August 13, 2008
To the Commission:
This is a brief follow up to my previous letter of September 13, 2007, which is preserved here: http://www.sec.gov/comments/s7-19-07/s71907-291.htm. There seems to remain some confusion at the Commission as to whether it is in the best interests of the public to continue to allow the options market makers (OMMs) among other miscreants to pervert the markets pricing mechanism by introducing counterfeit securities into the markets, artificially increasing what is otherwise legally required to be a limited, publicly disclosed supply of shares, while shifting the costs, risks and uncertainties to the legitimate shareholders of their victim companies. It is not.
Very little new information can be added to the comments of the hundreds of other writers urging the Commission to end the OMMs exemption. Assuming for the purpose of argument that the Commission wants to eliminate fraud and manipulation from the public markets, the Commission has no tenable rationale for continuing to tolerate this unfair practice by OMMs, or to permit extended settlement failures by any other market maker or other market participant, by the way. Surely the Commission has noticed the audacity with which manipulative short sellers, often aided and abetted by market makers, OMM's and the current SEC regulations that allow the same to avoid settlement of their trades for as long as necessary, continue to attack the markets even as the Commission waves its water pistol and threatens to do something. Did the Commission notice what happened to the financial stocks the very day after the emergency order expired? You threw your favored goldfish back into the piranha tank, and you never did pull the parasites off of them in the first place.
One would think that the criminals would be on their best behavior while the Commission debates whether to introduce a modicum of integrity to the settlement process but the bottom line is, and the criminals know that, other than the recent emergency order temporarily protecting a few favored financial institutions (including some of the main perpetrators of the stock counterfeiting/delivery failure scam, who also own and control the utterly corrupt Depository Trust and Clearing Corporation) the Commission has never really done anything against the pecuniary interests of the criminals and their enablers. In fact, even the recent emergency order did not stop the miscreants, though it may have increased the costs of operation for non-market makers as they were required to rent the services of an OMM or other market maker, thus adding a middleman and additional hassle and costs to the mix. Perhaps this caused some of the manipulators to go after unprotected targets for a few weeks.
If history is a guide, any change to existing regulations, and any new regulation the Commission implements, will be feckless, full of loopholes and not enforced (see, e.g., Regulation SHO and the Threshold List), and will be offset by another group of loopholes and/or creation of another manipulation tool (see, e.g., removal of the uptick rule). I fear the Commission will be made to look incompetent, or worse corrupted by Wall Street, yet again.
Maybe this time the Commission will prove us skeptics wrong and do the right thing, to wit, end the options market maker exemption altogether, do not compromise by implementing the proposed or any other alternatives, and let the OMMs pass along any increased costs to their customers.
And while you are at it, eliminate all exemptions to timely settlement and require ALL sellers, including without limitation all market makers, to own or pre-borrow and then timely deliver what they sell. Market makers are nothing more than parasites, and in an ECN world are rusty, dangerous antiques that serve no useful function at all. There is nothing wrong with providing for a reasonable extension of time for settlement for legitimate delays, such as your fabled lost certificate or paperwork delays. If the Commission insists on allowing anyone at all to sell unregistered securities to the investing public, then remove the registration requirements of the 1933 Act and let the issuer companies themselves sell unregistered shares into the market. At least in that case the buyers of securities would get a real ownership interest in the companies they had expected to invest in and the corporate issuers of the securities could use the sales proceeds for company purposes.
According to U.S. Treasury Secretary Hank Paulson, "In terms of naked shorts, my view on that is naked short selling is wrong anywhere. Any investor before they sell short should line up the stock and that goes without saying." Are you at the Commission going to claim that Secretary Paulson is ignorant of the relevant issues? He has figured this out, along with every other sentient being that is paying attention. Why does not everyone at the Commission understand that "naked short selling is wrong anywhere"? The Commission has given unscrupulous market professionals, greedy hedge funds that cannot succeed without cheating, and other outright criminals an unfair advantage for far too long. It is time to take steps toward leveling the playing field.
Finally, Mr. Cox, a technical correction to one of your recent public pronouncements on this issue: the usual scam is "short and distort" not "distort and short." The order is important: manipulators like to get their short positions in place before they start the defamation campaigns and get helpful allies at the SEC to open widely publicized, protracted and expensive investigations of the victim companies. See, e.g., Overstock.com Inc., Fairfax Financial Holdings, Ltd., TASER International, Inc., ad infinitum, ad nauseum. This is not to say they do not continue to short as they distort, etc. If there is a class action law firm that can be persuaded to find or buy a lead plaintiff to sue the victim company in conjunction with the defamation and SEC investigations, then that is an added bonus.
H. Glenn Bagwell, Jr., Esq.