Subject: File No. S7-12-06
From: Louis K. Keith
Affiliation: U. S. Postal Inspector (Retired)

September 18, 2006

As a retired fraud investigator for the U. S. Postal Service, I find it inconceivable that the SEC would ask whether it should eliminate the Grandfather Exception to Reg. SHO.

The Grandfather Exception is illegal and in blatant violation of Section 17A of the 1934 Securities Exchange Act. The SEC had no authority to "exempt" prior illegal acts of Wall Street firms, and the fact it did so without asking for public comment prior to taking the action reeks even more of cronyism and of their being a captured, bought-and-paid-for regulator. By not immediately buying in the fails that existed prior to Reg. SHO implementation, the SEC became an aider and abetter of known theft and fraudulent activity by the Wall Street community.

I used to put people in jail for committing far less serious fraud than this. Why hasn't the SEC referred the Wall Street firms who are known to be doing this over and over again...have been cited and VERY minimally fined for doing this over and over the Justice Department for prosecution? Why aren't you doing your job to protect investors?

For too long, Wall Street's DTCC participants have been yanking the SEC around -- bribing and intimidating them into protecting the illegal profits of the 11,000 members of this secretive, so-called self-regulating organization.

As the Director of Utah's Division of Securities so succinctly put it: "No broker-dealer should assert any entitlement to an ability to fail to deliver securities that have been sold."

The Grandfather Exception must be eliminated.

Hedge funds have moved into options in a big way, particularly in the case of the companies they have targeted for destruction by short selling. Their huge leveraged pools of money can realize a lot more bang for their buck with options, particularly when they can have the options market makers do their unlimited naked shorting for them to hedge the huge put positions put on by the short sellers. With no borrow fees for the hedge funds to worry about, and no share delivery requirements on the options market makers, they can--and do--drive small companies into bankruptcy very quickly.

ALL options market maker and specialist exceptions must be eliminated. A pre-borrow MUST be required before any short selling trade is executed. And no share can be allowed to be loaned out more than once.

The SEC must get back to linking the trading of securities with the actual share certificates underlying those trades.

Settle the trades. Don't just take the money -- deliver the shares.

Lou Keith