Our Broker Dealers protect each other through forgiveness. This is strictly in the best interests of the Industry and not the Investor. No investor would forgive trade settlement at the expense of diluting their own investment but one firm would forgive settlement on a trade because they would see it reciprocated back. This needs to stop. Regulation SHO must address sanctions and penalties to our Wall Street Firms initiating with 2X commissions being forgiven for trade settlement failures beyond a threshold and escalating it up for additional periods of settlement failures. Fines should originate at the failing firm first but then be imposed on both the buying and selling firm for failure to enforce each other. If we want self regulation we must put stress into failures and not forgiveness. Monetary pain is that stress. Those monetary pains should be provided directly to the issuers whose trades had the problems as that would be in the best interest of all investors. Those penalties could be returned to all investors by way of a dividend or higher asset values. In closing, I again want to express my delight and dismay at the SEC for these proposals. I am delighted that some measures are being taken but more dismayed at the efforts it has taken to get here. The lack of compassion by the SEC at what their failures in doing so has taken upon this Country is unacceptable. The lack of compassion to all those who have complained about this issue since the late 1990's is reprehensible based on the reality that they were correct in their assessments. In September of 2000, the SEC testified to the House Finance Sub-Committee regarding Organized Crime on Wall Street (http://www.sec.gov/news/testimony/ts142000.htm). This report addressed many abuses that were taking place in 2000 and it highlighted greatly that the Penny and Micro-Cap companies were ripe for Organized Crime infiltration. Likewise, recent events in terrorism have linked stock manipulations with the financing of terrorist activities. The SEC and FBI participated in an investigation of Pacific International between 1996 and 2000 where the manipulations addressed are linked to organized crime and terrorism. The abuses mentioned were illegal shorting of US penny stocks through offshore accounts. That is exactly where Regulation SHO is today. In all, the data has been available for many years linking the participants of illegal shorting with many of the activities that threaten our National Security. To think that the SEC and it's supervisory auditors (Senate Banking and House Finance) have allowed this abuse to continue knowing where some of the money is diverted makes you wonder about our Nation and our Leaders. To date, they (SEC, NASD, SRO's) have called the Penny Stock and Micro-Cap Markets the 'Wild West" but that "Wild West" is taking US dollars and sending them overseas to venues that are against our National Security. Wall Street needs to have clearly defined rules if we are to stop the manipulation of our markets. There is not enough integrity within the Industry to let them decide on their own. Recent events have proven that out. Regulation SHO falls short of clearly defined rules and allows to many "Excuses" for the violators to get around these laws. You now have the opportunity to right the mistakes and oversights of 1999, don't make that mistake again. Thank-you all for your time and considerations. Please do not let the US and it's Markets down by failing to take swift and appropriate action. Enforce all Trade Settlements and the abuses wil slow down tremendously. David E. Patch Jr. Topsfield, Ma.