EWING & PARTNERS
2200 Ross Avenue
Dallas, Texas 75201
(214) 999-1900 / (214) 999-1901 Fax
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Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Katz:
Ewing & Partners is the general partner and manager of Value Partners, Ltd., a private partnership with approximately $210 million in partners equity. Value Partners invests primarily in publicly traded securities, including microcap securities quoted on the OTC Bulletin Board or in the Pink Sheets published by the National Quotation Bureau ("NQB"). In addition, Value Partners invests in corporate debt securities, most of which trade on an over-the-counter market. Its investments in "fallen angel" debentures and bonds often lead to the ownership of such securities while the issuers are in bankruptcy, which in turn often results in the partnership owning microcap equities. Value Partners and its manager are both investors, neither of which is an owner or affiliate of any broker-dealer or market maker. Value Partners began operations on July 1, 1989, and I have been a professional money manager since 1982.
I applaud the Commissions efforts to address fraud with respect to microcap securities. The Commissions initiatives that educate investors, monitor broker-dealers, and punish broker-dealers and issuers who intentionally deceive the public are most welcome. I express here, however, my deep concern regarding the proposed amendments to Rule 15(c) 2-11 that would eliminate the piggyback provision of this rule. In particular, I am opposed to the proposal that "each broker dealer that publishes a quotation for a covered OTC security for the first time in a particular quotation medium other than the exchanges for NASDAQ would be required to review fundamental information about the issuer and have a reasonable basis for believing that the information is accurate, current, and from reliable sources" (Federal Register/Vol. 63, No. 37/Wednesday, February 25, 1998/Prosposed Rules, page 9664.) This provision will have unintended and potentially disastrous consequences for the Bulletin Board and Pink Sheet markets and the investors they serve.
Mr. Jonathan G. Katz, Secretary
April 27, 1998
I concur with the Commissions prior held conviction that: "The (piggyback) exception is grounded on the assumption that regular and frequent quotations for securities generally reflect market supply and demand forces based on independent, informed pricing decision" (Ibid., page 9663). I do not agree, however, with the Commission's view that " microcap fraud is facilitated by broker-dealers that publish quotations of a security without reviewing any issuer information" (Ibid., page 9663). In fact, it is the broker dealers very participation in the market making processso long as they are legitimate actorsthat encourages skeptical public investors to enter the market with sell or short-sell orders. The willingness of sophisticated, well-informed investors to place sell or short-sell orders thwarts the pump priming mechanism of a fraudulent operator before his scheme gets truly out-of-hand. These skeptical investors, generally speaking, do not rely upon market makers views of the issuers, but instead do their own homework. They do depend, however, upon the presence of honorable market makers without whose participation even the most sophisticated investors would fall prey to the boiler room trading tactics of the promoters.
Asking each broker-dealer that publishes a quotation on a covered security to review and verify the issuers fundamental information is tantamount to making each of such broker-dealers an underwriter of the issuer. This will confer upon them exorbitant civil liability for which they are receiving no benefit. (The class action attorneys must be licking their lips.) Only the broker-dealers that are affiliated with the issuer or receive some remuneration from the issuers should be held to this standard. Otherwise, it is the independent, unbiased broker-dealers that will withdraw from making markets, leaving only the unscrupulous characters for whom litigation is merely a cost of doing business.
In short, eliminating the piggyback exception will cause your good shepherds to flee, leaving the wolves to tend your flocks. Even with roughly $200 million in capital under management and fifteen years of experience analyzing and investing in corporate securities, I would not want to tread through the darkened microcap valley which this proposed amendment would leave behind.
I respectfully submit the above comments and would be honored to answer the Commissions questions regarding my views.
With all best wishes,
Timothy G. Ewing