Subject: File No. S7-19-07
From: Thyra Mangan
Affiliation: Private Investor

September 13, 2007

Miss Nancy M. Morris
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549

Attention: SEC Staff

Subject: File S7-19-07 Amendments to Regulation SHO

Who is responsible? Who is liable? Who can be prosecuted? Who is protected?

Does the SEC take responsibility? Do those who write the rules, blindly failing to enforce, and then departing the SEC without risking any personal liability or prosecution have any personal responsibility?

Should I be asking: who are you protecting?

These are hard questions.

While the SEC's failure to enforce its own rules and regulations does not personally damage them, it does personally damage me. While I have no jurisdiction to stop the flagrant disregard for security ownership, as counterfeit securities are delivered for cash, or the rules and regulations that continue to be misunderstood or ignored, I am the one from whom the thieves steal.

1. Eliminate the options market maker exception. Require delivery of shares T+3, with no exceptions. Require purchase of the failed securities.

2. Require brokers and dealers who mark a sale as long, to document the present location of those shares. Any failure to document and locate must immediately be followed with the buy-in, all to occur within T+3.

3. Eliminate the specialist's exception granted on a case by case request, to an anonymous specialist. Again, documentation of location or purchase of securities within T+3.

4. Return the up-tick rule.

5. Thank you for elimination of the Grandfather clause. Amend Regulation SHO to comply with T+3 for all transactions for all buyers and sellers, eliminating the 13 day settlement provision.

6. Report the number of shares failed on the Threshold List daily.

Most international market regulators have prohibited naked short-selling and require documentary evidence of borrowing with lenders before executing the sale transaction. They believe short sales in huge quantities can destabilize the market.

The current 13 day rule for settlement of fails to deliver allows manipulation to counterfeit securities, does it not? Do not allow settlement to occur at a date determined by an options expiration. That further exacerbates the manipulation tool.

Senator Bennett said July 20, 2007:
"The SEC has spent enough time looking at this and enough time talking to me that they issued to me a three-page letter outlining the steps they have taken to stop the practice of naked short selling.
I think the SEC letter goes a long way--the SEC actions go a long way. Without getting too technical about it, they have taken a number of steps to prevent what are called fails to deliver'' and, therefore, to try to stop the naked short-selling situation.
But I have discovered something that appears to be a way around the SEC rules. Here is the transaction: Broker A shorts 1,000 shares. At the end of 13 days, which is the period he has to produce the shares, he has been unable to find any--probably hasn't even looked--but he has this requirement under the SEC rule to produce 1,000 shares. So he goes to broker B and says quietly: Sell me a thousand shares. Broker B says: I don't have any. Broker A says: It doesn't matter sell me a thousand shares so I can cover. Broker B: All right. I will sell you a thousand shares so you can cover and there will be no passage of money this is a deal between the two of us--a rollover. At the end of 13 days, broker B has to deliver a thousand shares, so broker A sells the same 1,000 phantom shares back to broker B, and they ping-pong these back and forth for as long as they want.
So you can have a situation where people are selling shares that don't exist, taking commissions on the sale, and the profits of the sale, and never, ever having to produce the shares."
(end of quote)

You have further proof of this, previously sited, from the Arenstein Decision court documents.

15.In an example of one type of such a transaction, Respondents executed a buy-write using a one-day FLEX option that had the effect of temporarily resetting the buy-in date. In the transaction, Respondents bought stock from another Exchange market maker (buy-write contra party) and simultaneously sold (wrote) one-day, deep in-the-money FLEX call options for a corresponding number of shares to the same market maker. Respondents' clearing firm reflected the transaction in Respondents' account on the clearing firm's books and records.
Footnote: Respondents utilized a variety of different types of transactions to circumvent their delivery obligations under Reg SHO. Examples of other types of transactions utilized by Respondents include, without limitation, married puts and two-day FLEX options.
Footnote: A FLEX option is an exchange traded equity or index option, that enables an investor to specify within certain limits the terms of the options, such as exercise price, expiration date, exercise type, and settlement calculation.
Footnote: Respondents generally bought stock from other market makers that were also selling short hard to borrow Reg SHO threshold securities and utilizing the market maker exemption from the Reg SHO locate requirements.
Footnote: A deep-in-the-money call option is where the market price of a security is well above the strike price of the option.
Because the payment received by the other market maker is generally less than the interest payment that such market maker could have received by lending the same number of shares, Respondents should have been reasonably able to infer that such market maker selling stock within the buy-write transaction was also short stock.
16: The following day, the one-day FLEX call options expired in-the-money and Respondents, who wrote the FLEX call options, were assigned an exercise notice to deliver the stock. Respondents then used the purported long stock they had purchased in the buy-write the previous day, to satisfy this exercise notice. Respondents, however, had not received delivery of long stock from the buy-write contra party. Accordingly, shares were not delivered to close out the short position that was established during the initial reversal transaction. Based on the execution of the FLEX call option transactions, Respondents' clearing firm reset Respondents' Reg SHO close-our obligation to Day 1.
Footnote: by setting the FLEX option to a one day option, it meant the option would expire the next day.
Footnote: While Respondents appeared to have purchased stock on the books and records of Respondents' clearing firm, the counter party to the buy-write did not deliver stock to Respondents.
17. Respondents repeatedly engage in these or other types of transactions after receiving a Reg SHO Buy-In Notification from their clearing firm and these transactions caused the buy-in date to be reset. These transactions were executed approximately every 13 settlement days until the options positions either expired or were closed out. This course of conduct enabled Respondents to maintain impermissible short positions in a number of Reg SHO threshold securities for extended periods of time.

(end quote)

Every day , day after day, I look to see if NovaStar Fiancial Series C Preferred shares have been removed from Threshold Securities. It took five consecutive days of over 10,000 fails when it was listed on July 31, 2007. It remains there without interruption. This is a small company. There are 2,990,000 shares.

Why did you grant a specialist's application to sell naked shorts of these shares -- NFI Series C?
From time to time, upon application from a NYSE specialist to continue to fulfill its obligation to maintain a fair and orderly market pursuant to NYSE Rule 104, a temporary exemption from the close out and/or borrowing requirements of Regulation SHO, 17CFR 242.203 (b)(3), may be recommended by the New York Stock Exchange and granted to the NYSE specialist in the security, by the Securities and Exchange Commission. The temporary exemption would normally last no longer than 30 days but may be renewed, depending upon the particular circumstances. The fact that a NYSE specialist has been granted an exemption will initially remain confidential to protect the NYSE specialist's position in the subject security.
(end quote)

This anonymous specialist gets a special exemption from you. Please, eliminate this assistance to that specialist. It hurts the small company, it hurts the private investor. It is not fair. The share price will be orderly on its own, going up and down as news, dividends, sector perception dictate. As it should be.

I think I understand why the market maker desires to make a market. Therein lies the problem. There already is a market, but it doesn't suit him. The price of any share should be governed by supply and demand derived from how well the company is performing and how well it is being perceived to perform in the future. Simple and fair.

This calls for transparency. Publish daily the number of naked short sales.

Further in Senator Bennett's speech he offered this simple remedy: (quoted here)
Secondly, I think there ought to be a rule which says a broker cannot be paid a commission on a short sale until the shares are delivered. Back to the business model. The broker sells $5,000 worth of stock. He can do it every day. He can get $5,000 every day, without ever having to cover the stock, and he gets a commission on making the sale. So if you say, no, there will be no commissions paid until the stock is delivered, you will have a significant impact on stopping this activity. (end quote)


Investors have asked you to enforce the Securities laws of 1933-34. When you failed on this, you failed your directive. Issuing companies have asked you to enforce our Security laws.

It is not possible to enforce the law without penalties. It should hurt those that misunderstand the rules as much as their breaking the law hurts the investor that follows the law.

You can end this debate. Now.

Thank you for your time in considering my appeal to you.


Thyra Mangan