Subject: File No. S7-08-09
From: Wayne Jett
Affiliation: Managing Principal and Chief Economist, Classical Capital LLC

May 14, 2009

To SEC Commissioners and Executive Staff:

I write to register my vote of no confidence in your performance as commissioners and executive staff of the SEC. You have failed to enforce laws governing securities trading and to protect basic interests of the investing public in U. S. financial markets.

During 2008, the SEC stood aside as fraudulent trading practices destroyed major financial institutions. Then you failed to investigate or to disclose, even to Congress, evidence of frauds on the markets. Evidence of market fraud was rampant in the demise of Bear Stearns, yet you never disclosed findings of civil or criminal misconduct or absence of it. As shares of Fannie Mae and Freddie endured similar assaults, you denied their share prices were affected by naked short selling even as you prohibited naked short selling in them. Then you let your emergency order expire after barely one month, the trading assaults resumed and both Fannie and Freddie fell into the hands of the Treasury secretary - wiping out private shareholders and profiting short sellers immensely.

You and the SEC failed your statutory mission during similar trading assaults on Lehman Bros., AIG, Merrill Lynch, National City, Wachovia, Washington Mutual, IndyMac, Bank of America, General Electric and others. Even when you publicly prohibited all short selling of shares in financial firms during 2008, SEC executive staff did not enforce the ban. Limited data available indicate short selling of financial firms during the ban actually trebled as compared to the same period during the previous year.

In recent years, the most egregious scandals in SEC history have been unearthed, with no show of contrition by commissioners or staff. SEC's refusal to apprehend, prevent or punish massive fraud by Bernard L. Madoff Securities, despite eight years of persuasive evidence and efforts by respected securities analyst Harry Markopolos, is only the tip of the iceberg.

Markopolos testified in a House hearing that the SEC gives license to every big player on Wall Street to treat ordinary investors as he wishes without fear of law enforcement. Markopolos further testified that he is blackballed for life from working in the financial sector because he disclosed Madoff's fraud to the SEC. If these assertions are true, the SEC aids a criminal enterprise that robs other investors of hard-earned capital. Both assertions indict each of you for serious statutory malfeasance, yet no one rises to refute, to repent or to reform.

At the House hearing of Markopolos' testimony, the SEC's director of enforcement, Linda Chatman Thomsen, was berated by House members in strong terms for failure of performance, but offered only a meek response. Thomsen then resigned her post to accept highly compensated employment at a law firm advising and defending Wall Street's players. Adding insult to investors' injuries, SEC Chair Schapiro heaped praise upon Thomsen for valorous and meritorious service.

As SEC's director of enforcement, Thomsen presided over the firing of her investigating attorney, Gary Aguirre, in 2005 shortly after Aguirre disclosed to Paul Berger, Thomsen's immediate subordinate, evidence of insider trading by a hedge fund. Berger learned that Aguirre's evidence pointed to Wall Street player John Mack as the "tipper" in insider trading by Pequot Capital, a major hedge fund. Berger fired Aguirre and closed the investigation of Pequot. This inspired a Senate investigation of SEC malfeasance. The Pequot case was re-opened without real vigor, primarily to justify declining to answer Senate questions. The re-opened investigation learned that Pequot engaged in many "short-to-buy" transactions in which Pequot created shares by "selling short" to its own accounts, and then drove down share prices by dumping those "shares" on the market before covering at lower prices. But Thomsen, Berger and the SEC took no enforcement actions based on this explosive auditing evidence.

After a statute of limitations expired foreclosing further action against Mack, Berger resigned from the SEC to accept a position with a major Wall Street law firm - the same law firm which had contacted the SEC on behalf of investment bank Morgan Stanley to inquire whether Mack was exposed to any pending investigation. Berger pursued his new position as he exercised authority in the Pequot investigation and in the inquiry by Morgan Stanley.

Two Senate committees investigated Aguirre's firing and a joint minority report found appearances of impropriety. The report was followed by resignations of the SEC's inspector general, chief economist and three commissioners. A new SEC inspector general investigated and recommended disciplinary action against Thomsen for her conduct in the Pequot/Mack/Aguirre matter. But the Enforcement staff issued its own press release denying misfeasance. Commissioners voted to take no action against Thomsen despite the inspector general's report, and laudatory comments followed her eventual resignation.

Corruption at the SEC has enabled Wall Street grafters to rob hard-earned capital from middle class investors and taxpayers in greater amounts than at any time in history, eclipsing even the Crash of 1929 and the Great Depression. By its ignominious conduct, the SEC forfeited public trust necessary when an administrative agency solicits comments for evaluation in rule-making. Short of complete overhaul through legislative reform, this agency is incapable of adequate service as federal regulator of U. S. financial markets.

In so concluding, I note that Senator Charles Grassley, who initially chaired one of the committees investigating the Pequot/Mack/Aguirre affair, recently expressed a degree of satisfaction that procedural reforms recommended by his report have been implemented by the SEC. So far as public interests are concerned, however, procedural reforms are no substitute for redress of transgressions already detailed. Likewise, your proposals for revising rules on short selling do nothing to remedy millions of shares previously sold short and remaining undelivered. Leaving such undelivered shares undisclosed in daily trading and unmentioned in your deliberations are consistent with your agency's historic catering to Wall Street players.

Fraud in U. S. financial markets has driven private capital from its customary role in private economic activity, leaving federal institutions to dominate markets by spending taxpayers money. This deep economic crisis nurtured in your constituency will not be relieved until Congress insists that justice be done for all injured by manipulators who enjoy your grace.