Sent: Tuesday, March 02, 2004 3:28 PM
Subject: Naked short selling (nasd-2004-031)

Why postphoned to April 1-04. Why not ban this manipulation from
foreign countries? Why does electronic trading have any concern
to delay this? What is wrong with the telephone until the
software is installed? Seems like a very biased decision.

Michael Klymenko

The Canadian brokers called this tactic "Naked Short Selling" but
in truth is was a loophole used by less than ethical entities as
a way to break the US law requiring up-ticks and borrowed shares
before effecting short sales.

The work "Naked" is truthful but what the transaction is naked of
is money. This allows under capitalized and in most cases crooked
brokerage houses to assume large positions invisible to their
Canadian regulators because as sales they create credits not
debits. This is a transaction popular with organized crime on
both sides of the border.

Lucrative - as it is called in the press - is a nice word to
indicate huge ill-gotten gains that wreck havoc in their
production. This tactic was used primarily against smaller and
therefore generally defenseless companies.

The way it worked is that a short position is assumed quietly and
when the operators are satisfied that they have enough sold
short, they begin to hammer the shares lower by pounding the bids
right and left, raining stock on the market, selling shares they
do not own and have not borrowed.

Basically, they have no money in the transaction at all and are
creating credits to their account by their illegal US selling. As
the pounding of these little companies continues, long positions
of course panic and turn sellers. It is running the long
positions out that allows the illegal short sellers to cover.

It usually does not end there. Rumors of a negative nature are
started on web sites and via brokers. Reports are made to
regulatory bodies, claiming wrongdoing on the part of the
company. Newspaper articles are placed saying negative things
about the company. The reputation of the company is attacked as
the share price is attacked. This is repeated and repeated until
the small and usually defenseless company is driven into the dirt
price-wise.

Those using this type of loophole to sell short without the
required up-tick or having borrowed the stock have killed many
small and promising companies because their stock action removed
them from financing capacity. They killed them because their
price action turned their stockholders into a group of very angry
people opposed to management. They killed them because if you
bust a company's stock you generally bust the company itself.

This new rule will make it a crime for the US counterparty to
accept orders or OTC transactions in the US market from primarily
Canadian or any non-US brokers unless there is evidence that the
shares have been borrowed for the sale and are therefore
identified as a short sale. It will in effect require the
Canadian side to borrow the shares and where applicable sell only
on an up-tick or unchanged up-tick. This takes the hammer and
freebee out of the pure scam.

Canadian Exchanges speak loudly about the transparency
requirement for their listed companies but still allow practices
on their exchange floors that scream "no transparency" and
therefore reflect slack governance on the part of the exchange
itself.

An example is the ability of a buying or selling broker to hide
from the public by identifying themselves in the transaction as
anonymous. Therefore, the public and other brokers will not know
who is the selling broker and who is the buying broker. However,
they require companies listed on the exchange to keep an eye on
the trading of their shares to identify improper activities on
the part of insiders and others. The insider can easily hide
behind another broker who uses the name "anonymous" rather than
their own name on transactions in public view. That is totally
wrong.