March 30, 2008
The following are my comments to File No. S7-08-08, "Naked" Short Selling Anti-Fraud Rule.
1) Prohibit any shorting of any stock without a proven ability to deliver the shares. Require the posting of a cash bond for a reasonable percentage (25-35%) of the value of the stock being shorted. Any entities caught naked shorting should be prohibited for life from shorting again.
2) Require an immediate and substantial penalty for non-reporting brokerages if they fail to report any naked short position.
3) Require a mandatory three (3) day settlement on all trades. No grace period. Period. End of story
4) IF THE SEC FAILS OR REFUSES TO TAKE ACTION ON A REPORTED ALLEGED VIOLATION OF SECURITIES FRAUD WITHIN SIX (6) MONTHS FROM THE DATE OF THE FILING OF A COMPLAINT, AN INDIVIDUAL MAY SEEK REDRESS IN FEDERAL COURT AND IF THE PARTY PREVAILS THEY WILL RECEIVE TREBLE DAMAGES, PLUS LEGAL FEES AND COSTS.
I am 100% in agreement with the following text from a recent article by Bud Burrell.
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In the late 1990's and early 2000s, market makers at broker-dealers had a 10 day fail rule, which mandated a charge to their net capital for any fail over 10 days. They would roll their positions within the system by kiting trades known by several names, including whip calls, and rolls. Reg SHO changed that effectively to 13 days. Re-enter rolls/whip calls, but now, not put through the clearing system, but rather done directly broker to broker in what is called Ex-Clearing.
Shorts and their related counterfeit longs would sit in Ex-clearing, invisible and unreported anywhere. Taking things a step further, the short players would take to intentionally miss-marking tickets to reflect short sales as actually "Long Sales" when they weren't, and no one was the wiser. Well, not exactly no one.
Everyone needs to realize that calling naked shorting anything other than counterfeiting, albeit by virtual electronic journal entries rather than a printing process, is simply WRONG. It is the intent of the perpetrators to delude the longs into thinking that they have bought real shares from a real seller, when in fact, the longs only know this when they themselves are dirty, such as when a manipulator wants the counterfeit proxies attached to the counterfeit longs to manipulate actions at a target company.
One well known company would call for a Proxy vote at their annual board meeting. They had a legally outstanding number of shares according to their stock record book of 60 Million shares. How many proxies showed up? 80 MILLION. I am shocked, SHOCKED, that such a thing could happen in America. Counterfeit proxies are the most serious corporate governance issue coming out of this scandal, a concern to every major corporate counsel in this country and overseas.
This is the longest piece I have ever posted. It re-covers many points in my previous writings. The SEC recently declared that the naked shorting selling of securities was NOT the sale of an unregistered security, in a completely illogical and self serving regulatory statement designed to feed key vested interests with their hands in the guts of the SEC.
Illegal naked short selling is MOST CERTAINLY not only the sale of an unregistered security, it is by intent and practical impact the COUNTERFEITING OF COMMERCIAL SECURITIES BY SYNDICATES. What the SEC says as a bureaucracy is meaningless to true honesty. It is very interesting that in making this declaration, the SEC specifically did NOT exempt such players from insider trading rules, particularly where they had previous knowledge of a pending PIPE deal.
After a scathing set of Euromoney articles in April and June, 2005, the UK and EU went to a mandatory three (3) day settlement on all their exchanges, effectively stopping their shorting scandals mirroring those here. They gave no grace period. It was hard, but their markets are now much cleaner than here. It is no accident that London has now trumped New York as the leading IPO environment.
End of Bud Burrells comments.
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FINALLY, why in the world does this new rule need to include any mention of Scienter as a condition??? Including this one clause/condition, in my opinion, will allow any good attorney to drive a truck right through this rule making this rule unenforceable and, for all intents and purposes, useless This is a real JOKE But NOBODY is laughing.
FWIW, for those non-attorneys reading this comment, the definition follows:
SCIENTER - Knowingly. Having the requisite knowledge of the wrongness/illegality of an act or conduct guilty knowledge knowing the impropriety/illegality associated with doing certain acts. This is often an element of liability or guilt that must be proven before a judgment or conviction can be obtained.
A man may do many acts which are justifiable or not, as he is ignorant or not ignorant of certain facts. He may pass a counterfeit coin, when he is ignorant of its being counterfeit, and is guilty of no offence but if he knew the coin to be counterfeit, which is called the scienter, he is guilty of passing counterfeit money. A man who keeps an animal which injures some person, or his property, is answerable for damages, or in some cases he may be indicted if he had knowledge of such animal's propensity to do injury. In this respect the civil law agrees with our own.