Subject: File No. S7-08-08
From: Gene Arensberg
Affiliation: Author, Got Gold Report

June 30, 2008

June 29, 2008

Via Electronic Mail:

Ms. Nancy M. Morris Secretary Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Re: Proposed Naked Short Selling Antifraud Rule S7-08-08

Dear Ms. Morris:

Although comments for this Release were supposed to be tendered by May 20, I would appreciate the opportunity to comment on the Securities and Exchange Commissions (SEC or Commission) proposed naked short selling antifraud rule S7-08-08 (the Proposed Rule) under the Securities Exchange Act of 1934 (the Exchange Act), issued in Release No. 34-57511 (the Release) for your consideration and for the public record.

I am the principal author of the Got Gold Report which concerns, among other things, the markets for gold, silver and public companies that explore for and/or produce them, but I am also an active, private investor and currently employ both long and short sales of marginable securities through several prime brokers (and one small broker) and speak from that private investor point of view for this comment.

Naked Short Selling Not Small to Small Companies

As Dr. Robert Shapiro pointed out in his May 8, 2008 comment , (see ), while naked short selling is presumed to be a small amount of the trading volume when compared to all volume of the exchanges as a whole, when the illegal practice is concentrated into thinly traded small and micro-cap companies it can make up a large portion of the trading activity in those issues, perhaps even a majority of all trades for those issues for extended periods of time.

Small, thinly-traded issues on the Over-the-Counter Bulletin Board, or on the Pink Sheets are particularly vulnerable to so-called bear raids by unscrupulous short sellers (naked or otherwise) that trade for effect. That is, short sellers that trade in order to artificially create profit by their own overwhelming manipulative trading action.

As others have already pointed out in previous comments, The Commission already has the authority and the means to prosecute such fraudulent activity, but there is a growing perception in the marketplace that either The Commission is not concerned enough about the issue to commit precious resources and manpower sufficient to provide the necessary enforcement of existing anti-fraud rules, or that The Commission lacks sufficient manpower and resources to do so. There is a growing belief among investors in these small companies that the market is being played by a relative few, but well funded short-selling pros at normal investors expense, which belief leads to investor retreat from the markets entirely. The resultant loss of investment capital and opportunity for many small companies is destructive, counterproductive, undoubtedly results in lost jobs, in lost tax revenue for the country and is completely unnecessary.

Public Confidence is Falling Under Reg SHO

When Reg SHO was first proposed investors in small cap and micro-cap companies rightly applauded the initiative by The Commission and welcomed it as a big step toward eliminating abusive naked short selling. However, today Reg SHO is widely believed to have done little to curb fraudulent trading practices such as naked short selling. Reg SHO is widely viewed as being impotent and toothless, in part because of the large number of extended delivery failures still being reported on the SHO threshold lists, with little apparent enforcement action being taken, but also because of so many obvious trading tactics which are employed by short sellers daily.

In my view Reg SHO contained within it a fatal flaw which has yet to be rectified by The Commission. That fatal flaw was that Reg SHO contained exemptions for market makers engaging in bona fide market making. Until all short sales have to be borrowed simultaneously with the short sale by all participants, all participants including market makers, no strengthening of Reg SHO will have much, if any additional deterrent effect.

Many feel that allowing market makers the discretion to sell naked short provides a window of opportunity to the unscrupulous and invites abuse from large, sometimes offshore clients who are not subject to the reach of The Commission. Many feel that allowing market makers an exemption is akin to having convicts watch over the vault. Therein lies too much temptation and opportunity for abuse. In addition, allowing market makers to sell naked short gives market makers an unfair advantage which cannot be matched, offset or even noticed by ordinary investors, especially in small, thinly traded issues.

Ban Short Sales Entirely on Small and Micro-Cap Issues

I realize that this particular Release and comment period is regarding The Commissions proposed strengthening of Reg SHO and I support the proposal, but Reg SHO has failed to achieve its intended purpose in my opinion and today there is more fraudulent trading and trading for effect than ever in the markets I am a participant in. I follow about 80 companies on charts. I often check their trading in real time and forensically, so I am a witness to quite a few of the dirty tricks these stock manipulators use to intimidate, frighten and paint a false picture of weakness in the marketplace.

Having been on the receiving end of too many of these damaging, fraudulent practices, I believe the despicable practice of trading for effect is just as important as FTDs and should also see intense Commission scrutiny.

Since most of the illegal activity is concentrated in thinly traded, small and micro-cap issues, I fully support calls for a total ban on all short selling (naked or otherwise) on all issues below a certain threshold, say below $200 million in market cap or below U.S. $10.00 in price. By adopting such a ban, The Commission would eliminate the primary target of such illegal activity.

Although some may argue that if such a ban on short selling were adopted it would then just shift to higher priced securities, I would argue that the better capitalized and more liquid companies would at least be better able to withstand and to combat the predatory tactics employed by unscrupulous short sellers and their enabling broker/dealers.

Full Disclosure

I support those who have called for full disclosure of all short positions daily in all securities in all exchanges, including the company name, the volume of shares sold short, the amount of previous short sales covered, the cumulative total of FTDs for each company, the name of the broker/dealer responsible for the FTD and of the seller responsible for the FTD.

Interesting Resources

I strongly recommend that interested parties who may be unfamiliar with the basics take the time to view Dr. Patrick M. Byrnes slide presentation entitled The Dark Side of the Looking Glass: The Corruption of Our Financial Markets, for a well thought out, easy to understand primer on the basic mechanics of the issue Reg SHO was supposed to address and his opinions as to why it hasnt resulted in much relief. (See ).

In addition, I strongly recommend that interested parties take the time to listen to a series of audio clips produced by Jim Puplava on his Financial Sense News Hour program in five parts called Crime of the Century. That audio series is available at this link:

Closing Remarks

Selling a stock short without the means to borrow it is counterfeiting stock. It undermines the credibility of the company targeted, it undermines the credibility of the exchanges, it steals money from ordinary investors in order to enrich an elite few and that loss of confidence extends from there into all financial markets. The Commission should zealously protect individuals from these predatory criminals via vigorous and intense enforcement of existing rules.

Very sincerely,

Gene Arensberg
Author of the Got Gold Report