Subject: File No. 4-590
From: G. Jerome Beers, M.D.

September 30, 2009


A. Naked shorting

It is beyond scandalous that discussion of this topic is considered necessary except in two areas:

1. Vigorous enforcement.

The SEC, like other regulatory agencies, looks as if it has been bought and paid for, for years and years in this and many other matters. (It has been said, appropriately, that if the major stockholders, bondholders, and executives of the largest financial institutions generally had Italian last names, everyone would simply say that the Mafia had taken over the country.) Manipulation has been the obvious hallmark of the U.S. financial markets for years.

2. Selectivity in regulations and enforcement.

At the very least there needs to be genuine equality in policies and enforcements to prevent the biggest abuses--without exceptions being made to the big Mafia bosses from the huge financial companies. However even a generally even-handed approach may not be enough.

For one thing, the largest entities are able to hide their doings--for example, by shorting from off-shore dummy accounts, outside open and transparent U.S. exchanges. These sorts of abuses need special attention.

There are of course a multitude of other tricks (such as the routine revolving of Wall Street lawyers to the SEC and back), and the legal bribery of Congress through lobbying.

Therefore enforcement needs to be directed at the largest entities. Certainly no exceptions should be made for them.

Also, it is the smallest companies that are the most vulnerable to naked shorting. The wiseguys from the hugest banks and hedge funds hammer the share prices down, and can take over a company on the cheap. Alternatively, they simply knock the prices to zero, and walk off with easy profits, having destroyed the company. Unfortunately, it is these small companies that are often innovative. They often have to potential to do something useful (unlike the massive bloodsuckers and maggots that have typically been engorging themselves with SEC undersight or deliberate no-sight.)

I believe, also, that the smallest companies tend to have a relatively large proportion of not overwhelmingly rich people as shareholders--whereas many of the largest companies tend to be held by the hugest, most overly privileged, most overly protected entities.

Therefore it is a reasonable discussion point whether policy and procedure should give first priority to protecting the smallest companies from naked shorting.

B. Short-selling in general

Clearly the details of this topic are difficult. Much of the difficulty arises from or is complicated by the grotesquely complicated abusive distortions that the unproductive gigantic financial parasites have been allowed by regulators to create (unregulated OTC derivatives, "dark pools", front-running super-fast computerized nauseum). These have caused the markets to be, in essence, cesspools of manipulation and fraud.

I actually would like to be able to support short-selling. However in this environment I am very concerned that any rules allowing short-selling won't be gamed so as to make them worthless--something to be used against the little guy, while the huge wise-guys, whose lawyers rotate in and out of the SEC (while career SEC lawyers are not paid competitively), are granted exemptions or are given informal passes.

Even if there were carefully and honestly designed rules that were enforced with good-faith competent effort (chances what? pretty close to zero), I fear that the wiseguys could easily develop workarounds. If there is an apparently meaningful uptick rule, then they buy with one hand, being prepared to short heavily immediately elsewhere.

Unless the SEC were able to pay the salaries that the Mafia bosses can to buy the appropriate geeks, and unless the SEC were given permission by bank Mafia to hire such geeks, the SEC would presumably be powerless to stop far much more sophisticated ways of getting around apparently sound rules.

((Apologies, incidentally, to the real Mafia. I believe that there have been times and places where the Mafia has exhibited genuine concern about the populace, and in its own way has tried to behave with some significant set of responsibility and ethics.))

One of the most important points for short-selling is the general point: transparency, accountability, and enforcement. A rule--even if it hasn't been gutted by the outset on the recommendation of academic "experts" and other financial Mafia hirelings--is worthless if it can be worked around by using dummy corporations, "dark pools", "exemptions", unregulated OTC derivatives that are not market-priced, accounting methods that are subject to political pressure (e.g., the Mafia being allowed to keep items hidden off the books, or not having to mark-to-market), wink-and-nod collusion and conspiracy (including or not including SEC personnel), and so forth.

If there is any selectivity in which entities are to be shielded from short-selling, it should be the smallest companies, the ones that actually tend most to produce and create.