Subject: File No. S7-12-06
From: Art G Stone, III

April 20, 2007

I am writing this letter in order to formally request that you use your power and authority as an elected official, to demand Congressional hearings on a manipulative stock trading technique which threatens the integrity of our U.S. equities markets.
The practice is naked short selling/failing to deliver, which is at its essence, simple fraud. Unsuspecting buyers of stock buy the stock and pay their money, but at the end of the day, no stock is ever delivered.
Oftentimes responses from elected officials to date have contained boilerplate language which points out that short selling is legal, which I understand. The responses will also often contain the observation that not all naked short selling is illegal I understand fully that market maker-exempted naked short selling is legal in limited circumstances, however what I am alerting you to is not this legal variant, but rather the widespread and rampant illegal variant. I am not talking about temporary failures due to a lost or damaged certificate. I am talking about long term, strategic failures designed to depress a stock's price.
I believe that the practice is a large problem in the market, and that belief is fortified by the SECs passage of Reg SHO, complete with a grandfathering clause which grandfathers all failed trades prior to 2005 they never have to be bought in and delivered contrary to the wishes of Congress as expressed in Rule 17A, wherein it is expressly mandated that all trades must clear (be paid for) and settle (be delivered) promptly. The reason cited by the SEC for this extraordinary pardoning of past violations is a desire to avoid the volatility that would be caused by forcing the violators to observe the rules and deliver the shares they sold. This certainly appears to me to be an uneven application of the rule of law, favoring the wealthy special interests that violate the rules over those of the investors who have been harmed. When confronted over this inequity, the SECs spokespeople utter platitudes about being open to comment and studying the matter further. They have been studying the matter for over a year now, as Reg SHO continues to pardon past fails, never requiring them to be closed, and de facto running out the clock on the statute of limitations for prosecution of any violations in a civil forum all information about the number of failed trades which were grandfathered are treated as secret, and FOIA requests for that info are routinely denied.
In laymans terms, by Grandfathering, and continuing to treat all information related to naked short selling as a state secret, the SEC would rather allow Wall Street to keep the profits from selling non-existent shares to unsuspecting America then enforce the laws on the books for 71 years, as it could cause financial discomfort for the violators. Presumably the reason that the violators receive this extraordinary protection, which investors never did, is because they are better funded and better organized than individual investors. This is a travesty of the rule of law, and one that must be rectified in order for the markets to have any semblance of fairness or integrity. I am calling upon you to
demand that the SEC do the job it has thus far elected to avoid doing to enforce the law, and require delivery ending the fraud against the buyers who have not received what they paid for. The mechanism for making this demand would likely be the calling for Congressional hearings in the Senate Banking Committee something which its chair, Senator Shelby, has been inexplicably reluctant to do. This reluctance raises ugly speculations as to the intersection of money and power in Washington we recently saw that ugliness in full view during the SL crisis, where powerful Congressmen ran interference for their favored criminal constituents. It would be shameful if we had learned nothing from that shameful and expensive episode in our nations history.
I ask that you take a few moments, and go to a website that has been set up to bring visibility to the crisis: - among its materials are a transcript from a recent conference by the NASAA, where the practice is discussed exhaustively, and the secrecy with which the data is withheld from the public is unilaterally condemned by a panel of academicians, economists, and other authorities on the subject.
Spend some time at the Getting Started section, and review the volumes of data there which point to a systemic crisis of SL-level proportion, and then please, take the steps that are your duty as an elected official whose role is to safeguard the public good. Demand Senator Shelby convene a session of the Senate Banking Committee immediately to get to the bottom of this, and hopefully stave off a crisis that could cost this great country the integrity of its financial system.
Treating something as mundane as the settlement system for the US stock market as a state secret serves no one but those violating the law and preying upon the investing public. Keeping vital data from the public view is a recipe for larceny, as it has been innumerable times in the past. The SEC denies FOIA requests more than virtually any other agency that one data point should be troubling in the extreme, and demand a simple question: Why is the data as to the number, dollar volume, and concentration of failed delivery stock transactions secret from investors, and whose interests are served by an opaque market where regulators act as protectors of the industry they are chartered with regulating?
I appreciate your attention in this matter, and am placing my hope in the belief that you wont simply generate another form letter that misses the point, or pretends that the SEC is on the ball, but that you will demand real answers to the above real questions.
I look forward to your response.