Subject: File No. S7-19-07
From: David Patch

January 3, 2008

Ladies and Gentlemen,

It is a time honored tradition in this country that good people, intelligent people, learn from their mistakes.

In 2000 the NASD presented the Commission with evidence that a short sale loophole existed between Canada and the US whereby abusers would circumvent US law by executing "naked" short sales through the Canadian Markets. Crooks and criminals took advantage of that loophole to launder their illegal monies while short sellers such as convicted felon Anthony used such to manipulate public markets.

Nonetheless, the Commission sat on that proposed rule change for nearly 4 years before providing the NASD approval only to obsolete that change several months later when SHO was authorized.

In the interim, fraud existed and prosecution of such fraud was made difficult for the enforcement division of the SEC. Thus nothing was ever done. Cases were turned away at the door to the Enforcement offices.

Happy New Year folks. With 2008 barely underway the SEC's Division of Enforcement has lost yet another case due to the ambiguity in SEC rule making. Suddenly cases brought by the Commission are being tossed out by the courts due to "interpretations of rules" where interpretations should not exist.

I would urge the Commission to erase such future embarassments by drafting this rule to leave no wiggle room for the crooks and criminals to out lawyer you in court. Based on recent history, the SEC is behind the eight ball when it comes to intelligence so these lawyers need every tool available to make their cases easier.

Good Luck. I hope the committee preparing this reform learn from the past mistakes of Committee lead James Brigagliano and provide the Division of Enforcement a rule they have an opportunity to enforce. (Suggestion: Take out all the bells and whistles of Alternative 1 or 2 as those are just auditing and enforcement nightmares)

Dave Patch

SEC Suffers New Setback In Attack On PIPE Abuses

January 3, 2008 7:31 a.m.

By Judith Burns

WASHINGTON (Dow Jones)--The Securities and Exchange Commission suffered another setback Tuesday in its attack on short-selling abuses involving PIPEs, or private investments in public equity.

A federal judge in Manhattan dismissed the SEC's claims that a Dallas hedge fund manager profited illegally from so-called "naked" short sales after agreeing to invest in PIPE deals. However, the ruling by U.S. District Judge Sidney Stein allows the SEC to proceed with charges of insider trading and securities fraud against the manager, Edwin Buchanan Lyon IV, and the hedge funds he advised through Gryphon Partners LP.

The SEC claimed that Gryphon engaged in "naked" short sales from 2001 to 2004, typically in Canada, where it was legal at the time. Short sellers sell shares they don't own but have borrowed in hopes of replacing them later at a lower price naked short selling occurs when the seller doesn't borrow shares before selling them short.

Because PIPE deals typically result in issuing more shares and can depress stock prices, participants agree to keep such deals confidential and not sell shares short. The SEC alleged that Gryphon defrauded PIPE issuers and violated securities-registration rules by shorting shares obtained in PIPE deals and later covering its short position with those shares. Gryphon sought to have the claim tossed out, saying its short-covering didn't amount to a "distribution" of securities and that it hadn't misrepresented its intention to the PIPE issuers. The judge agreed and dismissed the SEC's claim with prejudice, while allowing it to proceed with charges of insider trading on four PIPE deals involving Celsion Corp. (CLN), Gentner Communications Corp., Manufacturers Service Limited and PhotoMedex Inc. (PHMD).

The ruling follows a decision in October by a U.S. district court judge in North Carolina in another PIPE case, rejecting the SEC's claims of registration violations in a 2001 transaction in which manager John Mangan, then with Friedman, Billings Ramsey, covered short sales in CompuDyne stock with shared obtained in a PIPE deal. Mangan asserted that his hedging transaction wasn't illegal or prohibited by stock-registration rules.

SEC lawyers couldn't be reached immediately for comment on the ruling in the New York case, and Ralph Ferrara, a Washington, D.C., attorney who represents Lyon and Gryphon, wasn't available to comment.

-By Judith Burns, Dow Jones Newswires 202-862-6692