From: info@our-street.net
Sent: Thursday, November 27, 2003 12:33 AM
To: rule-comments@sec.gov
Subject: RE: File No. S7-23-03

As a public company watchdog we do not trade stocks but we do have extensive 
first hand knowledge of the abuses that exist within the Bulletin Boards. We 
work full time uncovering those abuses and reporting them to the SEC. We have 
just published a position paper on the subject of Regulation SHO. We offer 
it herein.

REGULATION SHO 

A prelude to financial chaos

On October 29, 2003, the Securities and Exchange commission issued a proposed 
rule change effecting short selling in a number of ways. The complete proposal 
can be found on the SEC website. We believe their current proposed rule changes 
are the result, in part at least, of an efficiently executed campaign to eliminate 
short selling led by some of the most notorious pump and dump specialists around. 
Attention was further brought to this movement by investrend, a financial website 
that claims to provide "independent" analysis of companies while executing 
"shareholder enhancement" programs for their client companies. Investrend launched 
an aggressive PR campaign utilizing an abusive technique called "ticker spam" 
adding as many as 119 company symbols in a single press release in order to 
promote its site while campaigning on the side of stock promoters and pump and 
dump stock manipulators against naked short selling. Since no legitimate PR 
distribution service allows abusive ticker spamming, investrend used its own 
financialwire.net service to effect the campaign. Their efforts have done more 
to keep this situation in the public's eye than any other single activity we 
are aware of.

There can be no doubt that the types of abuses that infect the markets extend 
from abusive naked short selling at one extreme to manipulative and fraudulent 
pump and dump schemes on the other. Unfortunately, in its attempts to deal with 
abuses within the area of short selling, the SEC has completely ignored the market 
dynamic and, as a result, has set the stage for an economic catastrophe. They 
are, in our opinion, attempting to treat a symptom while ignoring the entire 
patient or considering the cause of the disease in the first place. (It should 
be noted that while naked short selling is illegal on the retail level within 
the US, it is not illegal outside the US nor is it illegal within the market 
maker community. This is contrary to many statements by proponents of 
Regulation SHO)

Our-Street.com is convinced, based upon years of experience, that the SEC's 
current proposed ruling will exaggerate the losses experienced by the average 
investor in micro-cap companies while enriching the worst of the dishonest stock 
promoters in direct proportion to their unethical or illegal practices.

At first, people may scratch their heads and wonder how that could be possible, 
but one only has to understand the market dynamic to realize that this, in fact, 
is the only outcome possible.  We're going to repeat this because we want you to 
understand that this is not some kind of overstatement or hyperbole on our part. 
We are totally serious when we say this. We are absolutely convinced that the 
SEC's Regulation SHO, as proposed, will result in utter financial chaos, increasing 
investor losses while enriching unethical stock promoters within the bulletin 
board and pink sheet markets. We further are absolutely convinced, based upon 
how the rule is currently written, that no other outcome is possible.  If you will 
take the time to read this article, you will come to understand why we can say this 
with such confidence.

Before you can understand why we can say this with such confidence, you have to 
understand how the market works. The stock market is a dynamic situation. Within 
a market there are many factors all working to influence the market and a stock's 
price, all at the same time. Without going into great detail, on any given day, 
the geopolitical and economic conditions throughout the world affect the market. 
The weather and natural catastrophes affect the market. The market itself and its 
momentum both on an exchange wide basis and within a particular sector or and 
individual stock will affect a stock's performance. The company's performance and 
it's press releases also have a direct effect on a stock as does the amount of 
promotional activity and short selling taking place in the stock. All these things 
can and do affect a stock's price on any given day.

THE SEC AGREES - SHORT SELLING PROVIDES THE MARKET WITH IMPORTANT BENEFITS

When it comes to short selling in general, the SEC acknowledges that "short selling 
provides the market with at least two important benefits: market liquidity and 
pricing efficiency."  The SEC explains these benefits further saying that "Market 
liquidity is generally provided through short selling by market professionals, such 
as market makers (including specialists) and block positioners, who offset temporary 
imbalances in the buying and selling interest for securities. Short sales effected 
in the market add to the selling interest of stock available to purchasers and reduce 
the risk that the price paid by investors is artificially high because of a temporary 
contraction of selling interest. Short sellers covering their sales also may add to 
the buying interest of stock available to sellers."

The SEC goes on to explain pricing efficiencies in this way, "Market participants 
who believe a stock is overvalued may engage in short sales in an attempt to profit 
from a perceived divergence of prices from true economic values. Such short sellers 
add to stock pricing efficiency because their transactions inform the market of 
their evaluation of future stock price performance. This evaluation is reflected 
in the resulting market price of the security."

Accordingly, it isn't simply short selling that is the problem, it is the abusive 
short-selling including abusive naked short selling that the SEC is addressing with 
this proposed change in the regulations. We share their concern but do not support 
their proposed solution. 

In broad terms, the reason we don't support the SEC proposal is because, like with 
any dynamic situation having a number of components, when you significantly alter 
one component, you change the entire dynamic and unless you address the offsetting 
components. This can create disastrous results if not properly thought through.

THE BULLETIN BOARD - DANGER AHEAD

With that basic truth established, let's focus specifically on naked short selling 
and exactly where the elimination of it will create economic havoc; that would be 
on the NASD Bulletin Boards. So, why is the bulletin board so different than other 
exchanges that the elimination of naked short selling would cause such a problem? 
The answer lies in the lack of certain listing requirements which are present on 
other exchanges. This would allow a company to structure their stock so as to make 
pumping the stock to unreasonable levels a snap and would virtually eliminate any 
opportunity for short sellers to find any stock to short to combat this event.  

Boxing a Stock

One of the favorite tricks of unethical promoters is to organize or reorganize a 
stock prior to a heavy promotion so that the number of shares outside of their 
control is either greatly limited or virtually eliminated. This tactic is commonly 
called "boxing a stock". This is most usually done through a reverse split and, in 
the case of a shell company, is followed by a reverse acquisition. In accomplishing 
such a reorganization, the amount of freely traded shares is often reduced to the 
level where a legitimate market really can't exist. 

The poster child for both the campaign against naked short selling and as fine an 
example of the effect of aggressive promotion a boxed stock as one is likely to 
see was Genemax Corp. (OTC BB: GMXX). With over 15 million shares initially 
outstanding, the company began pumping their stock under the direction of Vancouver 
promoter Brent Pierce, whose activities in British Columbia were already restricted 
by a 15-year trading suspension imposed on him by the B.C. Securities Commission 
in 1993. 

According to Grant Atkins, one of Genemax's directors, the number of shares actually 
available to the public for trading at the time was 250,000, hardly enough to allow 
for a legitimate market but perfect for those running the promotion to pump the stock 
to beyond $20 from a pre pump level of $1.05 even in the face of heavy naked 
short-selling. 

Of course, 9 months later, the stock is approaching its pre pump levels as the 
people close to the pump, began dumping their shares into the elevated market and 
reaping a windfall at the expense of all those investors who believed the 
promotional hype. Now, the shorts are gone for the most part, and with the expanded 
float, the stock trades at a level that the market is deciding rather than a level 
being decided by the promoters who initially controlled the market for all intents 
and purposes.

One can only speculate how high the stock might have gone had the naked short 
sellers not been there to counter the aggressive promotion of Pierce and his pals. 
Had Regulation SHO been in effect when GMXX was being pumped, there is no telling 
how high they could have pushed the stock since there would not have been any stock 
for short sellers to borrow, hence there would have been no short sellers. 

Accordingly, another unfortunate side effect of this lack of short sellers would 
be that there would be no one to counter the aggressive promotion on the various 
message boards where touts hype the stock and short sellers often bring forth the 
negative side of the company.  

CONCLUSION

In order to protect the markets serve the common good and maintain a realistic 
market price for stocks we oppose the elimination of naked short selling. However, 
if the SEC determines it wants all to eliminate all non-market maker naked short 
selling, they better make sure that the short selling community has the ability to 
borrow stocks by instituting float requirements on all stocks. We recommend the 
following for a stock to be traded on the Bulletin Boards: A failure to meet these 
standards will move a stock to the Pink Sheets. 

1. Public float must exceed 35% of the total issued and outstanding in order to 
qualify for trading on the bulletin boards.

2. At least 60% of the float must remain in street name to maintain a bid and 
offer on the stock. If the number falls below that, the market will revert to 
a "work out" market. (this is where each trade is negotiated and no bid or offer 
is quoted by market makers).

3. A stock must have a minimum of 100 non-affiliated shareholders, each with a 
minimum investment of $1,000 prepaid in cash and in free trading stock in order 
to qualify for initial trading. 

TOXIC FUNDING 
(THE FLOORLESS CONVERTIBLE SECURITY)
ALSO KNOWN AS "THE DEATH SPIRAL"

In our opinion, the biggest source of short selling and naked short selling abuses 
comes from the use of toxic funding strategies. These come in many forms from 
convertible debentures and options to simple private placements with a variable 
pricing structure based upon future market values. Regardless of their form, they 
all share one common trait. They all allow the funding source to purchase shares 
at a significant discount below the existing market, regardless of how low the 
stock price might fall. This sets the stage better than anything else for short 
selling abuses. A ruthless individual can literally drive a stock from over $1 to 
the sub penny level using toxic funding strategies and make risk-free money doing it. 

Since many, if not most, toxic funding sources exist within obscure offshore 
corporations, it is easy for them to short sell at will, undetected and assure 
themselves high profitability with complete disregard for the other shareholders 
in the company. 

Still, there are unsavory elements everywhere in business and it is up to the 
unscrupulous or lazy corporate executive to invite these funding strategies in 
before they can abuse the company.  Since the dangers of toxic funding are so 
widely known, only a CEO lacking any ethical foundation or one so lazy and stupid 
he doesn't deserve your support would enter into one of these agreements. To claim 
that the capital source promised or agreed not to sell and hurt the stock or not 
to short the stock falls into the same ignorant excuses as "the checks in the mail" 
and "it's only a cold sore".

Toxic funding is an invitation to short selling abuses, it is as simple as that. 
Blaming the system that allows naked short selling for the abuses caused by toxic 
funding is as stupid as blaming the lock manufacturer for your loss after giving 
the fox the key to your hen house.

CONCLUSION

Regardless of the outcome of the SEC's review of naked short-selling we support 
the elimination of floorless toxic funding strategies entirely. If you want to 
stop short sellers from torching a stock, take away the fuel, not the match. Loosen 
regulations so that companies can sell their stock privately at any discount to 
the market they want, just require they disclose it and publish the terms in a 
press release. If they want to sell stock privately for $.01 when the market price 
is $1.00, let them. Just make them disclose it in a press release. For the market 
to survive we must eliminate any opportunity for stocks to be priced at anything 
in the future but a fixed amount or an amount higher than the existing market price 
of the stock. 

GET RID OF THE PRIVATE EYE'S AND YOU ARE GOING TO NEED MORE COPS

Curtailing the number of short sellers by eliminating naked short selling 
translates into a reduced number of serious investors doing due diligence and 
passing their findings on to the markets and the SEC. The direct result of this 
will be more abuse and less prosecution by the SEC since they will have to rely 
upon themselves more to gather evidence now being provided by short sellers. In 
order to protect the investing public the SEC must look to increasing its staff 
or hiring outside watchdogs as subcontractors to fill in the gap left by the 
short seller's departure from the markets. 

CONCLUSION

Because of the negative effect it will have on the amount and quality of support 
given the Enforcement division by the short selling community, we oppose the 
elimination of naked short selling and favor a focus designed to remove the 
opportunity for abuses within all kinds of short selling instead of naked short 
selling itself. 

If the SEC moves to eliminate naked short selling, we recommend the establishment 
of subcontractors to act as watchdogs on behalf of the market. This can be in the 
form of a bounty or fee basis. 

Respectfully,
Nick Tracy Enterprises, Ltd
Our-Street.com