Subject: File No. 4-581
From: Ronald May

May 15, 2009

It is very important that naked shorting or shorting based on locates be terminated. The fact remains that naked shares have not been authorized, issued or registered by the company. Per the Securities Act of 1933, the sale of unregistered securities is illegal. A share counterfeited is a share that has been hijacked from the companys treasury and sold to an unsuspecting member of the public. It is wrong.

Allowing short sales on locates and giving the shorter 3 days to deliver or cover with a loan share does not stop the larger capitalized organizations from manipulating a share price. A deluge of shares offered for sale WILL force the price down and in most cases start a panic among the less sophisticated investors.

I am told that a multitude of devices are used by the shorts to create counterfeit shares, some are outright fraud, and some exploit loop holes for manipulative purposes. One of the later is Program or Black Box trading platforms. Basically these computer programs buy and sell stock based upon programmed parameters and triggers. What makes this dangerous is the Black Box Exemption allows an unlimited number of naked shorts to be sold the computer just creates the shares. So, for example, if the trading program says sell short if the stock price hits $4.20, it spews out counterfeit shares until the price drops back under $4.20.

Also of importance is there seems to be little consistency as to whether Black Box shorts are marked as a short sale or long sale, so this is another factor that contributes to the actual short being considerably higher than daily short disclosed by the NYSE/ARCA.

In theory, the Black Box is supposed to be long/short neutral at the end of each day, or they are to buy in the net short position. There are two problems with this: 1) The enforcement overseer of the Black Box is the broker dealer who owns it and who rakes in huge fees, particularly from those who dont want to borrow shares and dont want their identity known and 2) if a buy-in occurs that shares that are bought by the Black box are frequently naked shorts sold by the broker dealers prop desk, who then makes the audit trail to the naked short vanish.

I hope the SEC will take the action necessary to close these loop holes and apply meaningful penalties for violation of the rules. Not nominal financial penalties but serious fines and for consistent violations, jail time.
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