From: Carol Carolan []
Sent: December 28, 2004
Subject: File No. S7-23-03

To Whom it may concern,

For those living the battle cry of positive pro-active reforms out of the Securities and Exchange Commission, may expect to wait a long time. The fact is, the SEC, as recently observed, cannot bring themselves to enforce existing rules or enact appropriate legislation to curtail the rampant fraudulent practices of Wall Street. As Securities Police, they have failed miserably and frankly without some sort of oversight, will continue. Most of that failure could be looked at as intentional, as it would appear only the elite have their support, while the small investor is on the outside looking in and hopelessly crying foul. We use the word "Proactive" earlier. Well, what is Proactive?, could it mean that the regulatory group would be looking not only at the past but also thinking about what could and will happen next with any reforms they impose. The SEC needs to be one step ahead of crime and not one step and many years behind. The crimes of Wall Street will never be solved treating only the symptoms, identifying and attacking the "Problem" will guarantee resolution. Does the investor have more insight to what's currently wrong with the markets or are the regulators just looking the other way?.

In my opinion, the word Reactive probably describes them (the SEC) best, for only after several States AG's have turned up the heat on Wall Street crime have the SEC responded somewhat in kind

Case in Point: Proposed Reform

Last Wednesday, October 22, 2003, the SEC had an open public meeting to address what it calls Reform SHO. This would be a reform to short selling rules that would combat, among other things, the "Illegal Naked Shorting" that they (the SEC) have been tracking since the late 1990's. In their proposals, the SEC has presented options for reform, which include 90 day banning of a Short Seller who fails to properly borrow shares to settle a trade in T+3+2. While this appears "action oriented and logical", it is far from a pro-active reform. In fact, if you look at the industry wide abuses of today, it would not change much of anything, and here's why.

1.) It is not the short seller, but the Market Maker or Broker-Dealer, who is responsible for insuring that shares can be borrowed prior to execution. Why the SEC penalizes the Seller instead of the Wall Street Institution is beyond me. The penalty should be imposed on the firm that allowed the trade to be executed illegally. Our Wall Street Firms, under the Patriots Act, is required to know their client. If their client is about to do something illegal, they should not take the order.

2.) The 90 day banishment from shorting that security is moot if the short sale itself was enough to manipulate the stock price. Example, I can sell short for 5 consecutive days under these guidelines and once that first days worth of trades failed settlement under T+3+5 I am barred from further shorting. In illiquid stocks, 5 consecutive days of short selling could drive the stock values down tremendously. The additional repercussion that's introduced is the fear that's instilled in the long shareholders could drive the PPS down further as selling is induced, then, I could cover all my short positions during the 90 day period.

3.) Much of the illegal shorting comes from Financing packages called Convertible Debentures. In finance deals like this, the 'Bank(s)" are allowed, under the present short selling rules in place to short against fully hedged or arbitrage positions due them. As long as they do not short more shares than they are due under this deal, they can short the stock as a long trade on the shares due in the Convert. As such, and under this condition, the abusive nature of shorting the stock to yield a better convert value will not be covered under the proposed SHO reform as there are NO LAWS on trade settlement from the long side. I think they call these "loopholes'.

4.) Current market abuses seen every month are a result of the mis-tagging of trades. Many Short sales are improperly tagged by the firms, thus short sales are now tagged as long sales. Again, under the proposed reform, the short seller can be working with one or more firms to do so to manipulate the stock through shorting while having the trades mis-tagged. The Long trades will fail settlement but will not be flagged by the short sale settlement failure system proposed. It then becomes a reliance on the snail like pace of enforcement to catch the error and have the situation corrected. In the mean time the manipulation is already done.

I am not an industry expert. In fact, I knew very little about wall Street Operations until recent exposures over the past few years has soured me. What I now know is that the Securities and Exchange Commission is over their heads. Their allegiance to the Wall Street Institutions, and the protection of the business models and profitability, cloud the nature of the abuses we uncover daily. The above examples presented should be known by an Industry Insider like Chairman Donaldson but he appears to be too close to the industry to see what is truly wrong with it. Here would be my answer to Regulation SHO.


1.) Trade settlements of "all" trade executions shall be conducted under T+3 + 5 (Short or Long Trades). This allows for an initial failure in settlement and then an allowance for a buy in to take place and delivery of that guaranteed share. Failure to comply under these guidelines would yield a fine to the Selling Brokerage or Market making firm for executing an order they could not fulfill.

2.) Trade settlement Failures that Fall outside T+3+5+5 would yield additional fines of up to $1000.00/trade to both the executing Buyers and Seller's Brokerage or Market Making firm. Once an initial failure occurs, it then becomes a failure by the buying firm if they do not press the issue. The buying firm is obligated to their client who has paid for a stock and thus, they must police the selling firm. Having Brokers police each other with potential loss of income on both sides would be a good thing. Brokers execute settlement NOT clients.

3. ) No short sale execution shall take place to open up a Market where that short sale would result in a 5% or more drop in Market Capitalization. This will prevent a short sale from dictating a trading pattern on an illiquid stock. Today we see short sales open up at 10, 15, 20,% below previous day close based on the Gaps set by Market Makers on illiquid stocks. That initial trade, sometimes representing less than $100.00 in value, will drive sell-offs with panicked investors.

4.) No short sale on any stock would be allowed below a 7.5% reduction from a previous day close. This would prevent what I would call the "Piling On" in a sell-off that can only drive people further out of their holdings.

5.) To maintain liquidity in available short positions, no short seller can hold on to a short position for a period longer than 90 days. This will eliminate the massive sell-off in short sales during a Bankruptcy in which the short seller can fail to ever cover the trade. This 90 day window will also provide for a continuous flow of available shares to borrow on a given security.

In Conclusion

The Markets are intended to be fair and equitable for all. Trade Settlement Failures in any Market, under any circumstance, is a mechanism for abuse and should not happen. Wall Street Regulators are made up of independent Self-regulatory groups. Having Brokers regulate each other through shared fines would stop the "Hand Shakes" that take place today. "You don't force me to settle and I won't force you". Now they both would pay for violating the rights of the Client. What's really needed, is a reform with teeth. These rules would capture much of the past, present, and future violations that take place because trade settlement would be a controlled and monitored status. It would circumvent much of the abuses the SEC still continues to ignore.

The recommendations are short, simple and to the point. They also put the blame squarely where it belongs and that is the Wall Street Institutions. Yes there are bad guys out there but they need these institutions to turn their heads if they are to succeed in manipulating the markets. The SEC should and does know it but they fail to take charge of the situation. WHY????


Carol A. Carolan, Ph.D.

P.S. American Pharmaceuticals (APPX) is blatantly being controlled by the shorts.