From: Robert W. Hallam
Sent: March 28, 2007
Subject: File No. S7-12-06

The questions surrounding the SEC’s Reg SHO fiasco should be focused on solving the stock counterfeiting problem without cracking the Wall Street financial system. How do we put teeth into Reg SHO where none presently exist? The solution is for the SEC to compartmentalize the problem into four major segments, involving the DOJ for criminal prosecution, where appropriate:

1.) A new set of rules that would affect any company that henceforward is placed on the Reg SHO list.
2.) A plan for clearing and settling the fails for companies that are already listed on Reg SHO.
3.) A plan for dealing with companies that have been bankrupted by naked shortselling.
4.) A plan for settling the failed trades that were illegally grandfathered when Reg SHO was implemented.

Problem number one: What does the SEC do when a company first appears on Reg SHO list? The company’s stock should IMMEDIATELY go on RESTRICTIVE TRADING to prevent the stock counterfeiting problem from worsening. Restrictive trading means NO OPTIONS TRADING and NO SHORTING until the failed trades are fully settled. It is absurd to allow these prime brokers to allow phony “locates” when the CNS system clearly indicates that there are outstanding failed trades. If dealt with at an early stage, there should be no significant short squeezes. Restrictive trading should last a minimum of thirty days while all failed trades are settled. This period should be followed by at least another thirty days of carefully monitored PROBATIONARY TRADING. The goal would be to insure that the company does not wind up back on the Reg SHO list. Meaningful penalties should be levied by the DOJ against participants who have violated settlement rules. There should be assurances and transparency that the fines that are levied are actually collected.

Problem number two: How does the SEC settle the failed trades for the companies that have been chronically listed on Reg SHO? For starters, the SEC should implement all of the RESTRICTIVE TRADING guidelines previously mentioned, no further options, no further shorting allowed. More extensive investigation is obviously needed. Trading may be halted for a number of days while a comprehensive inventory is taken, both within the DTCC and ex-clearing of the trade failures. For each company, the DOJ should issue subpoenas for market maker’s trading records. This information should reveal the prime brokers who have failed to deliver or otherwise illegally manipulated the stock. To avoid a short squeeze that would crack the market, the abused company should enter into an independent arbitration to sell enough shares at a fair price to settle the delivery failures. What is a fair price for a company whose share price has been criminally manipulated? Let the arbitrator examine the company’s trading history decide the price and force settlement, even if it requires seizure of assets of the miscreant shortseller. The crooks should NOT be allowed to walk from the crime scene unscathed. Additional criminal penalties should be assessed by DOJ - including jail time, where appropriate.

Problem number three: How does the SEC compensate investors and the companies that have been bankrupted by naked shortselling? There is no simple solution here. I know that I do not have the answer here. The money has long since been removed from the system and there are thousands of companies bankrupted, jobs and technologies lost, hundreds of thousands of investors damaged involving TRILLIONS of dollars stolen by devious white collar crooks. This problem may never be addressed. This is likely the greatest financial crime in the history of the US. The problem only grows if the SEC does not start doing its job.

Problem number four: How does the SEC settle the failed trades that were illegally grandfathered when Reg SHO was implemented? Well, unfortunately this information remains a secret. We don’t have a company-by-company breakdown on the scope of this problem. Investors are kept in the dark and the SEC refuses any transparency. How can solutions be offered when the scope of the problem remains unknown? Why should the public have any confidence in the SEC when this is the case? The SEC should be forced to reveal the information. The victims deserve the complete truth, not excuses and obfuscation. Only when the information is revealed can a realistic plan of action evolve.

Sooner or later, the SEC must come to grips with the seriousness of the problems that have resulted from their years of inaction. This problem is possibly the greatest single threat to our national security.

The SEC must take the difficult first steps and start regulating. And the crooks need to go to jail.

Sincerely, Robert W. Hallam, private investor