From: Wayne Jett
Securities & Exchange Commission
Dear Mr. Chairman, Ladies and Gentlemen:
The central objective your amendments of Reg SHO must achieve is to assure that every buyer of corporate equities in U. S. markets must actually receive the shares purchased upon delivery and clearing of funds. Otherwise, the buyer will be fraudulently deceived, since no buyer is informed whether any seller is selling short rather than long.
Unless you achieve this objective, which Reg SHO does not presently satisfy, U. S. markets will remain unfair, deceptive and opaque. No participant in the trading system, whether a broker, market maker, investment bank or hedge fund, has an interest of any nature that can possibly justify clearing funds of a buyer to a seller who has not delivered actual shares which are the subject of the transaction.
If any arrangements relating to lending shares for purposes of short sale are to be permitted at all, those arrangements must affect only the lender and the borrower of the shares - NOT the buyer of the shares. Presently, that is not the case. Reg SHO as it exists allows a buyer to have his/her funds taken in exchange for nothing except electronic entry of numbers in his/her brokerage account; in the words of DTCC, the buyer gets an "entitlement" for the funds paid (to the complete surprise of any buyer). This is deceptive, and gives the buyer a substantively different asset than that which the buyer believed was being purchased.
That "entitlement" is, at most, a set of legal rights to pursue litigation against one or more parties, and its value depends upon efficacy of laws and financial viability of brokers and other parties other than the corporate business value of the shares intended to be bought. Such a circumstance makes analysis of the value of share purchases unviable, and "entitlement" purchases for fiduciaries such as pension plan trustees inappropriate.
Please review closely the factual allegations set forth in the complaints filed in the cases of Quark Fund LLC v. Banc of America, etc., et al., USDC-SDNY, Case No. 06 CV 3933, and Electronic Trading Group LLC v. Banc of America, etc., et al., USDC-SDNY Case No. 06 CV 2859. Each complaint alleges that the eleven largest prime brokers in the U. S. markets have conspired to fail to deliver all shares sold short by all hedge fund clients of those prime brokers. Each prime broker allegedly was contractually obligated to lend and deliver the shares sold short, and charged large fees for doing so, yet uniformly and consistently failed to deliver such shares. The allegations cover all such short sale transactions by hedge funds since April 12, 2000. No statement is made regarding the present status of those short sale transactions, but the potential number of shares sold without delivery is alarmingly high.
Please do what is clearly right and necessary to remove this blot on the integrity of U. S. markets immediately. Naked short selling, or concerted failures to deliver shares sold, ought to be eliminated from our markets entirely.