From: MIchael Morrison [michael@pyramid.net]
Sent: Thursday, October 30, 2003 12:01 PM
To: rule-comments@sec.gov
Subject: S7-23-03:

October 30, 2003

Dear Commissioners and Staff:

I would first like to commend and thank you for taking steps toward resolution 
of the rampant “naked” shorting phenomena which has served to destroy hundreds 
of small companies and the small capital markets in the U.S. “Naked” shorting 
has also allowed the culprits to steal Trillions of U.S Dollars from the U.S. 
economy, leaving a wide path of financial destruction, including unknowing and 
innocent investors, struggling companies working hard to recover from the effects 
of  9-11 and other victims, such as employees with families who have lost their 
jobs because their employer corporation was driven into bankruptcy or out of 
business as a result of the greed and unlawful conduct of the “naked” short 
sellers and the system that facilitates such conduct.

Your proposals are certainly aimed in the right direction, and represent a huge 
step forward in several regards, yet fall well short of the mark in others. 

The principal short-fall of your proposals lies in the failure to address the 
fundamental root of the problem: The Depository Trust & Clearing Corporation, 
and its subsidiaries, National Securities Clearing Corporation and the Depository 
Trust Corporation, collectively the “DTC”. An examination of the books and records 
of the DTC, and especially the records related to the DTC Stock Borrow Program 
(see NSCC Rules, Addendum C), and the “C” and “D” sub-accounts in the CNS system, 
will bring the entire problem into sharp focus. Those records will reflect both 
the motive (greed and profit) and the method (fabrication of “phantom” shares to 
“loan” to DTC Participants) for the corruption in the system. Until this de facto 
license to print and issue electronic forms of unauthorized, unissued, unregistered 
(read: violations of Sections 5 and 12 of the ‘33 Act) and totally bogus stock 
certificates into the DTC system is stripped away from the DTC, your rule proposals 
will be ineffective and worthless. Indeed, you’re allowing the proverbial fox to 
guard the chicken house. 

A good first step would be to require the DTC to perform the function it was 
originally created and intended to perform: serve as the depository for stock 
certificates. Then, you should have a totally unrelated entity (“ABC”) established 
to handle the lending/borrowing of shares. Thus, if a short seller wanted to 
borrow shares to cover a short sale, and had no other source of shares (which 
would have to be a source with documented, actual shares on deposit, which had 
not been loaned to anyone else), then the short seller could go to ABC to borrow 
the necessary shares. But, before lending the shares, ABC would first have to 
clear the transaction through the DTC to insure sufficient shares were physically 
on deposit in the DTC system to lend to the short seller. Again, the DTC could 
not loan out any shares which were, at the time, on loan to someone else. This 
would serve as a check-and-balance on the transaction and the system. There could 
never be a “naked” short sale under this system. It could all be done electronically, 
so no time would be lost in the proposed transaction. 

This proposed system is really no different from the system currently employed, 
except that the DTC is in charge of all the “checks and balances”, and, most 
significantly, never “checks” or “balances”, thus allowing an unlimited number 
of shares to be loaned out, on demand, regardless of supply. The DTC really 
doesn’t care how many shares are loaned out, as the more shares the DTC loans 
out, the more fees, commissions, mark-up, spreads and resulting profits are 
realized by everyone in the DTC “system”, i.e., the DTC, broker-dealers, market 
makers, clearing houses, investment banks and, yes, offshore hedge funds 
(surprise, surprise).

I respectfully implore you to exercise your lawful power and authority to 
subpoena the DTC records referenced above to obtain what I suggest will give 
you a crystal clear picture of the root of the entire problem. From there, a 
solution and appropriate rules should be easier to structure.

 

Very Respectfully,

Michael J. Morrison, Esq.