March 31, 2007
Subject: File No. S7-12-06
The Honorable Christopher Cox, Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Dear Chairman, Ladies and Gentlemen of the Commission,
I hereby submit the following article that I find germane to the issues at hand,
An online newspaper reporting the issues of Securities Fraud
Short Sale Corrections Postponed Again – March 28, 2007
Just when you thought it couldnt get any more bizarre in the land of abusive short selling regulations the Securities and Exchange Commission pulls the Joker out of their hand, after rounds of bets, and throws it down on the table declaring the game void. In this case the Joker was a wild card intended to once again demoralize an already victimized class of investor who has long suffered at the hands of regulatory failures.
The recent SEC actions took place on March 26 when a new regulatory proposal showed up for public comment on the SEC web site.
While, not new exactly, it was really just a re-filing of the 9-month old proposal to rescind the ill-advised "grandfather clause" of Regulation SHO that was last minute insertion into the original June 2004 release of Regulation SHO.
To understand how this action has become yet another slap in the face to the victimized general investing public, let me first work through some quick data numbers.
487. The number of public comments submitted to the SEC under the original proposal. Discounting for multiple comments submitted by individuals it would be conservative to say that 425 individuals, issuers, or organizations provided comments.
20. A very conservative number to be applied to the number of comments submitted that were against the proposed elimination of the "grandfather clause".
79. The number of comments submitted since the SEC re-opened the proposal for public comment two days ago. This number includes comments from individuals who had previously submitted comment as well as a substantial number of new individuals.
100%. The number of those recent submissions that are against the extension of time before taking action and against the "grandfather clause"
3. The seconds most important. The SEC has delayed taking action by a minimum of 75 days because of comments made by 3 individuals who identified that the SEC had not provided the supportive empirical data that validated claims of SHO not meeting its objective.
Suddenly the concerns of 3 are taking priority over the views of hundreds who commented and the hundreds of thousands they represent.
So who are these three significant individuals or organizations?
According to the SEC they are the American Bar Association, an Individual Investor named Alan Schwartz, and an options Broker-Dealer identified simply as CTC LLC. And what makes these three so significant?
Review of each of these three comments presented, as well as a historical past relationship each has with Regulation SHO problem flags surfaced.
The American Bar Association (ABA), the name sounds important doesn't it? The ABA opposes the elimination of the grandfather clause because in their September 27, 2006 memo they cite the lack of empirical data to support the SEC accusations that persistent fails continue to have a detrimental impact on our markets.
Looking historically back to 2003/2004, the ABA had no position on the original proposal of SHO or if they had it was not to a degree that warranted a comment memo as none was submitted. That original proposal, unlike this recent one that contained a full SEC Office of Economic Analysis (OEA) report of their findings, was devoid of any data whatsoever.
The ABA comment memo submitted in September had issue with a lack of empirical data regarding the grandfather clause despite the OEA analysis being published in August. My question to the ABA would be, since the "grandfather clause" itself was never put up for public comment in the original proposal, and the ABA position is that proposals must contain the proper data and options for the public to comment on, where was their outrage when the grandfather clause was enacted? Most victims are not sure the clause was even legal to begin with.
I can only guess which business organization financed this memo.
Alan Schwartz, Individual Investor. Alan, unlike the ABA did provide public comment back in 2003 and again this time around. Those comments, along with the recent memo the SEC now considers worthy to delay, identifies Mr. Schwartz as a short seller of micro cap stocks and a short seller who believes that the present restrictions like a borrow are unnecessary. Let the markets run foot loose and fancy free with short sellers because ..."There is no rationale for providing explicit regulatory protection to companies which are chronically and/or grossly delinquent with regard to public disclosure."
Suddenly, under the generalizations of Mr. Schwartz the 4500+ companies that have spent time on the Regulation SHO threshold security listing are being lumped together as companies with no regard for public filings and thus deserved of the selling abuses.
There is also the issue of an Alan Schwartz who testified on behalf of defendant Anthony Elgindy in the US Attorneys case against Elgindy for racketeering, stock fraud, and extortion. Elgindy was a known short seller and was sentenced to 11 years for his criminal actions and an Alan Schwartz was a premium member of that site and testified on behalf of Elgindy in that trial.
Couldn't the SEC have picked a better lightning rod to champion their delays in responding to the victim's complaints? A short seller who is a companion to a known short seller convicted of securities fraud.
And then there is CTC LLC, the third and last party responsible for this delay. CTC is the options broker-dealer who has no idea what this fuss is all about. CTC LLC is in the business of selling options whether inventory exists or not and therefore is providing input based on their business model needs. CTC LLC had no opinion in 2003 when SHO was initially proposed but today, with the potential of tightening up their printing press operations regarding unlimited options contracts; CTC accused the SEC of coming to conclusions not supported by data. The CTC comment memo was submitted September 28, 2007.
For the record, both CTC and the ABA submitted comment memos beyond the comment date of September 19, 2007. Two thirds of the comments rationalized for this delay were not even submitted within the comment period and thus, under Federal law not required for consideration. That leaves only Schwartz memo as required for consideration.
But with all the twists already exposed the Joker has yet to show in this story.
That new "strong empirical data" each of these memos demanded? Below is all the additional data the SEC has to provide. Two very bland, benign, and amateurish paragraphs added as an addendum to the original proposal.
Prior to the Commission's Proposal, the New York Stock Exchange LLC (the "NYSE") informed the Commission that it conducted a review of five securities with substantial aged fail positions from July 1, 2005 through September 23, 2005. The NYSE found that the aged fail positions in these five securities were attributable to one broker-dealer. This broker-dealer informed the NYSE that the fail positions were not being closed out because it was relying on the options market maker exception.
Prior to the Commission's Proposal, the Commission's Office of Compliance and Inspections ("OCIE") conducted some examinations for Regulation SHO compliance and found that some broker-dealers were still carrying a significant amount of fails to deliver in securities that they were not closing out because they were relying on the grandfather provision. One broker dealer indicated that it had not closed out several persistent fails in threshold securities because it was relying on the options market maker exception.
Yup that is it. That is the "strong empirical data" that any rational mind can now decipher as to whether SHO and the "grandfather clause" is working. That is the "new" data that created a minimum 90 day delay in releasing a law to protect victims.
Maybe I missed something in the translation here. Doesnt "prior to the Commissions proposal" imply prior to the release made in June 2006. That by definition means it is not new. I also enjoyed how definitive it is when the OCIE states they conducted "some" investigations. Is that more or less than several, several being more that two? I am sure it is more than "a couple", meaning two.
Nowhere in this great mix of useless data does the SEC explain away, easily done without violating confidentiality, whether or not the one options broker dealer responsible for all the fails had fails that were supportive of a significant number of clients or whether the fails were associated with a small group of investors. Basically, is this Options exemption about creating liquidity for all investors or did we create it, to levels where significant fails persist, just to satisfy a few isolated but powerful hedge funds? Worse, what impact did these options fails have on the equity market for those securities?
And how about all those persistent fails that remained open months after SHO was initiated in January 2005 using the grandfather clause as the exemption. In conducting "some inspections" did the SEC investigate deep enough to even determine whether the fails were justified to begin with, regardless of SHO and the grandfather clause? What legitimate reason can a stock be sold without delivery for 6 months or longer?
The last real number to consider is 1%. One percent of all trades that are required to settle through the national Continuous Net Settlement (CNS) system fail on an annual basis. That does not even count those that are not tallied outside the CNS settlement system.
The result of such abuse is that real people and real public companies are being victimized and that financial burden passes into our local communities. That is the Joke for the SEC.
The fact that Chairman Cox spoke before the US Chamber recently and identified that victims do in fact exist because "Reg SHO, has proven insufficient to stop the problem supports investor concerns that this delay does nothing but create more victims and more public distrust in the regulators. When investors are left laying on the ground beaten by the system nobody needs a federal agency to kick them for good measure because they can.
Under present standard, this delay will cause a real reform to take place no sooner than this summer without considering the timeframe regulators again provide the industry to comply. Last time it was six months.
For more on this issue please visit the Host site at www.investigatethesec.com