From: Dave Patch []
Sent: April 9, 2004
Subject: File No. S7-23-03

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: SEC Release No. 34-48709 (File No. S7-23-03)

Dear Mr. Katz:

In response to comments regarding Regulation SHO and the delays in getting this reform through, I would like to submit if I may some arguments that come forth from the comments submitted to date.

Regulation SHO. Why do we need it? Why is it we need to take on additional reform packages to protect the investing public? Maybe this is why.

According to the SEC released proposal:

  • Naked Shorting can be abusive
  • Trade Settlement Failures can exceed the public floats of companies (by how much the SEC fails to address)
  • Short sellers use additional leverage to deliberately depress the price of securities.

Since the SEC published this proposal we have read other comments like those from the NASAA:

  • Unethical individuals and firms are shorting stocks.
  • Maliciously driving down the price of securities
  • Investors?Victimized by naked shorting Market Makers and Brokers
  • "Bear Raids"

In addition, the NASD has conceptualized their own 10 day settlement policy for review where they admit:

  • Failures to deliver exceed the public float of companies
  • Extended Failures have a negative affect
  • Facilitate manipulative activities

So with these admissions by the Securities Organizations and State Ag's, why do we even question the need for Regulation SHO? Why such delays in getting out a reform package that has such an impact on so many "Victims". Maybe it is because Wall Street doesn't want the reform. Could it be that the financial lobby power of these Wall Street Institutions, who benefit from special "exemptions", are willing to sacrifice our investment rights for their financial gains? Has the need for liquidity and trading volumes superceeded our rights to safe markets? Only to show my point, and I have nothing against these firms in particular, here is the general perceptions of Wall Street to the allegations of above;

From Scott Arenstein, Managing Member of SBA Trading:

  • We support the current exemptions to Market Makers ..not forced to locate and borrow for delivery
  • Flexibility to shorting stocks creates liquidity

From John Bluher, Executive VP of Knight Securities

  • impose unnecessary restrictions on over-the-counter ("OTC") market makers
  • safeguards against short selling abuses inherent in bona fide market making
  • we see no reason why it should be forced to locate stock merely because it or its customer failed to deliver stock

We must ask these firms, as well as the others who submitted comments, at what cost have these exemptions manifested? Clearly, the exemptions provided to Wall Street to create liquidity has not been an across the board advantage to all investors. In fact, many have lost their entire life savings to abuses that have resulted in settlement failures that diluted the values of their investments. Are those sacrifices acceptable to the betterment of an industry willing to pay it's top executives $20, $30, $40 Million annually for Operations riddled with Sanctions and fines for abuse and fraud?

Liquidity is a double edged sword that has overstepped technology. Market Maker exemptions for liquidity, combined with an industry acceptance of settlement failures, has created trading practices resulting not from true buyers and sellers but from Market Insiders bettering their own personal positions with real buying and selling mixed in. Today, Buy-Ins on settlement failures, if and when they ever occur, fail because "there was no stock available for settlement at the existing market price". But who then dictates that price? The Market Makers and their exemptions for liquidity. They need to set these price values based on THEIR exposures not the basic priciples of Supply and demand. That is why settlement failures grow. The lower the stock price goes the more Market Makers have to dictate it because natural sellers are less willing to sell.

Today, we have a situation that could once again rock the financial world if it is not settled and settled swiftly. Due to the need for liquidity our Broker-Dealers and institutions have massive capital set aside to protect the holdings in client accounts associated with unsettled trades. These holdings represent stocks from all trading markets and all types of companies. To date, the cost of settling these trades has been weighed against the legal obligations as defined by present and future laws. The fear being that to force today what should have been controlled over a decade ago could in fact create a collapse of some of the smaller Wall Street firms and have significant impacts on the overall market. It is a difficult decision but one that must be made. To consider this decision the SEC and Congress must carefully decide which road they take now that they are at the crossroads. Will they protect the abuse forever or will they take stepos now to right the wrongs against the investors and the companies abused?

Wall Street has taken considerable liberties in their desire to create revenue growth. They have ignored the rights of Investors in solidifying the purchase of the rights to a company they invested in. In doing so, they created a mess that only they can get out of. They have reaped the benefits of years of profits that have gone right back into their own personal portfolio's and they have benefited from the value of capital that came from our losses. Wall Street makes revenues off trade volumes and thus trade volumes have been the name of the game. Unfortunately, trades that do not settle are not really trades, they are the sale of stolen goods. Wall Street needs to be held accountable for the sale of stolen goods and thus the distribution of false accounting statements. My account statements tell me I own stock in a company but if that trade never settles, do I really? Why don't these brokers tell us that we own unsettled trades? Because we would question their actions and force them to go settle so they instead take our money and submit statements of false information. Book entry of electronic counterfeit shares is no different than the printing of a counterfeit paper certificate, it is just easier to perform. In both events, a stock is held in an account that has no pedigree to support it.

We as Investors all want liquidity. We would rather have a fair and safe market. The SEC and Congress who evaluate the process of SHO and the delays we are seeing must effectively decide whether our needs for a safe market are better served by allowing an out of control Wall Street to continue to have special exemption status that guarantees profits at our loss. Has the SEC created a superhighway of efficiency and speed but in doing so created casualties? America had major superhighways built and designed to handle traveling speeds of 80, 90, 100 mph because it made it efficient to cross the country at these speeds. We all wanted them and we got them. These speeds, however, resulted in the deaths of many. The Financial Industry has done the same and it needs to be corrected. Liquidity is quick and efficient but when liquidity is used to manipulate a market, the deaths should not be tolerated. The SEC needs to bring liquidity back to the 65 MPH speed limits for the safety of all who travel the streets of the financial markets. We may get their slower but at least we survive.

I urge a speedy implementation of regulation SHO and a speedy resolution to all of these unsettled trades on the books of these Broker-Dealer and Institutions. There is no place in this financial industry for special exemptions and guaranteed profits when our economy and an entire class of investor is being abused and manipulated for the financial gains of Wall Street and these over paid executives of scandalous companies. Wall Street must change and change now. Those running this operation have the financial well being of our economy to protect and they seem more compelled to put personal profits above the values of a prosperous economy.

Dave Patch