From: jetter397@comcast.net Sent: Saturday, January 03, 2004 4:43 PM To: rule-comments@sec.gov Subject: Re: File No. S7-23-03 - Regulation SHO January 3, 2004 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Re: File No. S7-23-03 - Regulation SHO Dear Mr. Katz, Commissioners and Staff: As an equity investor for over 8 years I have come to realize many mitigating factors exist in the public equity markets. Recently, one topic that I take issue with is the organized fight against short sellers. It is my contention (which I will attempt to prove later in this letter) that in balanced and fair equity markets, short selling (including naked short selling) is not only a necessity but also acts as a mitigating factor to help fairly value companies. Upon examining the list of over 100 companies named in the fight against illegal short selling, it is most interesting to note that over 95% of those companies are listed either on the OTC or OTCBB where due to share price restrictions and brokerage house restrictions, short selling is already extremely limited here in the U.S. It is also interesting to note that there are very few companies on that list that are either NASDAQ or NYSE listed companies. The obvious question that comes to mind is why would the large, highly visible companies traded on the NYSE and NASDAQ embrace our trading system, knowing full well that shorting creates liquidity and balance, yet these small, less visible issues apparently despise short selling and see it as such a threat? To answer this question, an investor needs only to examine the actual companies complaining about short selling, examine the issues involving the viability of their actual businesses, and see who is really selling shares to fully understand this issue. It is my contention that by and large most of the OTC and OTCBB companies fighting short selling would not be viable businesses without their ability to sell shares in the public equity markets. I also believe that due to this public funding, most of these companies in one way or another attempt to manipulate their shares as high as possible, both for the benefit of company funding and for insiders. It is precisely this process that is the true cause for concern. While public funding of companies plays an important investment role within our society, it is also extremely abused, with a majority of the abuse coming at the hands of these smaller less visible OTC and OTCBB companies. As with most of the abuse we have seen lately, it is always the public investor that pays the price. In a perfect investing world, these small companies would not have the need to publish press releases continually promoting their prospects while their SEC filings repeatedly show the true story of non performance. In a perfect world these small companies would be fairly priced, and if they were fairly priced these companies would know that any short selling would be balanced by equal buying (either short covering or long buying) and the net effect on their stock price would be minimal. The real problem arises when the insiders of these companies promote their stock. These promotions (often paid for with company stock) cause a companies stock to become unbalanced. It is these valuation unbalances (mostly company induced) that cause sellers to come into the market. Whether these sellers are the company, insiders, longs or shorts, the selling brings balance back to an otherwise overvalued situation. It is apparent that most of these companies complaining about short selling are in fact attempting to corner the market on the ability to sell shares. I find it appalling that a company would in effect say to the markets that they should be able to sell unlimited amounts of shares to the public (by creating and issuing new company shares) and never have to worry about buying those same shares back, yet condemn a short seller who takes much more risk, and who would in fact eventually have to buy back any shares that they do sell. By focusing on short sellers, it is apparent that many of these companies are trying to redirect the root cause of why anyone would want to sell their stock in the first place, irrational valuations. As I mentioned earlier, if a stock price was fairly valued in the eyes of a majority of the investors, it would be equally risky to either buy or sell the security. I believe a considerable case can be made in support of making short selling less restrictive and easier for average investors, especially on the OTC and OTCBB. A less restrictive market for shorting would certainly provide more valuation balance, liquidity, and protection from companies that their only real products appear to be company stock, and the sale of company stock is the only thing that keeps these businesses liquid. To simply remove short selling from the overall equity equation would remove a very important check and balance, one that on the OTC and OTCBB markets keeps individual investors from paying substantially higher prices on already ridiculously overvalued companies. This quote from Lawrence Harris, the SEC’s chief economist says it all. “Singling out short sellers for possible market manipulation is akin to turning a blind eye to other blatant forms of fraudulent behavior. Efforts to regulate short selling to prevent manipulation has an unsavory impact upon the other type of manipulation which is the pump and dump…” In my opinion, it would be a very unwise move for the commission to remove any part of the markets mechanisms that would further give companies and insiders additional advantages over public investors. It is quite apparent that individual investors have been taken advantage of in just about every possible way by insiders. By allowing the markets to balance themselves with easier access to shorting, the markets immediately have more transparency and in effect become much more self regulating. Sincerely, Scott Benglen