Subject: File No. S7-24-04
From: H. Glenn Bagwell, Jr.

July 12, 2004

July 12, 2004

Re: Proposed Rule S7-24-04

Ladies and Gentlemen:

Thank you for the opportunity to comment on SEC Proposed Rule S7-24-04, entitled Issuer Restrictions or Prohibitions on Ownership by Securities Intermediaries, Release No. 34-49809 --herein, the Proposed Rule--. To summarize, the SEC should NOT implement the Proposed Rule until such time as the SEC can reasonably guarantee the integrity of the clearing and settlement system in the U.S. securities markets for all securities publicly traded in the United States.

It is disappointing that more comments have not been received by the SEC on the Proposed Rule. Most of the attorneys and others with whom I have spoken regarding the Proposed Rule have not bothered to comment on it, because of a general understanding that any demands the Depository Trust and Clearing Corporation --DTC-- makes upon the SEC are promptly met by the SEC, irrespective of any other considerations.

The general feeling is that legal action by state regulators and private litigators is going to be the only solution to the devastating problems associated with, first, naked short selling, and second, DTC and the deleterious effects of its Stock Borrow Program on the integrity of the U.S. clearing and settlement system. It is my hope that such cynicism is not warranted.

As the SEC is aware, naked short selling, and the resultant market manipulation, have done severe damage to the U.S. markets, especially for micro-cap securities. The actions of the various market makers, Canadian and other offshore brokers, U.S. brokers that take the short sale orders knowing they are not backed by borrowed shares, offshore investment funds, money launderers, terrorist financiers, etc., have cost the U.S. investing public untold billions and destroyed the market value of numerous American companies. This naked short selling would not be possible without the DTC Stock Borrow Program.

The SEC has acknowledged that settlement failures can exceed the entire floats of victim companies. This does not seem possible without the DTC Stock Borrow Program. Where else can settlement failures hide for extended periods?

The SEC and the NASD have observed these actions for years, and know that naked short selling and the resultant settlement failures are an astronomical contingent liability on the clearing firms, market makers, brokers, and of course on DTC itself. If the manipulators and their co-conspirators short sell more shares of an issuer than exist, how does that liability get satisfied? Assuming the manipulators can not kill their victims or force sufficient additional dilution through financing at artificially low prices, how will the trades ever get settled? And did the participants think this could go on forever?

A small number of companies have tried to extricate themselves from the monopolistic and self-serving clearing and settlement system run by DTC, by moving to certificate-only trading. The nature and issuance of the securities of a corporation are a state corporation law matter, and within the rights of the companies to determine. Of course, the SEC regulates transfer agents, and clearly has the right to set the rules for them as the SEC deems appropriate, so long as the rules are constitutional. Setting aside the potential anti-trust issues with further extending the de facto monopoly of DTC on the clearing/settlement system, is it appropriate for the SEC to, in effect, eliminate the right of a public company to ensure the integrity of its capital structure? Can the SEC guarantee the integrity of the capital structure of issuers subject to the machinations of the DTC Stock Borrow Program? Will the SEC allow issuers to clear through an alternative book entry system, such as its own in house system? Or is DTC to be the only game in town? As the SEC can imagine, that would look very suspicious to the investing public and to the federal judiciary.

Since the SEC acknowledges that naked short selling can lead to a situation where investors claim to own more shares of an issuer than exist, thus creating maddening problems for the issuer--such as determining who is a real shareholder and who has been defrauded into purchasing a counterfeit share, e.g., for voting and dividend distribution purposes--it is not appropriate to forbid companies from taking the only steps now available since the SEC in June, 2003, allowed DTC to forbid issuers to withdraw from the DTC system to ensure the integrity of their capital structures.

I understand the SEC has a goal of increasing the speed of the clearance/settlement process, and this is an appropriate goal however, it can NOT be appropriate to ignore the current lack of integrity in the system just to increase its speed.

While the industry may clamor for more speed, it is the investor who needs protection from the market manipulation facilitated by naked short selling and prolonged settlement failures, and the investor will gladly accept a longer settlement period to ensure that he or she actually owns a real percentage ownership interest in his or her issuer. If this means that he or she must pay a little extra for a physical certificate, then that is an investment consideration for the investor. At least he or she will know that it is a real share, not a counterfeit naked short...whatever it is--perhaps an open ended stock futures contract with an unknown counterparty who may just refuse to deliver, ever?

The SEC first asked for comments on Regulation SHO some time in October, 2003. A version of the proposed rule that apparently allows market makers to continue to naked short sale when engaging in bona fide market making transactions has now been approved, but will not be in effect until January 5, 2005. If the industry can have at least 15 months to adjust their systems to meet the requirements of Regulation SHO, then surely the issuers that are subject to the market manipulation that necessitated Regulation SHO should have a reasonable period of time--at least 15 months--to take actions designed to determine the amount of damage done by said market manipulation and to try to correct it.

Of course, since in practice many DTC participants refuse to comply with the disclosure and delivery requests of the victim issuers whose securities they manipulate, even when the instructions are delivered by the NASD--how can they when doing so will expose their illegal behavior?--15 months is likely not enough time to get the necessary information.

If an issuer can not even find out who its real shareholders are, as permitted by the laws of the state in which the issuer is domiciled, what else can an issuer do? How can it avoid voter fraud via proxies in shareholder meetings? How can it properly account for the cash or shares delivered pursuant to a dividend distribution? Is the issuer liable if a real shareholder does not get to vote or receive distributions because a counterfeit shareholder got them instead? The Proposed Rule puts the issuer at the mercy of DTC and its participants. These have not proven to be trustworthy in the matters at hand.

The Proposed Rule should not be passed until the SEC is certain that naked short selling, at minimum when done for purposes of market manipulation, CAN NOT OCCUR, and when the SEC is certain that the DTC Stock Borrow Program is only used for its original stated purpose, to cover SHORT TERM settlement failures resulting from good faith delays in delivery of the transaction security. Please do not approve the Proposed Rule.

Thank you again. The SEC has the toughest regulatory assignment in the nation, and does a good job overall. These matters are difficult, and will not be resolved without the industry feeling a lot of pain--only because of the pain it has inflicted, directly and via its complicity with criminals, on the investing public. But the investing public and the integrity of the U.S. markets demand resolution, and the SEC can be the one to provide it.

H. Glenn Bagwell, Jr., Esq.
Raleigh, North Carolina