July 24, 2008
Dear Mr. Chairman and Commissioners:
Your emergency order of July 15, 2008, was urgently needed and well advised for two primary reasons, as proved by subsequent events:
(1) the order saved the two GSEs, Fannie Mae and Freddie Mac, from almost certain financial destruction by powerful pecuniary interests using naked short selling tactics to dilute the public float of FNM and FRE securities, thereby robbing their shareholders of their fair market value, and
(2) the proven facts that the order was urgently needed and successful in saving the GSEs demonstrate beyond dispute for the world to see that U. S. financial markets presently are hostile, lawless environments for all publicly traded securities other than the 19 firms identified in your emergency order.
Your emergency order saved not only the 19 favored firms. Share prices of other important financial institutions rose sharply after you acted, thereby saving those firms from destruction. Their share prices recovered almost certainly because naked short selling of their shares was curtailed in anticipation that the SEC would extend similar protection to them.
Unfortunately, the same cannot be said for all securities traded in U. S. markets. Almost all securities traded in U. S. markets remain entirely at the mercy of powerful pecuniary interests which daily do their worst to strip shareholders of the value of their investments.
The perpetrators of fraudulent naked short selling, by which shares of corporate securities are sold without borrowing or delivering them, are easy to identify. Even now they complain to you that you must relent because their business and profits are injured by your requirement that they actually borrow and deliver shares they sell short. Yet, all your emergency order requires is that short-sold shares be borrowed and delivered to the buyers. Almost every American other than the perpetrators of naked short selling fully trust and believe that borrowing and delivery of shares actually occurs in every short sale.
The fact that complaints are made against your emergency order to the effect that short sales must be permitted without requiring first a borrowing arrangement establishes beyond doubt what these parties have been doing for years. They have been attacking the share prices of publicly traded companies by use of naked short sales. This tactic unquestionably has the capacity to destroy share prices by dilution of supply of shares, which can rob honest investors of their confidence in business performance and convince them to sell their shares at unfairly low prices.
Occurrence of any naked short selling in U. S. financial markets is deplorable, and yet the truth is it is presently rampaging daily. In making this emergency order, the SEC tacitly conceded that it is not enforcing the borrow requirement for short sales with respect to short sales of securities of companies not named in the order. This is inexcusable regulatory behavior, because it leaves every unprotected company to the tender mercies of the bear raiding marauders.
By now you are well aware that your allowing options market makers to sell short without first borrowing shares, even under your emergency order, enables that special license to be used for the benefit of parties other than market makers. Parties which wish to dump shares short without delivery need only buy option "put" contracts to accomplish that very objective.
The Commission should eliminate the exemption of option market makers from your emergency order, and you should take action with all due haste to extend the order indefinitely and to cover all securities trading in U. S. markets. Short selling that cannot comply with requirements of the order is detrimental to the health and stability of U. S. financial markets and of every publicly traded company.