Subject: File No. S7-12-06
From: US Citizen

March 3, 2007

Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-0609

Dear Secretary Morris,

I hereby submit the following article that I find germane to the issues we are attempting to resolve with respect to problems with the present effectiveness of Regulation SHO.


An online newspaper reporting the issues of Securities Fraud

Damn the Torpedoes - March 2, 2007

David Patch

As a kid I always thought torpedoes were these missiles shot from the hulls of submarines. It was a sign of war times and war movies. Little did I know that the guys on Wall Street had a different use for the term best associated with destruction and death.

Jim Cramer, in today's blog identifies how short sellers would "break the market" through a process they labeled "torpedo". In the blog Cramer states:

"On days like today when I was short, I would come in with a lot of firepower and try to blast things down at 2:45. I wasn't alone. We were never organized, but we did get the call from the trading desks that other guys were torpedoing the tape."

Cramer drafts these words like they were a badge of honor and proceeds to say:

"And don't forget, it's fun for these guys to try to break the market. And there's a level of sport in the bigs that can't be denied."

This is the guy CNBC hangs their reputation on as being out there to protect the general investing population. Its fun for these guys for which Jim was one to destroy the portfolios of others as part of a game? I thought Jim was about making me money.

A closer look into this public dialogue raises some serious concerns over whether our regulators are really in touch with market operations, liquidity, and in general how hedge funds operate. These concerns are only exacerbated by the recent proceedings where a ring of traders, compliance officers, and hedge funds operated an insider-trading ring that has been going on for the better part of this decade.

According to Cramer he would go in and blast a stock torpedo to drive the stock price down. I guess that begs the question, when is aggressive trading no longer trading but manipulation? Blasting a stock down hoping to force others to panic and do the same seems to encroach on bear raid manipulation. In fact, lets read the laws straight out of the SEC handbook.

Rule 10b-5 of the Exchange Act of 1934 states that it is unlawful "to effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange or in connection with any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others."

If a torpedo was intent on driving out the "weak kneed investors" hasn't Mr. Cramer just admitted to fraud by my interpretation of this law as it had the intent of inducing fear into others and forcing them to sell? I think that would be for regulators to sort out but certainly you readers are welcome to formulate your own opinions.

It only gets better though.

To address the potential of such sudden volume shifts, the SEC created special exemptions to market makers and specialists to allow them opportunity to sell what they do not hold in inventory as part of bona-fide market making. The intent was to take out the sudden burst of buy side pressures by allowing Wall Street to temporarily sell shares that did not otherwise exist.

The implication of this exemption was that market makers and specialists would likewise temporarily purchase securities in a bona fide market if necessary to flatten out a sudden influx of sell side volume entering a market. Cramer's observations and practices would imply that the buy side protections required by market makers were not taking place. Torpedoes only work if the market makers and specialists walk away from the bid during the raid and Cramer claimed they worked so well they were detectable.

Today, under Regulation SHO we have massive levels of failed stock deliveries in the system where the market lobbyist and hired guns The Securities Industry and Financial Association (SIFMA) have lobbied regulators to ignore these excessive and long standing fails in the system as necessary for the market protections. These fails being excused as Wall Streets need to sell non-existent inventory to stop buy side enthusiasms.

SIFMA apparently wants to allow a Wall Street exemption on one side of a trade but also wants to ignore the lack of fiduciary duties on the other side. SIFMA wants Wall Street to be able to sell what they don't own, which is profitable as it comes with a payment for non-existent goods, but does not want to sure up the venue where they are expected to buy securities where such would require each to come up with the capital to pay for such a transaction.

I guess in understanding the shear magnitude of the trade settlement problem one concern I have would be whether these torpedoes resulted in timely settlement of the trades or whether these torpedoes resulted in a settlement failure. Imagine selling with firepower into a market, with the intent of breaking the market, and it turns out the tools used were not even legal tender, a certified and existing share. A bear raid leveraged off shares that did not even exist to sell in the first place would be a real novel game.

Bull's eye - another investor portfolio knocked dead for Wall Street revenue growth.

Finally, my dissections of Cramer's comments lead me to where he admits that the trading desk will notify a fund manager that "other guys were torpedoing the tape."

How does such proprietary information come to hedge fund managers?

Now traders can of course see how a market is moving and react to the data the market provides. But if traders are capable of picking up a "torpedo" the data has to tell them that it is a short sale intent on breaking the market. That is more data than simply; "we have a seller out here".

How come traders can pick up the signs of a torpedo that by all accounts appears illegal and yet the SEC, NASD, and NYSE market surveillance teams can't?

Were the hedge funds receiving the proprietary information of other investors in the market and what they were doing? If so that too is illegal. In fact, the DTCC and SEC have stated that a simple publication of the level of fails in any particular stock cannot be published daily because "the fails statistics of individual firms and customers is proprietary information and may reflect firms' trading strategies. The release of this information could be used to engage in unlawful upward manipulation of the price of the securities in order to "squeeze" the firms improperly."

Chairman Cox is about to embark on a campaign where his foundation is to defend that the SEC's " role is to be the investors' advocate. I want to make sure that every company understands that so long as they treat their investors well, the S.E.C. will be friendly to them."

I say it is about time he steps up to the plate then and advocate for the investor and not the lobbyists who protect the wayward industry and the hedge funds who brazenly manipulate our markets. If I were SEC Director of Securities I would make a call to Mr. Cramer post haste and get clarification on what he means when in his blog he states "and it will happen again" referring to the torpedo.

Damn the Torpedoes, Full Speed Ahead. There appears to be a war taking place in these capital markets and the investors appear to be fighting it with the butter knives supplied by Chairman Cox and his staff.

Thanks to Jim Cramer for so eloquently presenting exactly what is wrong with the US Capital Markets and the conflicts between the average investor and the greed of the wealthy.

Since the last time I wrote about Mr. Cramer I was presented with the threat of a lawsuit, I will disclose here that the comments made regarding illegal trading activities are my personal interpretations of Mr. Cramers comments and that I have no direct evidence of wrongdoing. I would not want Mr. Cramer to misinterpret this as anything otherwise where he feels compelled to again threaten my personal opinions with a lawsuit. We know that both he and I are way too busy to address such matters in a courtroom.

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