Subject: File No. S7-19-07
From: David Patch

July 14, 2008

July 14, 2008

Securities and Exchange Commission
100F Street NE
Washington DC

Mr. Chairman,

On July 13, 2008 the SEC put out a public notice firing a warning shot over the bow of rumor mongers who use the spread of false rumors to manipulate our public markets. The SEC has identified that examinations of compliance operations will take place to insure that compliance programs are designed to prevent the intentional creation or spreading of false information intended to affect securities prices, or other potentially manipulative conduct.

I must ask the Chairman and the Commission staff what evidence the Commission has provided the public that would support the belief that this exercise is nothing more than a smoke and mirrors show? Clearly the Commission has failed to respond to these complaints over the past decades as public issuers and public investors have demanded enforcement actions in this area of market manipulation.

It is documented that public financial message boards are littered with paid bashers who provide a service to hedge funds intent on destroying the market capitalization of issuers they hold short interest on. Similarly enlisted by these hedge funds are members of the financial media for whom the SEC initiated an investigation through subpoenas in 2006 only to have those subpoenas stricken by the Commission staff prior to any evidence being gathered.

Knowing that the SEC has issued a subpoena to CEO Patrick Byrne regarding his interests in naked short selling abuses, demanding all documents he had on the subject matter, it is not without reason to believe that the computer he received containing over 8,000 e-Mails documented the aforementioned is in fact in the hands of the SEC as well. Byrne addresses these e-Mails at and discloses several who are identified in this game of manipulation.

What does this all have to do with the proposed rule I comment on? Everything

Simply spreading a rumor does not guarantee a response. Many times a catalyst is also required. That catalyst is the very perception that the rumor must be true based on the markets responses.

In Bear Stearns, Lehman, and public issues across the market and over decades we have seen how trading into settlement failures have and continue to create that catalyst. The SECs own OEA analysis confirms that investors otherwise unable to short the equity due to the tightening up of equity short sale rules have moved their sales over to the Options Market and have essentially rented out the options market exemption into the equity.

If a hedge fund can do this, what is the difference between that hedge fund shorting the equity into a failure or shorting an options market and having the options market maker short the equity into a failure? Isnt the abusive leverage obtained in the failed trade the same? Does the equity market and those investing in this market understand the difference between an equity fail and a hedged options market fail as it is portrayed into that equity market?

When Bear Stearns was morphed into dust, as was the billions in market cap lost to all investors, could it have been avoided?

With negative rumors, false rumors floating in the markets and across the financial media, and with a large scale sell-off in the market of Bear Stearns through the use of failed trades, could Bear Stearns have survived without the failed trades? Was the failure of the SEC to respond to the comments posed in 2006 and again in 2007 partially to blame for the destruction of such wealth?

For decades the SEC, financial journalists, and hedge funds have claimed that short selling can not destroy a public company because each survives on the merits of their own financial stability. What we have experienced is that that is not the truth. Abusive short selling can destroy public companies because it can destroy the confidence necessary to sustain the business capital necessary to survive such attacks.

From an article in the NY Times on July 14, 2008.

But Wall Street executives insist that false information is permeating the marketplace as never before. Since Wall Street firms are highly leveraged businesses that need outside financing, confidence is crucial, and rumors can overshadow the strength of their businesses, executives say.

Smaller issuers, not large financial institutions, are even more dependant on the confidence of the markets to secure business and survive.

In the SECs figurehead enforcement case SEC v. Rhino Advisors it was identified that Rhino abused Sedona Corp. through a massive illegal selling (naked short) campaign. That selloff created a confidence problem for the company and not only investors backed away from the market but customers backed off on sales orders. Customers became fearful of the long term stability of the company based on the impression that Wall Street had lost confidence in the company.

It was several years later that the SEC finally brought an enforcement action against Rhino that revealed that the loss of confidence was in fact market manipulation and fraud. By that time the contracts were awarded elsewhere as were others that failed to come to fruition. Today Sedona continues to struggles under the duress of business opportunities lost nearly a decade ago.

The SEC has provided the public with irrefutable documentation that the fraud has moved over to a venue recognized as a loophole. Instead of managing the options markets within the options market by adjusting the cost of options contracts to balance the books the SEC has opted to let options market makers sell unlimited contracts to those intent on forcing a raid on the equity pricing.

In 2006 one of the largest options market makers, Citadel, informed the SEC that they did not need to use the options market making exemption to manage their books because they adjusted their books under alternative means. Such disclosure reveals the ability to maintain options liquidity without the need to abuse the equity market, the equity investor, and ultimately the public confidence of the business itself.

The SEC is to blame for Bear Stearns because the SEC failed to respond to the signs that bear raids can and do exist in todays markets and exist through the use of trading on shares that fail settlement. Smoke and Mirrors aside, the SEC aided the fraud and in the process allowed the confidence in the US Capital markets to drop yet again.

Dave Patch

For the record, I notice that a comment memo I sent on July 8'th discussing specifically the Bear Stearns data has not been uploaded despite hundreds of others being loaded. Is there a reason for not publishing a public comment?