August 14, 2007
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington. D.C. 20549-1090
Re: Comments on Amendments to Regulation SHO
File No. S7-19-07
Dear Ms. Morris:
The following referral was submitted to the SEC Division of Enforcement on 8/13/2007. The data attached to the referral shows a clear pattern of abuse of the options market maker exception in numerous "reverse conversion" transactions used to create new unregistered shares in a Reg SHO threshold listed security. This referral was also submitted to FINRA on the same day.
Please accept this data in your consideration of complete elimination of the options market maker exception.
date Aug 13, 2007 8:03 AM
subject Enforcement referral: MDTL reverse conversions/naked short selling
Dear Division of Enforcement:
Please find attached a table of Medis Technologies, Ltd. (MDTL, Cusip # 58500P107) stock transactions which are directly linked to identically sized options transactions. This table includes only those block transactions which we could identify as having this exact options match, there were many other large block transactions that crossed on the Chicago Stock Exchange. Also, this table is only for this calendar year, this same activity occurred before 2007. Furthermore, this list should in no way be considered comprehensive as it is only the transactions that we have happened to observe. The information is accurate to the best of our knowledge, where the exact time or price of a transaction is unknown this is left blank on the table, or where several transactions were combined the aggregate total is listed.
Medis Technologies has been continuously listed on the Reg SHO threshold list since August 2005, thus restricting short selling in this issue to situations where a locate has been performed to verify shares for borrow. According to the CNS aggregate delivery failure data made available to us by the Commission under the FOIA, CNS level fails in this issue are excessive and frequently exceed one million shares. On the last settlement date for which this data is available, 3/23/2007, there were 1,009,938 failed deliveries at the CNS level.
On July 20, 2007, the Disciplinary Panel of the American Stock Exchange LLC handed down decisions against Scott H. Arenstein, SBA Trading, LLC, Brian A. Arenstein, and ALA Trading, LLC, for among other acts, violation of SEC Rules 203(b)(1) and 203(b)(3). The respondents were not acting as bona fide market makers, improperly used the Reg SHO market maker locate exemption to avoid locating shares prior to effecting short sale transactions in Reg SHO threshold securities, and engaged in a series of transactions that circumvented their delivery obligations in Reg SHO threshold securities that had been allocated to them by their clearing firms. These decisions can be found here: http://www.amex.com/atamex/regulation/discipline/2007/SArensteinSBA_Decision_072007.pdf and http://www.amex.com/atamex/regulation/discipline/2007/BArensteinALA_Decision_072007.pdf .
Need for investigation:
The attached table describes transactions that closely mirror those illegal "reverse conversion" transactions for which the American Stock Exchange penalized the respondents in the above decisions. The MDTL shares listed in this table totals 5,401,800, a figure greater than the difference between the legally issued and outstanding and the number of shares that were identified as owned by various institutions and company insiders in recent SEC filings. During just the past week we have observed stock transactions followed by matching options totaling 948,500 shares.
The suspicious nature of these transactions demands an examination to determine if this activity is in accordance with bona fide market making activity or are purely the creation of unregistered securities via the options market maker exception for a fee for use of this exemption. Owners of legal MDTL shares were recently being paid over 30% interest to lend those shares, indicating the scarcity of real shares and the difficulty one faces when locating shares to borrow.
Please do not hesitate to contact me if you have any trouble accessing the attached table or with any other questions. Also, I can provide you with the aggregate CNS delivery fail data though 3/23/07 in .pdf format if this simplifies the process.
from ENFORCEMENT firstname.lastname@example.org
date Aug 14, 2007 10:38 AM
subject Delivery Notification / Enforcement Complaint Response
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