Subject: File No. S7-19-07
From: Gary Rupp
Affiliation: Investor

July 26, 2008

In my opinion, the SEC has failed to enforce the rules they already have on the books that require locating stocks within 3 days (T+3) after a Short Seller has Naked Shorted a stock. And, the SEC has failed in their duties to force Short Sellers to "Buy-in" when they Fail to Deliver (FTD) within the required three day settlement period.

The Buy-in requirement simply means that the Short Seller must purchase the stock, at current market prices, if they are unable to locate a source to borrow the stock within three days after committing to the sale. Otherwise, the investor who is purchasing the stock is essentially buying an I Owe You, and not a real stock.

Moreover, because the DTCC, Brokers and SEC were not enforcing the Buy-in rules, Short Sellers were realizing they never had to find the stock to borrow especially if they could force the shorted company out of business.
Current laws do not require the Naked Shorts to be settled if the company goes out of business so the Naked Shorter gets to pocket the entire proceeds from the transaction and the investor who purchased the stock is left with nothing.

The only people who have benefited from all of this are the large hedge funds, brokerage firms and investment banks that have the financial ware-withal to target and kill a company through Naked Shorting.

Is it any wonder the SEC is fearful what will happen to Fannie Mae, Freddie Mac and the other 17 investment banks they are now trying to protect?

However, this issue is critical for all investors and for all companies that rely on the Capital Markets to raise capital... not just the Investment Banks the SEC is now trying to protect.

Bluntly, many believe the Investment banks that are now in financial trouble were also some of the worst offenders of violating these rules. But, because they are our banks, and their failure causes blatantly obvious problems for citizens and investors alike, it appears the SEC was finally forced to step in, if only temporarily, and implement a rule that is really unnecessary. Again, if the SEC would enforce the Uptick Rule, plus require Buy-in on all Fails to Deliver within three days, as required by current law, we would NOT be in this mess.

With regards to the Uptick Rule... this rule was enacted after the Stock Market Crash of 1929, in the Securities Exchange Act of 1934, precisely to slow down a Bear Raid that is purposely being executed by Short Sellers in order to damage a company purely for their own financial gain. However, The rule was eliminated by the U.S. Securities and Exchange Commission (SEC), effective July 6, 2007. The Uptick Rule required that short selling was only permitted following a trade where the most recently traded price was higher than the previously traded price, (e.g. uptick) The Uptick Rule did not eliminate Short Selling, but it did make it more challenging for short sellers to maliciously target companies, and profit, through Naked Short Selling.
By the way, while the SEC is at it, they should look into all the Off Balance Sheet Assets these Investment banks are carrying. These Off Balance Sheet assets are the true liabilities that will likely topple some of our leading investment banks. Moreover, many investors and analysts believe that a large portion of these Off Balance Sheet Assets/ Liabilities will in fact prove to be Securities that were Naked Shorted and never covered through a borrow or buy-in.

This is an absolute disaster and the current SEC Administration has been asleep at the wheel - at best, and compliant and facilitating - at worst.

Jim Cramer of Mad Money on CNBC has done a fairly decent job of explaining this problem and how pervasive this problem is. I encourage the SEC and every small investor to listen to his broadcasts on this subject.

Having said that, many investors already knew this was a significant problem, and that the SEC was failing to do their job. For whatever reasons, the SEC has clearly favored the Short Seller, and given them the tools to significantly harm hundreds, and some people think thousands, of businesses.

In conclusion, The SEC needs to enforce the rules they have... and they need to be held accountable for their past errors and indifference