From: idpatch [mailto:idpatch@attbi.com] Sent: Saturday, March 15, 2003 8:17 AM To: aalizzi@dtcc.com; Thompson, Bernard; Steve-D.Jones@wsj.com; Stephen.Lynch@mail.house.gov; sletzler@dtcc.com; sgoldstein@dtcc.com; SCrane; Pat Clem; oreilly@foxnews.com; Nightly@NBC.com; msnbcinvestigates@msnbc.com; marketreg@sec.gov; lynn.cowan@dowjones.com; letters@nypost.com; Letters@newsweek.com; John_McCain@McCain.senate.gov; John Labate; jkehoe@ida.ca; Jim Cramer; jdaw@thestar.ca; InvesTrend; hardball@msnbc.com; enforcement@sec.gov; editor@globe.com; DDecloet@nationalpost.com; consumer@banking.state.ny.us; Commerce@MSNBC.com; chairmanoffice@sec.gov; carol.remond@dowjones.com; bmudry@stockwatch.com; bizcenter@cnbc.com; BillM@fool.com; bcopple@forbes.com; AskDOJ@usdoj.gov; 60II@cbsnews.com Subject: Comment letter to SEC regarding DTC - JGMHA Re: File No. SR-DTC-2003-03; Requests for Withdrawal of Certificates by Issuers Dear Mr. Katz: JAG Media Holdings, Inc. (OTCBB: JGMHA) is pleased to provide the Securities and Exchange Commission ("Commission" or "SEC") with comments on The Depository Trust Company's ("DTC") proposal to clarify its rules and procedures regarding r equests from issuers to withdraw their securities from DTC. The Issue Like many companies whose shares trade on the Bulletin Board, we believe that our company has been the target of naked short selling. Accordingly, we are submitting these comments in the hope that the Commission will take into account the ramifications of depriving small publicly traded companies of one of the few timely and cost-effective remedies they have to protect themselves and their stockholders from predatory naked short selling, which would result from implementation of DTC's proposed rule "clarification." The question of whether issuers will be permitted to withdraw the trading of their shares from DTC can only be fairly addressed in the context of the true underlying issue of naked short selling. To date DTC has been extremely reluctant to acknowledge the existence of this practice and simply spins the issue as small companies wanting to exit DTC to stop "short selling" of their stock. Obviously, short selling is not the issue at all. Our company, and virtually all other small companies and investors, acknowledge the right of investors to sell a company's stock short provided that it is done lawfully (i.e..the parties handling the trades have made an "affirmative determination" that the stock is available to borrow and delivery of the stock is made within the required timeframe). We also acknowledge that lawful short selling helps maintain the integrity, liquidity and equilibrium of the markets. Unfortunately, much of the short selling which takes place, especially with respect to Bulletin Board companies, we believe, does not meet these parameters. This has led to a systemic problem that must be corrected. The Response by Issuers In response to this flaw in the system, small companies have tried to protect their stockholders from naked short selling abuses by implementing "custody only" or "certificate only" trading, which would require that all trades be settled only by the delivery of physical certificates. Only in this way can companies and their stockholders be assured that when a sale of their stock is made that it is a bona fide sale. Companies have resorted to this process because it represents a timely and relatively cost effective way to deal with naked short selling and protects the interests of their stockholders. To date, an ever-increasing number of companies have adopted custody only trading with overwhelming stockholder support. Some companies, such as ours, have gone through the effort and expense of putting the matter to a stockholder vote prior to adoption to more accurately determine the level of support for such a measure among stockholders. In our particular case, in excess of 98% of the votes cast for the custody only trading proposal were in favor of the proposal. While it is true that paper certificates do cause a certain amount of inconvenience for investors and brokers, such inconvenience cannot outweigh the right of a company and its stockholders to protect them against naked short selling. We are confident that now that the issue of naked short selling has received increased attention the Commission and other applicable regulatory bodies will make significant progress in eliminating this insidious practice. Nevertheless, everyone must be realistic and acknowledge that no matter how strong intentions may be, resources at the Commission and other regulatory bodies are not limitless and therefore it will take some period of time before significant inroads are made into the elimination of naked short selling. Therefore, it is especially important that small companies and their stockholders not be stripped of their right to implement custody only trading and protect themselves from predatory naked short selling practices during this period. We believe that the Commission will find that once naked short selling abuses are significantly curtailed, one by one companies and their stockholders will deem it safe to get back into the water and will once again feel confident about relying on electronic book-entry as evidence of stockholders' ownership rights. The DTC Experience To date, DTC has permitted a number of companies to voluntarily exit their securities from the DTC system. Then, on January 28, 2003, DTC issued a guidance statement which for the first time officially stated DTC's position on the matter. In that guidance statement, DTC relied on undisclosed provisions of the Uniform Commercial Code (UCC) as the basis for its position that issuers do not have the right to withdraw their securities from the DTC system. In our particular situation, we contacted DTC on January 24, 2003 (the date we adopted custody only trading) to notify them of our adoption of custody only trading and make arrangements for the withdrawal of our stock from DTC. However, it was not until nearly ten days later that our attorneys received a response from DTC confirming that they would no longer allow issuers to exit the DTC system. DTC once again relied on the UCC as the basis for this decision but declined to provide us with the provision of the UCC on which they are relying. It is our understanding that there are a large number of companies that have also adopted custody only trading who have similarly been denied the opportunity to exit their securities from DTC. In a further attempt to formalize its apparent policy change, DTC placed on its website a press release dated January 23, 2003 which reiterated DTC's position regarding custody only trading. Unfortunately, it appears that the press release was not posted on their website or otherwise made public until approximately January 29, 2003. Finally, after taking the position that their right to deny issuers the ability to exit their securities from the system was clear and supported by the UCC and DTC's own rules, DTC has now asked the Commission for a rule "clarification" on the very same issue that it maintained was absolutely clear. Despite the need for this apparent clarification however, DTC also stated that it would continue not to honor Issuer Withdrawal Requests, even if approved by the majority of stockholders or the issuer's board of directors. That is, with or without SEC approval, DTC will continue to follow a policy that it feels the need to ask the commission to approve. This makes no sense to us. If this policy were in fact already provided by DTC's rules and procedures, there would be no need for Commission approval, and DTC could have simply filed this proposal under Exchange Act Section 19 (b)(3)(A) as a rule interpretation. Needless to say, we believe that the manner in which DTC, a self-regulatory organization, has handled this apparent policy change is arbitrary, capricious and detrimental to companies such as ours which relied on state law and DTC's previous actions of permitting certain companies to voluntarily exit the DTC system. Important policy changes such as the one proposed by DTC should not be made surreptitiously and on a broad stroke basis. At the very least, they should take into account the facts as they apply to each issuer requesting removal as well as the application of state law to each issuer. There is one additional inconsistency with the proposed rule and flaw in DTC's legal argument. In taking the position that issuers do not have the right to determine whether their securities are held in physical certificate form, DTC is taking a position squarely inconsistent with the industry's position regarding straight-through processing. It is our understanding that the Securities Industry Association (SIA) is engaged in a long-term program to encourage straight-through processing in the clearance and settlement of U.S. securities. This program would ultimately involve the elimination of paper certificates on the road to an ultimate goal of settlement of trades in T+1. As part of this program, we understand that the SIA will be encouraging issuers to do away with paper stock certificates and utilize book-entry proof of stock ownership. It is also our understanding that the first issuer to voluntarily do so was AT&T. We do not understand how a company can have the right to determine that its stockholders must hold their stock only in book-entry, non-certificated form but not have the concomitant right to determine that its stockholders must hold their stock in physical certificate form. In any case, Nevada law is at least very clear that, unless the articles of incorporation or bylaws of a corporation state to the contrary, a stockholder is always entitled to obtain a stock certificate from a Nevada issuer certifying the shares it owns (See Nevada Revised Statutes Section 78.235). The Law Perhaps most importantly, we call into question the legal basis for DTC's refusal to allow companies to voluntarily exit the DTC system. As you are aware, DTC has relied on the UCC as the basis for its decision but, to date, has declined to provide the specific provisions of the UCC on which it is relying. In our case, we have reviewed the UCC, as adopted by the State of Nevada, our state of incorporation, and have been unable to find a provision that supports DTC's position. Further, we believe that the issue of whether a company can implement custody only trading is governed by the law of the state of incorporation of that company. Under Nevada law, custody only trading can be validly implemented by a company. We do not believe the SEC, let alone DTC, should lightly attempt to override established state laws which have always defined the mechanics of corporate life and the most basic rights of stockholders. Accordingly, we fail to understand how a rule can be imposed unilaterally by DTC, which in effect usurps a company's (and its stockholders) rights under state law. Even more disconcerting is the fact that the DTC rule proposal does not even attempt to take into consideration the potential conflict of such a rule with the applicable laws of each state. In conclusion, we believe that DTC's proposed rule clarification is ill-conceived, would in most cases be in conflict with state law and would be detrimental to all those small companies that have no other viable alternative for protecting their stockholders against naked short selling abuses. Very truly yours, Thomas J. Mazzarisi Executive Vice President & General Counsel Jagnotes Archive Whisper Numbers JagNotes.com © 2002 JAG Notes. All Rights Reserved. Today's research has been obtained from sources believed to be reliable, however, JagNotes.com cannot attest to the completeness or accuracy of such