This is a Great read but if we all know about this

Securities and Exchange Commission: 
450 Fifth Street, NW 
Washington, D.C. 20549-0609

Re: File # S7-23-03

Dear Mr. Katz,

We thank you for this opportunity to offer comments and suggestions in regards to the proposed Regulation SHO. We are of the opinion that the rampant "naked short selling" of stocks and the associated epidemic of failures of "good delivery" and loans made to mask "failures to deliver" that we are currently experiencing, threatens the very core and integrity of our financial system. These problems need to be dealt with IMMEDIATELY, even before the implementation of the proposed Regulation SHO.

As each day goes by, the investment losses pile up, another handful of micro cap companies go bankrupt, and the inevitable loss in investor confidence once this little "industry within an industry" is exposed increases. This is occurring at a time when the system can ill-afford any new scandals involving perceived regulatory apathy. Our comments will first address some specific suggestions and then some generalizations based on 21 years of research on the phenomenon known as "naked short selling."

Throughout the process of designing these new rules, we ask that you keep one fact at the forefront of your mind. That being that the Depository Trust and Clearing Corporation ("DTCC") is aggressively driving towards STP or "straight through processing." This means that the trade date will equal the settlement date, i.e., settlement date will be referred to as T+0. This single event will increase the levels of naked short selling abuses we currently see many many-fold as "failed deliveries" will be the norm and not the exception and abusive and intentional failed deliveries will be camouflaged.

Therefore, whatever rules you implement now will be severely diluted should STP become a reality. We noticed this trend back when settlement date changed from T+5 to T+3 several years ago. The DTCC's never-ending quest for clearing and settling trades at light speed, no matter what the effect on the INTEGRITY of the process, needs to be addressed.

One caveat, in this letter we will use the term "naked short selling" as is currently used in the vernacular. The term "naked short selling", for the record, is an unfortunate misnomer. "Short selling" refers to the sale of legitimate, borrowed "shares/packages of rights", in the hopes of repurchasing them at a later time for a lesser amount. The borrowed "shares/packages of rights" are then returned to the lender. Shares are, of course, a "package of rights" attached to a specific public corporation. They include the right to vote the percentage of equity ownership purchased, the right to dividends that don`t dilute the percentage of equity ownership, to residual rights in the case of dissolution, to preeminent rights, the right to sell at a time of one's choosing, the right to become the nominal/legal owner by taking delivery of a certificate with one's name on it, the right to use this proof of ownership to collateralize business or personal loans, etc.

The term "naked short selling" would thus refer to the selling of legitimate "shares/packages of rights", without first borrowing them. On Wall Street, the reference to "naked short selling" is of a much more heinous nature than the name implies. That which is being sold by unethical market makers, clearing firms, and co-conspirators and purchased by investors is not a legitimate "share/package of rights".

Legitimacy is dictated by the existence of a corresponding certificated share bearing the signature of the Corporate Treasurer and Transfer Agent, somewhere in the system. The entity being sold and purchased in "naked short selling" does not exist. A public corporation has a finite number of "rights" to vote, receive dividends, etc. The entities being bought and sold are above and beyond this finite number of "shares/package of rights".

In "legal" short selling there are intrinsic checks and balances in existence to prevent massive fraud. By far the most important being that the number of shares that can LEGALLY be sold short is governed by the number of shares that can be LEGALLY borrowed. This would be comprised of the issuer's "float" less the number of "fully paid for shares", excess margin securities, and shares held in qualified retirement plans subject to the 1974 ERISA Act. Thankfully, the thinly traded securities of the OTCBB and Pink Sheets, which are the most susceptible to short selling frauds, do not have a high percentage of shares that are "lendable" since most of these shares are non-marginable. In naked short selling, this, the most important intrinsic governing mechanism is gone by the wayside. This fact, in conjunction with the DTCC's allowance of a "real" share to be loaned out in more than one direction at any given time, accounts for the reason we find "open positions" or accumulated fails to deliver or loans made to mask these fails in excess of 300 and 400% during the discovery phase of naked short selling civil cases.

What we would hope that the SEC could appreciate is the element of TRUST that investors have in the system and in the regulators that in turn have a fiduciary duty of TRUST to these investors. Naïve investors assume that the SEC has created a "level playing field" on these trading venues. They assume that the regulators are professionals, that they know every dirty trick in the fraudsters' playbook, and could recognize a fraud while it is being perpetrated. These investors really think that they are buying "real" shares from a "real" shareholder, perhaps across the country, with a market maker acting as the middleman. They see no need to ask for the delivery of their certificated shares to prevent fraud. In fact, corrupt broker/dealers will attempt to talk their clients out of demanding certificates and/or make it cost prohibitive to do so. We got a kick out a brokerage firm's comment letter during the last "short sales" comment period back in 1999. In it this firm urged fellow DTCC participants to just hike up their fees for certificate delivery to thwart investors demanding proof of their purchase. This firm cited a 70% decrease in demands for delivery after doing this. Investors also do not have a clue that their own broker/dealer, who owes the investor a fiduciary duty of care after being paid a commission as an agent, is "renting" out their purchased shares to the mortal enemy of the client's investment. The investor has been "sold out" by his own brokerage firm. There isn't even any sharing of the rental income from the loan.

The fiduciary duty of care owed to the client/investor seems to disappear as the shares purchased head into the DTCC where they are held in an anonymous "pooled" format. Because of this anonymity, Shareholder "Sam" would have a tough time making a case against his brokerage firm for breach of this duty and being "sold out" in exchange for a rental check. Where did the fiduciary duty disappear to as these "shares"/ nonexistent entities entered into the DTCC system? Can you find it with a GPS? The naïve investor does not realize that there would be consequences for his brokerage firm if it were to "break ranks" and do the right thing. The Wall Street community and various co-conspirators have made this issue into a "Wall Street versus investors" battle.

We would warn the SEC not to expect too many comment letters this time around. These investors have had it. Back in 1999, the vast majority of 2700 commenters begged you to throw them a lifeline in regards to this naked short selling issue. Here we are over 4 years later commenting on Regulation SHO. The only bets being placed now have to deal with how long Wall Street can stall its implementation. Please act quickly, this country's financial system is much too important to toy with. What advances have been made over this past 1,500 day period subsequent to one of the most massive pleas for help in the history of the SEC. What is really troublesome to the legal community is the fact that the SEC already has in its possession the power and the mandate to address these naked short-selling problems. The 1934 Securities Exchange Act gave it to them.

The crime being committed is actually a hybrid between counterfeiting and a 10b-5 securities fraud. In our opinion, the SEC does not have the power or mandate to allow "would be" bona fide market makers to sell nonexistent "packages of rights" attached to a specific public corporation in exchange for a U.S. citizen's hard-earned cash.

The concept is preposterous even if the "pseudo-shares" were to be "bought in" within 24 hours. The current system not only allows this heinous act, but it also allows these nonexistent entities to remain within the system for years at a time. The allowance of a "sell" without a corresponding "borrow" is a recipe for disaster that any fraudster could-and many of them do-make billions of dollars off of. It is "the borrow" or MONITORED "affirmative determination" in writing of the "borrowability" of legitimate "shares/packages of rights" that allows the process to have any shred of integrity.

This whole issue is not a matter of "good clean fun between the shorts and the longs". This is organized crime permitted and condoned by naïve regulators not recognizing the absurdity of letting Wall Street participants dealing with trillions of dollars of investors' property to sell things that simply don't exist. The non-applicability of Rule 3370 necessitating the "borrow" or "affirmative determination in writing of the "borrowability" of legitimate shares/packages of rights" to the OTC: BB and Pink Sheets markets was a counterfeiter's dream. Does the Real Estate Commission condone the sale of "oceanfront property" in Arizona by "bona fide" realtors to "inject liquidity" into the Real Estate market when buyers outnumber sellers of real estate? What is the difference, private property is private property and State Securities Statutes deem that an equity ownership position in a public company is a form of private property?

We are convinced that the various State Securities regulators, if they understood the concept of naked short selling, would have had an absolute fit if they knew that the SEC was even considering allowing market makers to sell entities that don't exist and thereby dilute the equity ownership of investors in their states, or to fraudulently distribute counterfeit shares of public companies domiciled in their states. This only illustrates how little people know about "naked short selling" and the role of the DTCC.

Please do the investing public a favor. When reading through comments on Regulation SHO or discussing this matter with other regulators, please mentally substitute the phrase, "the selling of nonexistent entities by participants of the DTCC to U.S. investors to whom they owe a fiduciary duty, in return for their cash" in the place of "naked short selling". Keep in mind that it is the SEMANTICS involved in the term "naked short selling" that somewhat legitimizes this heinous concept because legitimate "short selling" does indeed have its place in a healthy market.

Our greatest concerns revolve around "naked short selling" and Rule 203, as well as Rule 201.

In regards to Rule 203(b):

1) In 1(i) we would ask that you strictly define what a "bona fide arrangement to borrow the security" entails. Does this refer to the affirmative determination rules? The current affirmative determination rules are riddled with loopholes. They only require a broker/dealer to use its best knowledge and judgment to determine the availability of shares for loan and to notate it in writing. Where is the contract? The absence of the security on a non-audited "hard to borrow" list as proof of "borrowability" is a total joke.

2) In 1(ii) "Had reasonable grounds to believe that it could borrow the security" is unbelievably subjective. What are reasonable grounds, "easy to borrow lists"? When writing these rules, we would suggest that you "PRETEND" that the naked short selling of micro cap securities represents perhaps the single biggest fraud ever perpetrated on U.S. investors and the integrity of the market is at stake and that the people that have made literally billions of dollars committing this fraud are looking for any potential loophole that will allow them to carry on the commission of this fraud ad infinitum. Plug all loopholes! Why would the SEC even consider allowing these crimes to continue?

3) In (2) we would suggest adding "or any affiliate, client or associate thereof" after the "purposes of the broker or dealer".

4) In regards to the last line of (2) "or is disproportionate to the usual market making patterns or practices of the b/d in that security", this invites a crooked market maker ("MM") that naked short sells into every order he sees to continue to do that because that IS his usual MM pattern.

5) In (3) (i) what keeps a crooked MM from just naked short selling through a different proprietary or non-proprietary account once he's caught? Please refer to the Sedona case modus operandi. These people usually work in collusion with many other co-conspirators both on and offshore. A MM caught misbehaving can hand the naked short selling torch to a "buddy MM" for 90 days and return the favor should the "buddy MM" get caught. The emphasis has to be on shutting down the abusive naked short selling of the abusive BROKERAGE FIRMS, NOT JUST THE OFFENDING ACCOUNTS. IF YOU ACTUALLY PUNISH THE BROKERS, THESE CRIMES WILL BECOME LESS PERVASIVE

6) In (3) (ii) (A) threatening to report the culprit to the NASD has no deterrent effect whatsoever. Investors are tired of watching perpetrators being fined $20,000 for stealing $5 million. Signing off on an AWC (Acceptance, waiver, consent) stating that, "I didn't do it and I won't do it again" just doesn't cut it anymore. That's how the SEC allowed the U.S. financial markets to get into this mess. The NASD's naiveté-or complicity-in naked short selling matters is summarized in "endnote" #42 of the document we are commenting on wherein they state, "The Association (NASD) does not anticipate that a firm could properly take advantage of its market maker exemption to effectuate such speculative or investment short selling decision." Perish the thought, can you in your wildest dreams imagine an OTC market maker taking advantage of his and only his "right" to naked short sell into buy orders when "theoretically" acting as a bona fide market maker?

7) In 3 (ii) (B) withholding the proceeds of the crime for 90 days is like handing a bank robber the proceeds of the heist after a 90 day waiting period. This is a crime being committed. The motive is greed. The shares that were sold for real money don't exist, they never did. There was no intent to ever cover this naked short position. The "intent to defraud" is typically present right from the "get go" as there is usually not an imbalance of buy orders over sell orders at the higher trading levels of these "bear raid" victims. These victim companies are "targeted" because DTCC participants, in their infinite wisdom, feel that their market cap is a bit "rich" or that the prey is weak. These fraudsters are predatory. This intent is further demonstrated as the market makers don't reappear on the bid at lower levels to repurchase the shares they just sold, as a bona fide market maker would. Unethical market makers that sold millions of shares at $5 did not try to cover this naked short position at $4.80 like a "bona fide" market maker would have. Nor did they attempt to cover at $3.80 or $2.80 either. They're not even bidding at the current price level of 2-cents for that matter. The only intent was and is the bankruptcy of the victim company. Naive micro cap investors have been getting their pockets picked systematically by Wall Street "professionals" for decades. FRAUDSTERS ARE SELLING ENTITIES THAT DON'T EXIST AND NAIVE INVESTORS ARE SPENDING BILLIONS OF DOLLARS SCOOPING UP THESE PERCEIVED BARGAINS TRADING AT TINY PERCENTAGES OF BOOK VALUE.

8) A lot of investors have 10 or 15% of their portfolio in micro cap high flyers on the OTC: BB and Pink Sheets. They want to discover their own future "Nike" while it's trading at 10-cents. Why would U.S. taxpayers that happen to invest in these micro cap companies be afforded any less protection from market maker induced fraud than those that invest in Microsoft and General Motors? U.S. investors love to gamble. It is these thinly traded securities that are the most easily manipulated by predatory MMs and their associates in Canada as well as in offshore hedge funds. One would think that they would need MORE protection than the investors in Microsoft if anything. Solid development stage companies "incubating" on the OTC: BB and Pink Sheets are extremely fragile and very susceptible to predatory attacks. Unethical market makers and their co-conspirators have come to the conclusion that billions of dollars can be made while shooting these "fish in a barrel". The sobering reality is that these companies are a lot like sandcastles and naked short selling predators are a lot like beach bullies and we all know that it's a thousand times easier to destroy a sandcastle or a young public corporation than it is to build one.

9) We believe that the naked short selling problem is much more systemic than you at the SEC give it credit for. It is the collusion and complicity amongst MMs that needs to be addressed. Watch Level 2 trading and see how they operate as "packs" or "herds" in heavily naked short sold stocks. The mere act of sending these naked short selling accounts to naked short selling "jail" for 90 days will just result in handing the naked short selling baton to a different account or to a buddy MM. The offshore hedge funds would obviously just set up numerous accounts at many different MMs and b/ds and rotate naked short selling orders through those accounts not currently in naked short selling jail. Perhaps severe penalties, criminal and civil, should be administered to repeat offenders while any of their accounts are in "jail". The text of the explanation didn't address it, but we assume that these illegal naked short positions in excess of the Rule 11830 parameters will be bought in as the account goes off to 90-day jail. If not, why not? Why would the SEC not require the settlement of all securities transactions in U.S. markets?

10) We believe that a prospective investor contemplating the purchase of a micro cap security on the OTC: BB or Pink Sheets has the right to see what the outstanding failures to deliver and loans masking these "fails" total up to. These are collectively referred to as "open positions". Let's not go back to the "caveat emptor" days. If there are 100 million legitimate shares issued in the stock he or she is contemplating buying, and 300 million "failures to deliver" or "loans made to cover a failed delivery" within the system, the prospective investor has the right to know that his purchase of 1 million shares will NOT give him 1% of the voting power of the company, 1% of any dividends distributed, or 1% of any residual equity rights in the case of the dissolution of the company. The SEC has the DUTY to make this crime-preventive information available to the prospective buyer. Otherwise, this investor will have walked into an ambush that the regulators were well aware of because on the day after his purchase there are 400 million shares that can be sold at any instant in time should bad news arrive on the doorstep. You at the SEC are very well aware of the ambush because you have visibility of these "fails" and "loans". Please give us a "heads up"! Just as the SEC and the public have the right to know of any additional shares being registered by an issuer, the micro cap investors have the right to know how many "counterfeit electronic book entries" are on the books at the DTCC and clearing agencies. In other words, how many shares has the DTCC illegally "registered" unbeknownst to the corporation and its shareholders.

This is all in the spirit of Regulation Full Disclosure or Reg. FD. It is a two way street. It is inherently wrong for two or more shareholders to receive monthly brokerage statementsINDICATING THE OWNERSHIP OF THE SAME PARCEL OF "SHARES/PACKAGES OF RIGHTS". We would advise the SEC to not get "faked out" on the concept of "good delivery". "Good delivery" is an instantaneous phenomenon at the DTCC. Fraudsters can borrow the same shares involved in effecting yesterday's "good delivery" of shares to create "good delivery" of today's trade. This allows access of these nonexistent entities into the DTCC via the creation of "counterfeit electronic book entries" or "CEBES".

Once into the DTCC all shares, real and fake, are conveniently held in an anonymous pooled format which camouflages the existence of the fake shares. The real and fake shares then play a gigantic game of "musical chairs" at the DTCC, circling around chairs the number of which match the number of "real" shares only. But since the music never stops at the DTCC, i.e., no periodic aging and quantification analyses of failed deliveries and loans made to mask failed deliveries, the fraud goes on undetected and the shareholders never do figure out if they bought real or fake shares.

This revelation can't be made until the victimized company convinces its shareholders to remove their shares from "street form" which is a difficult task due to the "handiness" of keeping shares at the DTCC. Should this depletion of real shares successfully occur, those demanding and receiving their certificated shares first are by default deemed to have bought "real" shares and those that did not receive their certificated shares are deemed to have bought "counterfeit" shares. But since 95% of shareholders hold their shares at the DTCC in "street form", the fraudsters can usually dodge this bullet.

All the SEC has to do is to look at the books of a b/d to see how many "shares/packages of rights" of a given corporation they "imply" possession of to their clients via monthly brokerage statements and compare this number to the number of "shares/packages of rights" actually held in their DTCC account. If you would like we will give you as many companies to examine in this manner as you can handle. You might start with Pinnacle Business Management (PCBM). The difference between these two numbers signifies the arithmetical sum of current "failures to receive" at the DTCC or loans made to the NSCC to cover up other "failed deliveries" of that same security at the DTCC. This is not rocket science. Ask yourselves just why all of those "victim" companies finally got so fed up that they tried to make a mass exodus from the DTCC. This has never occurred in the history of the markets. Victimized companies and their shareholders have had enough.

11) The bogus electronic book entries at the DTCC resulting from naked short selling and the resultant failed delivers do NOT represent what the public thinks of as "shares". "Shares" represent a "package of rights" attached to a public company. This does not include the 300 million bogus or counterfeit shares in the system in the previous example. "Shares" also include the right to any dividends distributed without causing any dilution to the percentage of equity ownership of "real" shares held.

In the above example, if that U.S. corporation did a 100% dividend share distribution to its shareholders and assuming all of the shares were held at the DTCC, then the Transfer Agent would send a "real" certificate made out to Cede and Co. for 100 million shares. Why then would the next monthly statements of the shareholders collectively total up to an extra 400 million shares theoretically having been delivered by the TA to the DTCC? The trouble is that the fraudulent behavior associated with the naked short selling of shares by Wall Street "professionals" and their co-conspirators in the clearing agencies and the Lending Departments, begets the necessity to commit cover up frauds every time a shareholder tries to exercise one of the missing "rights" that are only attached to "real" shares. These bogus electronic entries in the clearing agencies are not "shares" and do not have the rights attached to that issuer. THE ENTITIES BEING SOLD DO NOT EXIST.

One of the many rights attached to share ownership is the right to take delivery of the proof of ownership of the shares, the share certificate, thus allowing the purchaser to become the "nominal" or "legal" owner. This registered share certificate might then be used to collateralize personal or business loans as the creditor sees fit. It also allows a shareholder to become a "shareholder of record" giving him easy access to press releases, proxy solicitations, and dividend distributions.

Regulators that can't make the distinction between "shares" as a package of rights attached to a public company and "counterfeit electronic book entries hosted by the DTCC", can't effectively regulate. The allowing for the clearing and settlement of trades involving nonexistent entities at the DTCC via the borrowing of "shares" in order to effect good delivery represents the "counterfeiting phase".

The nonexistent entity sold by market makers masquerading as bona fide market makers becomes a "counterfeit" book entry every time this is done. These are counterfeit "packages of rights". "Naked short selling" is not a form of "short selling", it is a form of fraud. Shares are a lot more than a blip on a computer screen. The DTCC and its 11,000 broker/dealers have no right to create counterfeit voting rights, dividend rights, preemptive rights, equity ownership rights, residual ownership rights, delivery rights, etc. attached to a company.

This reality is borne out by witnessing the cover up frauds that need to be perpetrated in order to mask the fact that these entities are indeed counterfeit. Again the "intent to defraud" is quite obvious as you study the mechanisms of the "cover up" frauds being committed to hide the initial fraud. The above-cited company has 100 million legitimate voting rights, PERIOD! The Transfer Agent, in the 100% share dividend distribution cited above, will mail a certificate for 100 million new and legitimate "shares" to Cede and Co. and not one more, yet the monthly brokerage summaries for the shareholders of the issuer will now total not the old 100million real and 300 million counterfeit "pseudo-shares" but now 200 million real and 600 million counterfeit "pseudo-shares".

In this example, the dividend distribution resulted in the DTCC creating and distributingANOTHER 300 million non-registered "counterfeit electronic book entries", again out of thin air, without an exemption from registration in sight as mandated by the '33 Act. Why did Wall Street do this? They had to; otherwise they would have had to tell the owners of these 300 million nonexistent entities that they didn't get their dividend shares from their earlier purchase that they paid good money for because they bought counterfeit "pseudo-shares" that don`t really exist and that their money is sitting either in the pocket of the seller of these nonexistent entities or in their "C" sub account at the DTCC until the share price gets further decimated from this activity and this now "excess" margin capital trickles to the clearing firm of the naked short seller.

When a shareholder owning one of those 600 million counterfeit shares at the DTCC calls his broker and puts in a sell order, will that broker say, "No you can't sell those, they are counterfeit, we never got good delivery of your purchase?" Of course not. The broker has to sell those counterfeit shares to some other naive sap. Have you ever heard of an investor who got a proxy solicitation statement that indicated that he or she can't vote his or her shares because they are counterfeit and there never were any voting rights attached? Of course not, any fraud necessitates a cover up fraud once the original fraud is in danger of being discovered.

Why else did Medinah Minerals, Inc. tally up 168 million votes at a recent Annual General Meeting when only 111 million existed? Why can't the dozens and dozens of NUTEK shareholders that have been pounding the table for their share delivery for years not get their shares EVEN AFTER FILING SUIT TO DEMAND DELIVERY? WHY WASN'T WALL STREET THE LEAST BIT INTIMIDATED BY 32 SHAREHOLDERS FILING SUIT FOR DELIVERY OF THEIR PURCHASES? WHAT IS GOING ON HERE? WHY WOULD THE DEFENDANT BROKER/DEALERS PAY HUGE LEGAL BILLS INSTEAD OF JUST BUYING IN THE MISSING SHARES AND GIVING THEIR OWN CLIENTS THEIR POSSESSION? THIS NUTEK SITUATION REPRESENTS A BLACK EYE THAT THIS COUNTRY'S FINANCIAL SYSTEM DOES NOT NEED. Perhaps Regulation SHO should incorporate a rule that if a shareholder's request for the delivery of his certificate has not reached the Transfer Agent's office within 3 weeks time then an immediate cash buy-in must be effected.

12) The invisibility of trading on the OTC: BB and Pink Sheets needs to be addressed. Even Level 2 visibility tells an investor absolutely zero about which market maker is buying and which is selling. What's the big secret? If a certain MM was selling 50 million shares of an issuer every month and buying none, month after month, this would be a nice thing to know. Don't you agree? If the SEC is strapped for cash and manpower then open up the visibility to investors and place a deputy's badge on them to protect their possessions. They are aptly incentivised to do a good job. The monthly disclosure of aggregate short positions and fails to deliver is critical to ending theseabuses. There is no better disinfectant than the light of day. OF COURSE THIS WON'T HELP WITH FRAUDULENT SHORT SALES INTENTIONALLY MISLABELED AS LONG SALES.

13) I would hope that the SEC would treat naked short selling as a totally out of control systemic fraud that, if remains un-addressed, WILL cause cataclysmic damage to the integrity of our markets. We are of the opinion that the naked short selling fraud totally dwarfs the current mutual fund fraud even though there are currently $7 trillion currently sitting in these vehicles. Look at the egregious nature of selling entities that don't exist and bankrupting U.S. companies as well as investors, versus market timing issues or late trading issues.

In two recent naked short selling cases that resulted in jury awards to two corporations that were victims of naked short selling abuses, the debt collectors each located many, many billions of dollars of assets belonging to each of those two INDIVIDUAL naked short sellers. THIS FRAUD IS ENORMOUS. The sense of emergency must be understood. Do not wait for Regulation SHO to become law to address these problems. Investors are buying tens of millions of dollars of micro cap securities-at least, they are trying to-each and every day. They are walking into an ambush each and every day.

Those investors plopping down big bucks tomorrow have a right to know if they're walking into an ambush. We need regulatory "cops" out there practicing crime prevention. If they think they are buying a 1% equity and voting position in an issuer and you, through your perusal of failed deliveries, KNOW AS AN IRREFUTABLE FACT that this is way off base, then PLEASEwarn these investors via access to the truth. You don't need Regulation SHO to do this, the Securities Exchange Act of 1934 gave you BOTH THE POWER AND THE MANDATE to do this. All you have to do is look at the failed deliveries that have been covered up by loans.

Keep in mind that NASD Rule 11830 serves as a benchmark stating that failed deliveries above 10,000 shares and one half of 1% of the issued number of shares represents a level that needs addressing via a buy-in. While studying the levels of the failed deliveries and "cover-up loans", also notice the ages thereof. Addendum "C" to the rules and regulations of the NSCC, set up a "Lending Pool" of shares in street form to cover failed deliveries FOR ONLY A DAY OR TWObecause there are indeed legitimate reasons why delivery might be held up for a day or two. A year or two would seem to be a little excessive. Be aware also of the constant "kiting" of these "open positions" amongst the perpetrators of this fraud and their co-conspirators made in an effort to "freshen up" the ages of these "fails" and "loans".

It really doesn't matter whether the actual initiator of the naked short sell order was a predatory financier selling death spirals, an offshore corporation set up in a tax haven with strict banking secrecy laws, an unregulated hedge fund, an Internet naked short selling "guru" or one of his disciples, a Canadian broker/dealer, etc. All of these orders go through U.S. market makers, U.S. clearing firms, and the DTCC.

14) Do we need firm rules to address which shareholder is allowed to vote the shares which each of two individuals purchased and one of their firms "rented" them out to cover a failed delivery of the other?

That's what it would come down to if shares are allowed to be sold without a borrow. This "joint" ownership of the same parcel of securities that results from naked short selling is a joke. Does anybody for a moment believe that for every loan made to mask a failed delivery of naked short sold shares a letter goes out to the shareholder whose shares were loaned out informing him that he can no longer receive dividends or vote at meetings? Does anybody believe that the new purchaser got a note appended to his purchase confirmation that he's not allowed to receive any of the rights attached to the ownership of shares in this specific corporation? No, because at the DTCC both the "real" shares and "counterfeit electronic book entries" are CONVENIENTLY held in an anonymous pooled format where they are indistinguishable from one another. The best victim a fraudster could hope for is not only one that does not recognize that he has been defrauded but also one that couldn't prove that he was a victim even if he was aware of the fraud. Blind anonymous pools are extremely clever.

If somebody doesn't get to vote their shares, then tell them that before you loan out or borrow their shares. Is it perhaps appropriate to share in the rental income of these shares? The DTCC has no right to create voting rights in a public company. Rules addressing which shareholder in the case above would get a share dividend also would have to be addressed.

In the case of a dividend distribution, the DTCC has no right to create new "registered" shares of an issuer out of thin air and lie to shareholders implying that these were sent by the TA. The fact that all of these real and fake shares can be sold at any instant in time represents a phenomenon known as dilution. Dilution kills companies. The resultant forcing of these issuers to raise money at artificially low levels exacerbates this dilution. Almost all "development stage" issuers have to raise money to pay their monthly "burn rate". The combined effects of immense "open positions" on the books at the DTCC, plus further naked shorting day after day, in addition to the raising of necessary funds at these artificially low levels just to pay the bills, cause a downward spiral in the share price of these companies and their eventual bankruptcy. This has to be recognized by the SEC and stopped immediately to minimize the damages accruing on a daily basis.

15) In regards to Proposed Rule 201, the trading venues of the Small Cap NASDAQ, the OTC: BB, and the Pink Sheets need the protection provided by the Proposed Bid Test. These trading venues do have "effective transaction reporting plans" and information related to these trades is made available on a real time basis. They also have an easily distinguished best consolidated bid. The OTCBB and Pink Sheets trading venues have matured immensely in the last few years. There are plenty of real time market quotation vendors involved.

In IV b 2 you mention that "We are not proposing at this time to extend the uniform bid test to securities not currently covered by a short sale price test in part because these markets have not been subject to the rule in the past. More significantly, we believe that the proposed locate and deliver requirements may address many of the concerns regarding abusive short selling in thinly-capitalized securities trading over the counter". The reasoning used in the first sentence is exactly why we're in the mess we are today. No offense intended, but what kind of reasoning is "We're not going to address the problem of "bid banging" now because nobody addressed it in the past"? And also don't address "many" of the loopholes, address them all, especially while being cognizant of the "Straight Through Processing" policies were heading towards.

All efforts made now will be severely diluted if STP becomes a reality and we hope that you recognize the perils of a policy like that. Aggressive changes are needed now because this naked short selling and "failed delivery masking" scandal could undermine what little confidence investors still have in the system. Without "bid banging" protection, abusive MMs will hammer away at the bid with a big sell order of nonexistent shares and then fail delivery and head off to the 90 day jail term. But the damage will have already been done before the jail sentence has been carried out. The visible stop loss orders will have already been "tripped" and the impressionable shareholders will have already done their panic selling.

Other co-conspiring MMs as well as other proprietary and non-proprietary accounts at the same firm will then pick up the slack and nothing will have changed. Abusive MMs love to spot a "stop loss sell order" down below the bid, sell a bunch of nonexistent shares knocking out underlying bids thereby "tripping" these stop loss sell orders. They then watch the PPS implode from long shareholders sensing a catastrophic sell off in process and selling out their long positions. This is a very common phenomenon known as market makers "shaking the tree" and is extremely easy to perpetrate because of the enhanced visibility these Wall Street "professionals" have and they love to use this leverage over the people to whom they owe a fiduciary duty.

16) The proposed text of Rule 203 does not include the inclusion of Rule 11830 as proposed. Was that an oversight or do you plan on amending 11830 separately?

17) We do agree wholeheartedly with Lamont and Thayler's work cited in endnote #21 in regards to short selling's two greatest benefits being market liquidity and pricing efficiency. Market liquidity has two components. These are buy side liquidity and sell side liquidity. The problem with relating this to naked short selling is the disconnect involved because in naked short selling frauds market liquidity becomes immense only on the buy side as pricing efficiency goes out the window. Market liquidity should aid both buyers and sellers of a stock, not just the buyers. Thus two of the three benefits of "short selling" do not apply to naked short selling and the one parameter that does apply, buy side liquidity, actually works against the investor because it just serves to draw more victims into the trap. The same type of disconnect has occurred at the DTCC which is so focused on clearing trades at light speed at the same time that the INTEGRITY of the process has fallen out of bed.

As the DTCC is now hell-bent on Straight Through Processing wherein the trade date IS the settlement date, please design the new rules with that in mind, as the integrity of the process will go right out the window if you don't. Our advice is to slow down and do it right.

18) In endnote #50 you state that, "The NSCC currently tracks this information on fails to deliver and provides it to the NASD for purposes of administering NASD Rule 11830". (The mandated buy-in rule) How can neither the NSCC nor the NASD, two SROs, being fully aware of these "fails" and "masked fails", not warn naive investors that they are walking into an ambush when they buy shares of "xyz" when there is a 200% naked short position at the NSCC? At what level of failed deliveries or cover-up loans do the alarms and red lights go off? Are there alarms and red lights in existence for somebody to monitor? Are there employees of the DTCC and or broker-dealer's Compliance Offices commissioned to monitor the age and quantities of failed deliveries? Shouldn't "good delivery" be more than an instantaneous blip on a computer screen that can get "undone" five minutes later?

The criminal activity being disguised as "shareholder advocacy" needs to be recognized for what it really is. Individuals hiding behind the anonymity provided by the Internet and First Amendment rights to free speech are acting as co-conspirators in this fraud. Only bona fide MMs can legally sell shares without borrowing and this applies to only when they are acting in the capacity of a bona fide MM. Bona fide MMs just don't hire co-conspirators to "bash" the stocks that they are naked short, racketeers do this. They don't "rent out" the lack of necessity to borrow before selling shares, as provided by Rule 3370, with those they are in collusion with or acting in complicity with.

19) Please note the wording of Addendum C to the rules and regulations of the NSCC as it pertains to when these counterfeit electronic book entries should be cleared up. We're trying to get a handle on what "when the amount of securities within the system at the DTCC is above and beyond what is needed for the normal clearing and settlement functions" really means. Just where would these mystery securities arrive from? The "D" sub accounts housing these "counterfeit shares" just keep getting fatter and more numerous through time. Your suggested amendment and invocation of Rule 11830 is very appropriate. Addendum C undermines all of the various delivery rules contained in the '34 Exchange Act. Be cognizant of the fact that a "loan" on the books of the DTCC is no more than a "failed delivery" in disguise. They both leave an "open position" that needs addressing.

20) We would suggest that delivery must be made unless it causes "undue inconvenience" be either tightly defined or changed. We expect that it might turn out to be "unduly inconvenient" for a market maker to use some of the proceeds of selling nonexistent shares to buy those shares back, don't you think? But does that give them the right to refuse to deliver?

21) People should realize that your proposed rules will also help thwart "Pump and dumps" by crooked insiders as the shares they are typically dumping are non-registered and restricted shares that just stay in the "open position" column until the restriction periods have passed.

22) We note that endnote #56 has several key errors in it. The concept that naked short sellers do not receive the proceeds of their sales until delivery is made is the second biggest misconception of naked short selling in existence and couldn't be further from the truth. Rule 11 at the NSCC says nothing of the sort indicated in the explanation of Proposed Rule SHO.

The only thing in the system that offers a slight check or balance to what these naked short sellers are doing is the fact that they must collateralize the loan that was made to mask the failed delivery. Recall that the critical intrinsic governor of only being able to short sell shares that can be legally borrowed has gone by the wayside in the case of naked short selling. As the constant selling of nonexistent shares drives the PPS from $5 to a penny, the amount of collateral needed to guarantee that debt is negligent at the 1-cent level. The proceeds of the sale of nonexistent shares at the $4 and $5 level are safely in the pocket of the fraudsters. That brings us to the single biggest misconception in the discipline of naked short selling, that being that the naked short sellers have to cover. They would be idiots to cover, all they have to do is to keep the price per share ("PPS") pinned down low and that's incredibly easy because they really do act like bona fide MMs at extremely low price levels because there are no real sellers and plenty of opportunistic buyers, and their supposed mandate is to provide liquidity by selling nonexistent shares into this disparity. Unfortunately for the investors, the further along these frauds mature, the more "bona fide" the market making activity actually becomes.

Just look at the various issuers whose share prices are pinned down at the no bid and $.0001 offer level. Of course there is an imbalance between too many buy orders and not enough sell orders. Note in the daily trading of these issues that no matter what the level of buying thrown at the $.0001offer, the offer just won't budge. Crooked insiders do not sell in this fashion. When they see huge levels of buy orders entering the market, they scale up their offers to yield the maximum amount per sale. What's interesting about these "stalemates" is that if the fraudsters stop naked short selling and the PPS goes up the least amount possible, to $.0002, then this will result in the fraudsters having to "pony up" millions of dollars in cash to maintain margin requirements.

At these levels one tiny up-tick to $.0002 represents a 100% gain in the PPS that needs to be collateralized. Broker/dealers "hosting" naked short positions at the $.0001 level will demand a very usurious margin maintenance requirement because of the tremendous risk involved. Market makers need to be concerned with net capital deficiency problems in these cases but on paper they are up perhaps tens of millions of dollars at the $.0001 level, but if the company refuses to die and the management and shareholders figure out the scam, then things can get dicey.

23) We would hope that you learn about some of the mechanics of naked short selling through the Sedona case. Notice how the offshore Panamanian domiciled corporation working out of Zurich was utilized. Notice how multiple U.S. broker/dealers were used in series to obfuscate identities of the sellers. Notice the use of the market maker's proprietary account allowing access to the Rule 3370 exemption from borrowing before the sale of nonexistent entities meant for bona fide market makers only.

Space underneath this "umbrella of immunity from the borrow" entrusted to bona fide market makers only, is being rented out by market makers constantly. The rent payments are usually in the form of increased order flow. Notice also the use of ECNs to maintain yet more anonymity and how the ECN trades were done after the close. Notice the role of the "Internet bashers" paid to induce selling and dissuade buying. We would hope the Department of Justice will eventually get around to addressing these "shareholder advocates". Notice how once Rule 11830 was invoked and Sedona went onto the "restricted" list the immediate transfer of the naked short selling to Canadian broker/dealers.

Notice in the SEC press release that you mention that, "Canadian broker/dealers are not members of the NASD and are not subject to its short sale restrictions". Notice also the use of "wash sales" and "matched orders". Keep in mind that Rule 100 of the Canadian Investment Dealers Association allows naked short sellers to "hedge" positions in unregistered convertible securities that don't mature for years to come by selling nonexistent shares today. How can the SEC allow offshore brokers with lax rules and regulations to amalgamate the loopholes in their system with those in our system? Please closely study the Thomson Kernaghan bankruptcy and note the percentage of their business dedicated towards the naked short selling of U.S. micro cap corporations. This is not an isolated case as recent cases have revealed during their discovery phases.

The laxity, or more accurately nonexistence, of Canadian delivery laws is often referred to as the "tunnel under the border". They simply sit on "failures to deliver" for several years. Canadian broker/dealers enjoy access to the U.S. markets yet are not forced to follow the rules of the NASD and SEC. Please take note of the fact that there is no "affirmative determination" rule or Rule 3370 analogue in Canada. Not that this makes a whole lot of difference as the affirmative determination rules in the U.S. are riddled with loopholes and violations detected are met with minor hand slaps and a meaningless letter of censure. Nor is there a Rule 15c3-3 or 11830 analogue in Canada forcing buy-ins of undelivered shares after 10 days.

Notice also the incestuous ownership relationships of the offshore hedge funds utilized in these alleged frauds. The point being that there are thousands of "Sedonas" out there, some already bankrupt and others on their deathbeds. Death spiral financings probably don't even account for 1% of all of the naked short selling activity out there because of the easily recognized motive of the financiers. As heinous as the practice is, the convertible death spiral is a rather mild version of naked short selling. In the garden variety naked short selling the fraudsters pay nothing to the issuers and investors. They just take their money and run. The only expense they incur is the collateralization of the naked short position via margin maintenance requirements and/or net capital reserve requirements, but since these are tied to the "marked to market" share price that is in free fall, it is just looked upon as a cost of doing business and is minimal. At least predatory financiers cough up some money although often it is money from the sale of nonexistent shares of the victim company even before approaching them to do a financing. How's that for a slick fraud, take money from the investors in a company and hand it to the company in exchange for a floorless convertible security, and then use that convertible security to destroy the company completely?

SUGGESTED ADDITIONS/MODIFICATIONS TO REGULATION SHO

1) Modifications to Addendum "C" of the rules and regulations of the NSCC and the automated "Stock Borrow Program" therein created is critical. The greatly perverted intent of this addendum was to allow trades involving shares that for one or more legitimate reasons could not be delivered by settlement date to go ahead and settle since their arrival was imminent.

Our research indicates that the abuse of the spirit of this extremely short termed exemption from delivery, when combined with allowing market makers to LEGALLY naked short sell into buy orders while theoretically wearing a "bona fide" MM hat (NASD Rule 3370), has resulted in synergies that abusive MMs and clearing firms and their co-conspirators have used to fleece micro cap investors for decades, thereby undermining the entire clearing and settlement process in the United States.

All you have to do is look at the age and magnitude of the "open positions" which in effect have masked the sale of nonexistent shares in the 7,500 U.S. public corporations trading on the OTC: BB and the Pink Sheets. We'll warn you in advance, this is going to be a very sobering experience. This is a national scandal of heretofore unheard of proportion. The nonexistent shares sold by and through these unethical market makers and clearing firms enter into the clearing and settling system at the DTCC via the smokescreen provided by the "Automated Stock Borrow Program".

Once within the system, the DTCC treats them as genuine shares and allows these counterfeit electronic book entries to earn dividends, vote at annual meetings, exercise preeminent rights, residual rights, and the right to sell these "entities" to others as if they were real. The DTCC is thereby distributing unregistered securities of issuers with no exemption from registration in sight. This is, of course, strictly forbidden by the '33 Act. These are the very crimes you at the SEC have been prosecuting for decades but in this case at the DTCC the scale of the crimes being committed are beyond imagination and it is occurring right under your noses-literally, across the street from your offices on Wall Street.

DTCC then allows its participants to mislead their clients on their monthly brokerage statements into believing that they had bought and received delivery of "real" shares with all of the rights of share ownership attached. These are not real "shares" of a specific public company that have a "package of rights" attached to them.

Do they always get "good delivery" at the DTCC as indicated in their recent press releases? Yes, they TECHNICALLY do get good delivery, but it is of a borrowed share, but what they don't tell U.S. investors is that they "un-did" yesterday's or last week's "good delivery" of a similar trade in order to make today's trade clear and settle. The initial purchaser of this "borrowed" share does not have a clue that his purchase was rented out by his "agent" who owes a fiduciary duty of care to his client, to the mortal enemy of his investment and is being used as an integral part of the plan to bankrupt the company he invested in. Does the term CONFLICT OF INTERESTcome to mind? So much for holding shares in "street form" at the DTCC. Why might the DTCC and its participants be in such a hurry to cut corners thereby allowing all of these sales of nonexistent trades to clear and settle? The motive is of a pecuniary nature. The clearance of this trade allows the DTCC to earn fees, its participating b/ds to earn commissions, and its participating MMs to earn "mark-ups".

Further, the DTCC participant that "generously" rented his client's shares to the abusive market maker is highly incentivised to do this because he can convert a stock certificate or electronic book entry gathering dust into real cash that collateralizes this "loan". Everybody on Wall Street comes out a big winner as the investors watch their investments become worthless from the massive dilution attendant to this process. The "borrowed" share simply gets credited to the new buying b/d's account where it can be loaned out from tomorrow. At any given time, one "real" share can be loaned out in 43 different directions allowing the very temporary "good delivery" of 43 different illegal naked short sales and their clearance and settlement.

If the system had integrity, once loaned out a share would be sequestered off to the side until the loan is repaid. This "reverse Ponzi scheme" has been in existence for decades in a variety of other frauds. What is particularly disappointing is that the DTCC is an SRO or self-regulatory organization that wears a sheriff`s badge. The "cops" are overseeing and benefiting from all of these misdeeds! Why is the fox allowed to guard this "hen house" with over $127 trillion in assets? In order for an SRO to work, everybody in the SRO must be acting in good faith. On these smaller trading venues there are too many naive investors who have no idea that by investing in these corrupted markets-corrupted by the greed of the securities industry and its SRO's-they are asking for their pockets to be picked. What is really clever is to set up this SRO/"police force" of DTCC as a limited purpose trust company under the banking laws of the State of New York, with its attendant levels of immunity. Going after individual "cops/broker-dealers" that hide behind this badge is a little tricky. Does New York's banking commission know what DTCC is doing under their auspices? Just who keeps an eye on the world's largest financial institution operating as a Self Regulatory Organization and set up as a "limited purpose Trust Company under the banking laws of the State of New York"?

On June 4,2003, you at the SEC stated in a press release that, "the issues surrounding naked short selling are not germane to the manner in which the DTC operates as a depository registered as a clearing agency. Decisions to engage in such transactions are made by parties other than DTC. DTC does not allow its participants to establish short positions resulting from their failure to deliver securities at settlement. While the commission appreciates commenters' concerns about manipulative activity, those concerns must be addressed by other means".

Do you see now just how badly you at the SEC were hoodwinked by this statement written by the DTCC? The statement that the issues surrounding naked short selling are not GERMANE to how the DTC does business is obviously sheer lunacy as you surely have learned by now.

The comment about the DTC not allowing its participants to establish short positions resulting from failed deliveries at settlement is very cleverly worded. What they fail to mention is that the "good delivery" made was made by means of a borrowed share and that today's good delivery was made possible by "undoing" yesterday's good delivery. How long can a reverse Ponzi scheme like this go on undetected by the regulators without leading to catastrophic consequences to the financial system of which it is a part? All that transpired was that a nonexistent security was sold and converted into a "counterfeit electronic book entry" (a CEBE) via the DTCC's "Automated Stock Borrow Program". This "CEBE" will exist in an undetected fashion until the SEC pulls the plug on the DTCC's stereo in this gigantic game of musical chairs and forces the counterfeit electronic book entries in excess of the Rule 11830 parameters to be bought in under a guaranteed delivery process. Are we going to wait for a couple of thousand more micro cap corporations to become insolvent? Soon those with private companies needing access to the public markets to enhance their growth potential are going to smarten up and stay private.

The net effect for the victim company and its shareholders is a tremendous pile-up of counterfeit shares at the DTCC in the form of bogus electronic book entries conveniently held in an anonymous pooling format, which increases the supply of shares that can be sold at any instant in time. This anonymous pooling prevents any purchasers of these shares from being suspicious. This increase in the supply of "shares" causes a decrease in the price per share as the rules of supply and demand are still at play, but the supply variable is grossly exaggerated. It is a brilliantly constructed and maintained fraud of historic proportions, and it has been done and is ongoing literally right under the regulator's nose!

This decrease in the price per share forces the victim company to raise money to pay its monthly burn rate at artificially low levels. Keep in mind that most of these development stage companies are not yet cash flow positive and pay the bills by selling shares. This makes them an easy prey to predatory market makers and their co-conspirators that kill their prey via massive over dilution. These smaller trading venues are incubators. The constant raising of cash at ever lowering levels exacerbates the dilution; and this, in combination with yet more abusive selling of nonexistent shares on a daily basis by would be "bona fide" market makers and their co-conspirators, causes the share price to spiral downwards until the intended bankruptcy of the victim company is accomplished and all of the receipts of the bogus sell orders of nonexistent shares go to the fraudsters in a tax-free manner since the cycle of "sell then buy" never needs to be completed. Trust us when we say that when this fraud is finally addressed, the big winner will be the IRS.

2) A "gatekeeper" must be installed to monitor "bona fide" MM activity. Selling millions of nonexistent shares of a stock month in and month out while buying zero, does not constitute "bona fide" MM activity. Nor does the hiring of paid Internet bashers to dissuade the buying and induce the selling of a targeted company's shares. If you don't think this is happening, let us give you a few company names along with the main manipulating market makers on each one, and you can do your own research via your subpoena powers. We are happy to provide the names of the bashers as well, to make your lives even easier.

The least expensive way to accomplish this proposed "gate-keeping" function is to open up the visibility of the identity of the buying and selling market makers and let the public be the "gatekeepers". Why should the identity of the buying and selling firms be kept so secret? NASD Rule 3370 allows "bona fide" market makers to sell nonexistent shares into buy orders when buy orders vastly outnumber sell orders. Within a day or two, a legitimate "bona fide" MM goes onto the bid for a like amount and buys back these shares and pockets the difference known as "the spread". When we plot MM naked short selling activity against the PPS of a given issuer's stock, we typically see that the naked short selling activity increases as the PPS drops precipitously. Wouldn't a bona fide MM be on the buy side when sell orders overwhelm buy orders in an issuer's stock, at least some times?

How can one explain this phenomenon when the law says that a MM can only sell nonexistent shares when buy orders overwhelm sell orders? HOW CAN THE PPS DROP PRECIPITOUSLY WHEN BUY ORDERS VASTLY OUTNUMBER SELL ORDERS?This is not rocket science! Every sale by a MM that is introduced into the DTCC system without good delivery is automatically ASSUMED to have been done by a MM acting in a bona fide MM capacity. This has to end.

You at the SEC have mentioned in the prelude to Regulation SHO that you have visibility of failed deliveries within the system. PLEASE DON'T LOOK AT JUST ACTIVE FAILED DELIVERIES, LOOK AT THE STATUS OF THE "C" AND "D" SUB ACCOUNTS AT THE NSCC BECAUSE THESE TRADES TECHNICALLY HAVEN'T FAILED DELIVERY. THE "FAILED DELIVERY" WAS MASKED BY A "BORROW" WHICH UNDID YESTERDAY'S GOOD DELIVERY. Do you think that the DTCC fees generated in yesterday's trade whose "good delivery" just got "undone" were returned to the payer? Do you think the commissions and mark-up's "earned" by the participants of the DTCC were returned due to the "undoing" of this good delivery? I think not! This is a fraudulent cash machine beyond belief. And the fraud is against the investing public, those whom the SEC is charged with protecting.

3) The SEC must closely monitor the activities of the DTCC and realize that the DTCC IS the 11,000 b/ds and bankers that we refer to as "Wall Street". These abuses are being perpetrated by the coalescence of 11,000 b/ds and bankers hiding behind the shield provided by organizing themselves as a limited purpose trust company under the banking laws of the State of New York. The linkage of these participants is effected by the SIAC computer system. These abusive practices have pitted the U.S. micro cap investors against the Wall Street system. The Wall Street "professionals" have a superior knowledge of, access to, and visibility of the system for the clearance and settlement of trades in the U.S. The Securities Exchange Act of 1934 gives the SEC the mandate to make sure that Wall Street "professionals" don't leverage these advantages against the investors to whom they owe a fiduciary duty. YOU AT THE SEC HAVE THE POWER AND THE MANDATE TO ADDRESS THESE ABUSIVE ISSUES IMMEDIATELY BEFORE REGULATION SHO MYSTERIOUSLY GETS STALLED TO DEATH BY THE WALL STREET FRATERNITY SYSTEM. As you recall, the last attempt to save these victim companies came in the form of the "BBX" which addressed many of these naked short selling abuses. The Wall Street fraternity system, however, successfully snuffed it out before its inception, imagine that!

4) The mandate of the DTCC was to create a national system for the expeditious clearing and settling of the massive amount of trades on Wall Street. This Congressional mandate was precipitated by the Wall Street "paperwork crisis" in 1969 and 1970. What has happened with the system at the DTCC is that the constant striving for more rapid clearing and settling of trades has caused the INTEGRITY of the system to fall apart. Speed kills! The underlying presumption made when the DTCC was formed and when MMs were allowed to naked short sell while acting in a bona fide capacity was that the Wall Street participants WOULD ACT IN GOOD FAITHand not abuse this incredibly easy opportunity to pick the pockets of U.S. micro cap investors to the tune of hundreds of billions of dollars. SO MUCH FOR GOOD FAITH. What really causes us anxiety is that the big push now is to go to STP or straight through processing. As we mentioned, this means that the trade date will equal the settlement date, or T+0. Just imagine the failure rate of deliveries in this scenario. Almost all trades will fail delivery without a loan "undoing" previous "good deliveries", which will serve to camouflage these abuses. This lack of INTEGRITY of the system at the DTCC is why you are seeing hundreds of issuers trying to exit en masse. This recent massive attempted exodus has no historical precedent. The investors have had enough of this and they are making the officers and directors of the companies that they co-own aware of this refusal to take no more abuse from the Wall Street "fraternity" embodied by the DTCC. Enough already!

The recent SEC Release forbidding the exit of all of the shares of an issuer at one time has locked the back door of the DTCC and nailed it shut. We investors will respect your mandate but we expect the SEC to clean up the system for clearing and settling that you have now locked us into. Fair enough? The smaller trading venues of the OTC: BB and the Pink Sheets represent an incubator within which small companies develop and mature while they are particularly fragile. This is where jobs are created in the U.S. The jobs of hundreds of thousands of Americans working at or about to be hired at these developmental companies need protection.

5) We would ask that the SEC address the massive influx of naked short selling orders from Canada and other offshore locations. The SEC must realize that the Canadian brokerage system has a system that does not value nor prioritize the concept for the "good delivery" of shares purchased. They just don't get it, or worse yet, they do get it and since the casualties occur to U.S. companies and American citizens and the benefits of the fraud go to Canadian b/ds, they choose to turn a blind eye to it. The Investment Dealers Association of Canada (the IDA) openly admits that this just isn't a high priority for them. That is their business, but when the DTCC allows these incredibly lax delivery guidelines to interface with our system for clearance and settlement with all of its loopholes, then it becomes our problem.

We would request that you closely monitor for the abuses involved in this "interfacing" with the Canadian Depository System (CDS) via the NYL, DDL, and A.C.C.E.S.S programs. Hopefully our SEC learned volumes about these abuses while studying the Thomson Kernaghan frauds and resultant bankruptcy as well the myriad number of lawsuits against Canadian b/ds for naked short selling abuses. During the discovery phase of some of the recent cases, it was shown that well over 90% of the income of several defendant Canadian b/d firms, was derived from the naked short selling of U.S. micro cap corporations on these trading venues in the U.S.

6) We would also suggest a careful monitoring of the abuses involved in allowing shares forbidden by 15c3-3 to be loaned out that are indeed being loaned out. Here we are referring to "fully paid for securities" and "excess margin securities". We would advise the SEC that the "Customer Protection Rule" (15c3-3) has a gigantic loophole built into it that Congress didn't foresee. This loophole allows buying broker/dealers to choose whether to take "Possession" of share certificates for shares bought on behalf of their clients OR to keep them in a "Control" location. The 12 locations that qualify as "Control" locations just happen to include the locations where most of these naked short-selling abuses occur. Hence the common reference to them as the "Dirty dozen". Note that the DTCC, the Central Depository for Securities in Canada, clearing agencies, Canadian banks, etc. qualify as "Control" locations.

How can the institutions of a country like Canada, with its Rule 100, that doesn't consider the good delivery of purchased securities a high priority, possibly qualify as a "Control" location for the protection of our citizens' investments? How can the DTCC with its gigantic conflicts of interest between investors and the Wall Street "professionals" that owe them a fiduciary duty, be considered a "control" location for the protection of investors' shares? Rule 15c3-3 is referred to as the "Customer Protection Rule" or CPR". Where is the protection? The Congress in 1934 had no way to anticipate the skullduggery that would evolve over the next 70 years.

7) We would ask that the SEC realize the prominent role of offshore hedge funds working through Canadian naked short selling margin accounts. As you know, hedge funds with less than 100 participants do not need to follow the precepts of the 1940 ICA or Investment Company Act. They are allowed, for some unknown reason, to fly under the regulatory radar. Many U.S. MMs have very distinct ties to offshore hedge funds as you well know. Besides abusive MMs working through proprietary or non-proprietary accounts while theoretically under the umbrella of immunity from borrowing provided by acting as a "bona fide" MM, the next most common abuse we see are offshore hedge funds operating through Canadian margin accounts. This puts them two steps out of the SEC's grasp theoretically. Space underneath this umbrella of immunity from borrowing is very much for rent. Rent is most often paid by "order flow" to these unethical market makers.

8) When contemplating the importance of curing these abuses, realize that naked short selling totally undermines many of the most important aspects of the "33 and '34 Acts. For instance, the DTCC cranking out unregistered shares of an issuer without an exemption from registration or the permission of the issuer, and in violation of state securities and corporation laws. A "restricted" stock under the 144 Rule has no meaning whatsoever when both crooked insiders and naked short sellers can sell them now and just sit on a failed delivery for a year or two. This brings us back to something even worse than the old Regulation S abuse days.

The SEC demands to know every time an issuer issues registered shares and the issuer needs your blessing. Does not a shareholder or a company's management have the right to know every time the DTCC illegally issues unregistered shares without an exemption or your permission? Should an investor file a 13-d when he reaches 5% ownership of the issued # of shares of a company or 5% of the total amount of shares, real and fake, at the DTCC? Does a person become an affiliate or "control" person when he owns 10% of the issued shares of a public corporation or 10% of the total shares represented as being owned on monthly brokerage statements to shareholders? Which # does Rule 16 (a) refer to? Should every person ever fined for 13 d or 16a violations appeal these fines, look at the # of "counterfeit" shares in existence at the DTCC at the time of the alleged violation, and recalculate what % of the TOTAL # of shares, real and fake, he really did have control of?

All one has to do is go through the '34 Exchange Act, rule by rule and regulation by regulation, to see how undermined these securities laws really are when unregistered, unrestricted, dividend lacking, vote missing, and basically nonexistent "pseudo-shares" fill the computer banks at the DTCC as well as the monthly brokerage statements of investors who THOUGHT they had bought real "packages of rights" (shares) in a public corporation. People that think that they own 1% of the shares of a public corporation may only own one-fourth of that and the one-fourth of 1% ownership share is of a greatly damaged company and not the company that was "advertised".

A lesser % ownership of a greatly damaged entity is a double whammy and even more heinous than a "bait and switch" fraud wherein you at least get 100% ownership of the inferior product. The repercussions of naked short selling are so far reaching that they undermine the very concept of the publicly traded "corporation" which forms the very foundation of the U.S. financial system. The SEC must take this issue seriously now, or it certainly will have to later, after the house of cards build by DTCC's behavior completely crashes down.

9) We also believe that the monthly disclosure of net short positions will increase the visibility of these abuses as well as to deter them. Again, the U.S. taxpayers that just so happen to prefer micro cap investments on these lower trading venues deserve the same protection as those investing on the national exchanges and the NASDAQ NMS. They pay taxes just like the investors in GM do. The agencies clearing these trades that never seem to result in a completed delivery must be held accountable and their actions need to be more transparent to the investing public. The registered clearing agencies that continue to clear trades for b/ds that chronically don't deliver shares must be held accountable for acting as a "fence". (See, e.g., Koruga v. Fiserv)

In summary, we can't impress enough upon you how critical IMMEDIATE changes are within the system for monitoring the DELIVERY of shares purchased in the United States. There cannot be a disconnect between the clearance and settlement of a trade and the good delivery of the shares sold. Clearing, settlement, and good delivery form the three legs of the stool of integrity for the Wall Street trading system.

What the current system does, in essence, is to push the price per share of these victimized companies to artificially low levels via massive increases in the overall SUPPLY of shares that can be sold at any instant in time as a result of the company being targeted by naked short sellers. This creates a line up of opportunistic investors that have done their due diligence and sense an incredible bargain at hand. Their buy orders come into the system and since there are no real sellers at these artificially low levels, this excess of buy orders over sell orders is addressed by market makers naked short selling yet more nonexistent shares into this imbalance. These trades are allowed to clear and settle via a "borrow" from the "lending pool" at the DTCC as allowed by Addendum C to the rules and regulations at the NSCC. This adds yet more to the supply of "counterfeit electronic book entries". This further dilution adds yet more downward pressure to the share price. Victim development stage companies, being not yet cash flow positive, are then forced to pay their monthly bills by selling shares at artificially low levels which adds yet more dilution, this time involving "real" shares. This constant increase in "real" shares as well as "fake" shares finally proves too much of a burden for the victim company and the intended bankruptcy ensues.

Since the fraud being perpetrated starts off way down at the foundation level of a company and involves the "counterfeiting" of a company's "shares" or basic equity ownership units, the repercussions of the fraud are far reaching and the protective effect of the securities laws that protect shares and shareholders is violently undermined.

The fraudsters have learned that it is much easier to counterfeit electronic book entries than paper certificates and it has nothing to do with the price of paper and ink! They are also aware that our financial system is trying to do away with paper certificates because of their cumbersome nature. Therein lies their niche. Since "shares" represents "packages of rights" attached to a public corporation and these "counterfeit" shares have no such rights, every time a shareholder tries to exercise one of those missing rights the fraudsters find themselves in a pickle and a cover-up fraud is necessitated.

Look no further than the way the DTCC handles a 100% share dividend of a victim company with a plethora of "counterfeit electronic book entries" in existence at the DTCC. The right to a dividend being distributed represents one of these share "rights". Even though the transfer agent mails out a legitimate certificate made out to Cede and Co., the DTCC's nominee, only for the amount of "real" shares held at the DTCC, it appears that the DTCC allows their participating broker/dealers to send out a monthly brokerage statement to their client/shareholders implying that the Transfer Agent sent enough dividend shares to cover both the real and fake shares at the DTCC and they just double the number of counterfeit electronic book entries with no real share certificate anywhere in sight to justify their existence. The nonexistent entities sold have become counterfeit electronic book entries which have somehow become procreative. The heinous nature of this crime can't be overlooked. When the company finally goes bankrupt the shareholders haven't got a clue as to how they were defrauded and the bogus electronic book entries get thrown into the grave along with the company. An interesting study would be to "exhume" some of these recently "deceased" micro cap companies and determine the number of "CEBEs" in existence at the DTCC at the "time of death."

If this whole issue had to be summarized in three words, they would have to be CONFLICT OF INTEREST. The conflict of interest is between the Wall Street "haves" and the investor "have-nots". The Wall Street "professionals" have a superior knowledge of, access to, and visibility of the trading, clearing, settlement, and delivery systems in the securities markets. They also have the ability to create an unlimited supply of counterfeit shares to sell to investors. The micro cap investor "have-nots" have not a chance in the world for a successful investment.

When broken down into its simplest form, the clearing, settlement, and delivery system at the DTCC allows fraudsters to target a company, sell nonexistent shares in unlimited numbers (see,e.g., Pinnacle Business Management, Inc.), thereby creating a giant pile of money in their margin or proprietary accounts. These naked short positions at the DTCC must be collateralized at 130% but the collateral necessary is MARKED TO MARKET on a daily basis. This explains in part why you will see 100 or 200 share prints at the bid on thinly traded OTC:BB and Pink Sheets securities, especially where there are wide spreads between the bid and offer. These are referred to as "NEBBs" or non-economic bid-bangings. They are a form of market manipulation that try to paint the picture of a stock constantly being sold by shareholders but sold into bids that are extremely small i.e. there are no buyers around that want to invest in this scam. They represent a good screening tool to estimate the level of manipulation of a victim company. All one has to do is to chart the percentage of trades of an issuer that are NEBBs. The 2002 NEBB champion is well on its way to defending its crown in 2003. It is a small company called NP Energy (NPER) that trades on one of these smaller trading venues. . As the share price tumbles from the massive artificially manufactured dilution that ensues from these sales, the amount of collateral needed drops precipitously and is returned to those perpetrating the fraud. Thus the naked short sellersNEVER NEED TO COVER THESE NAKED SHORT POSITIONS in order to receive the proceeds from the sale of nonexistent stock. They just need to keep the share price pinned down to artificially low levels, which is extremely easy to do because the market makers really do "almost" assume the role of a bona fide MM when the stock previously trading at $5 now trades at a dime. At the 10-cent level there really is a long line up of opportunistic investors and nobody willing to sell "real" shares. NASD Rule 3370 encourages MMs to naked short sell into these imbalances. Thus the further along the "bear raid" matures the more "bona fide" the MM activity becomes. As the PPS continues to drop, the proceeds of the sales of nonexistent shares at the $4 and $5 level is sitting in the pockets of the fraudsters EVEN THOUGH THEY HAVE NEVER COVERED THE NAKED SHORT POSITION. This is a closed system and a "zero sum game", the money in their pockets is, of course, the money paid by the investors that thought they were buying real "shares".

A particularly popular version of these naked short-selling attacks is called the "death spiral" financing. In many of these, the fraudsters really do have the audacity to take the proceeds from the fleecing of the investors of a company via selling nonexistent shares to naive investors, and then turn around and loan this very same money to the victim corporation via a "floorless" convertible debenture. After pummeling the price per share with yet more naked short sales, the fraudsters convert the fixed amount of the debenture into a massive amount of shares thereby covering the original naked short position and then typically taking control of the company, or what's left of it. Again, the non-delivery of shares sold for extended amounts of time, forms the foundation of this heinous fraud. There is at least one willing market maker and clearing firm acting in complicity with the actual naked short selling fraudster.

The SEC needs to realize that there is a subliminal message being sent as to why so many of the trades in the markets of these victim companies need to be completed via a "borrow" from the Automated Stock Borrow Program. This entire system pushes the PPS to an artificially low level, well below the PPS dictated by the intersection of the supply of real shares and the demand for real shares to a level at which no investors can afford to sell shares. The forces of supply and demand are still at work but the supply variable is grossly exaggerated from the presence in the system of all of those bogus electronic book entries that can be sold at any instant in time.

Perhaps the solution is to not allow the buying broker to cash the investor's check UNTIL "real" shares are for sale at those levels. Let the supply and demand of "real" shares only dictate market price. What a novel concept! The DTCC and its participants would obviously throw a fit since their fees, commissions, and markups would decrease. Please recognize that these Wall Street fraudsters are making fortunes both on the fee, commission, and mark-up side of the equation AS WELL AS receiving the proceeds from the sale of nonexistent entities. Note also that the proceeds of these "sales" are, of course, exactly equal to the losses of the investors since it is their money simply being shunted over to the fraudsters.

The system of clearing and settlement at the DTCC interposes the NSCC sub-division of the DTCC as the "contra-party" to all trades as well as the intermediary of all share loans. When purchased shares don't show up on settlement day, the NSCC borrows shares on behalf of the party failing to deliver. They borrow these from a willing lender. Because of this "smokescreen" provided by the loan, the failed delivery becomes a temporary "good delivery" and the trade clears and settles. At the end of the day, the party failing delivery does not owe the purchasing broker/dealer, they were paid off with the borrowed shares. Nor do they owe the lending party because it was the NSCC that made the borrow. They owe the NSCC this debt and the NSCC in turn owes the lending party.

Can you see the "layering" going on here just as it does in anonymous offshore "nominee" corporations owned by other anonymous offshore "nominee" corporations? The naked short selling MM and their co-conspiring participants at the DTCC OWE the other 11,000 participants at the DTCC this debt. Since many of these participants are playing these very same games themselves, the 11,000 participants end up owing THEMSELVES billions of dollars worth of shares of issuers' stock. Now think for a minute about these shares of stock. Who owns them? Well, the rules of the DTCC say that the DTCC IS THE LEGAL OWNER OF THESE SHARES THROUGH THEIR NOMINEE "CEDE AND CO." The investors only purchased them, the DTCC OWNS them. The net effect of all of these perversions is that the 11,000 b/ds and banks at the DTCC owe themselves their own possession. Is it any wonder why these IOUs stay on the books for so long and how they will even survive a dividend distribution?

As long as no participants at the DTCC "rock the boat" and buy-in any of these debts from their co-participants, then all will be fine. Now you can see why the DTCC, when faced with an issuer distributing a 100% share distribution, doesn't force those that owe it shares to level up their accounts before the dividend record date like any other creditor would. Instead it tells its participants/debtors, itself basically, that you don't have to pay your debt because of this dividend, we'll just start up a new IOU for the dividend shares and place it right next to your old unpaid debt. When the debtors ask, "But what shall we tell the investors on their monthly brokerage statements?" The reply is to just tell those naive investors that their dividend shares arrived from the Transfer Agent safely, and since we hold them in an anonymous "pooled" format, they'll never know the difference! So what, in essence, are the shareholders really buying since these bogus electronic book entries don't have the rights attached to shares? They're buying the "right" to sell these bogus electronic book entries to some other naive sap that senses a bargain since the price is so cheap.

We understand the need to inject liquidity into the markets of thinly traded securities when buy orders greatly outnumber sell orders. We also understand that these trades have to clear and settle. Genuine "Bona fide" market making truly is a good thing. What we have to convince you of is that if these naked short positions are not covered within a day or two, as the authors of Addendum C and Rule 3370 intended, then the integrity of the process goes out the window and the predators take over. Stocks shouldn't be trading at 20-cents per share when there are no "real" shares for sale until 35-cents.

Could these fraudulent schemes work against a more mature company that has graduated from its "incubation" period on the OTCBB and Pink Sheets and is now cash flow positive? No, not nearly as easily. The fraudsters must catch their prey when they are the most fragile. That being when they must constantly sell shares to develop the company and keep the doors open. This is the key to the "Suffocation by dilution" cited on the company's death certificate. The sobering reality is that it usually doesn't matter if the development stage company "has the goods" or not. Even if that new technology or cancer cure is legitimate, the company can't outmuscle Wall Street.

U.S. investors are smart and they know how to calculate the book value of a stock. A company does not have to be cash flow positive to have a good solid book value. Their brain tells them that a stock trading at 10% of book value represents an incredible opportunity as an investment. Their brain also tells them that they should average down their cost if the stock drops in price post-purchase and starts trading at 5% of book value. After a while all of these seemingly judicious decisions land an investor and his family into financial problems just from trying to get back to even. The more due diligence an investor does on these solid companies the more likely he is to get in over his head because he just knows that this company really does "have the goods". The underlying presumption is that the SEC, over the years, has made sure that the playing field is indeed level. The element of TRUST is involved.

As you know several companies did recently make a successful exit from the DTCC before the back door was locked and nailed shut. This afforded researchers a view of what was really going on behind the scenes on Wall Street as it pertains to the "delivery", or lack thereof, of shares purchased. Once out of the DTCC system for clearance, settlement, and delivery of purchased shares, the transfer agent of these issuers takes over these duties. The transfer agent is an employee of the public company it serves. In the trades under study, approximately 3 to 5% of sell orders resulted in the "good delivery" of these shares to the purchaser's firm. This was after a successful exit from the DTCC and changing over to a "certificate only" or "custody only" basis for the transference of share ownership. Good delivery in this system results in the Transfer Agent receiving in the mail an endorsed certificate that he cancels and reissues in the name of the new buyer. This transparency of our system created by this successful exit from the DTCC provided a view that was rather shocking to say the least. The arrogance of the Wall Street community into not even cleaning up their act when the floodlights are on them speaks volumes. The problem is that of no deterrence to this type of activity because even when you get caught red-handed the reward overshadows any risk.

We believe that the SEC needs to get their arms around the concept of just what the DTCC is all about and especially its structure and rules and regulations. The DTCC is the legal owner of $127 trillion in assets and is the single biggest financial institution on earth. Have you at the SEC ever wondered why 99% of the American public doesn't have a clue as to what the DTCC is and that they legally "own" all of the shares held in "street form" that investors have purchased? The participants of the DTCC have the most gigantic FIDUCIARY DUTY OF CARE ever even contemplated. The DTCC is comprised of 11,000 broker/dealers and banks. Many of these individual 11,000 b/ds and banks are behemoths in their own right but imagine the "critical mass" attained when these 11,000 are allowed to coalesce themselves into one limited purpose trust company with rules and regulations containing literally hundreds of conflicts of interest between its participants and the investors they owe a fiduciary of care to. The DTCC embodies what is referred to as the "Good ole boys network on Wall Street".

The DTCC is a master template for utilizing the concept of "pooling" in order to achieve one's goals. It's very clever to commit improprieties when acting as a member of a pool; it creates critical mass and mitigates individual liability on the part of any one particular b/d. Note that the market makers on the OTCBB and Pink Sheets operate as an anonymous "pooling" of DTCC participants. The activities of individual MMs is invisible even to those with Level 2 visibility. Notice that the 11,000 b/ds operate as a "pool" as they act as the contra-party to all trades on Wall Street and as the intermediary in loaning shares to mask failed deliveries.

Notice that the "not so bona fide" MMs that need a borrow in order to effect "good delivery" of the sale of nonexistent shares borrow the shares from a "pooling" of their 11,000 co-participants at the DTCC. This pooling of b/ds do the actual borrowing from individual lenders. At the end of the day this pooling of b/ds owes itself these debts. If individual b/ds were borrowing from individual b/ds then these debts would undoubtedly be called in before any dividend distribution of the issuer's shares otherwise an individual b/d could be held liable for lying to a client on his monthly brokerage statement as to receiving dividend shares from the Transfer Agent. Note also that all of the shares at the DTCC, both real and fake, are held in anonymous pools.

Until all of the legitimate shares, that is those with a certificate in existence to back it up, are pulled out of the DTCC by shareholders demanding delivery of their certificates, those that bought "fake" shares are oblivious to this fact. This pooling phenomenon gives power to the malfeasor and blindness to the victims. Notice how the shares in a given b/d's "lendable shares account" are anonymously "pooled" together. Shareholder Sam from Chicago will never know that the shares in his qualified retirement account have been illegally rented out to cover some MM's sale of nonexistent shares.

Notice how the DTCC acts as an irrefutable monopoly in the clearing and settling of trades on Wall Street. If an issuer is unhappy with all of the conflicts of interest at the DTCC and the daily frauds being perpetrated therein, it has no options to go elsewhere for its trades to be cleared and settled. Where is the incentive for the DTCC to do a good honest job? Is the SEC aware that the DTCC sells "Securities positions listings" or SPL lists to issuing companies for $1,850 per year? Does the SEC realize that the SPL list for the company with the single biggest collection of counterfeit shares in the history of Wall Street will portray to management that all is in order in regards to the trading of their securities?

Can you imagine all of these victimized companies paying $1,850 per year to be perhaps intentionally misled by the DTCC in an effort to cover up the loans masking failed deliveries caused by the sale of nonexistent shares? Does DTCC know or care that they might be committing criminal mail and/or wire fraud? Does the SEC? As we mentioned earlier, every fraud committed at the DTCC needs a cover up fraud to be committed whenever victim companies start asking questions about the disposition of their shares or when shareholders try to exercise any rights attached to "real" shares that seem to be mysteriously missing from their purchase.

One concept that we would hope that the SEC can grasp is that for an issuer to have 100 million real shares in existence at the DTCC and 300 million counterfeit electronic book entries at the same time, then the same real or fake book entry must be being loaned out in more than one direction at any given time. How can a system like this have any integrity? Notice what happens when the above portrayed company declares and distributes a 100% share dividend. The historical lack of the applicability of NASD Rules 3350,3360,3370, and Rule 10a of the 1934 Securities Exchange Act have created a fraudster's dream on the OTC:BB and Pink Sheets.

The 300 million bogus electronic entries cited above are allowed to give birth to yet another 300 million bogus electronic "dividend" book entries just to keep the initial fraud from being discovered. Can you imagine the Board of Directors of a victim corporation peering through the windows of the DTCC and watching this crime being committed to the company that they have spent years and years developing? These new "offspring" of the old counterfeit electronic book entries are set up in a "D" sub account at the DTCC right next to the original 300 million-share debit. But since the creditor, the DTCC itself, doesn't demand the payment of the original debt like any other creditor would in the face of a dividend distribution, the "counterfeit shares" are allowed to have babies. Is the DTCC aware of all of these debit accounts that go unpaid for years on end? Of course they are, they're reminded every time a dividend is distributed or a proxy solicitation is done for an Annual General Meting. Every Friday afternoon when they send out the weekly SPL lists they are reminded of it.

One thing that we hope the Enforcement Division of the SEC realizes is that the ulterior motives of those bringing disparaging information about an issuer or its officers or directors should be considered. We are very well aware that the naked short selling community works hand in glove with the Enforcement Division of the SEC. They are the single largest source of "tips" as to alleged corporate malfeasance being committed. Some of the information is accurate but a lot of the information is tainted.

Since the only participants within the system that can LEGALLY sell "SHARES" without borrowing are bona fide market makers that, by definition, will rapidly cover these sales, all of the intentional sales of nonexistent "counterfeit shares" not repurchased within a couple of days are therefore illegal or fraudulent. It is, of course, 100% illegal for a "would-be bona fide market maker" to rent out to co-conspirators space underneath this umbrella of immunity from making the borrow that he has been entrusted with in good faith.

Please consider the source of the income for all of those people knocking on the SEC's door with disparaging information concerning an issuer. Where is the monetary incentive for all of these "shareholder advocates" that spend hundreds of thousands of dollars in hiring lawyers, private investigators, and Internet bashers to dig deeply into the background of corporate officers, directors, and even shareholders since the only people that can legally sell "unborrowed" shares" are bona fide MMs and this investigative activity is obviously not in the job description of a "bona fide market maker"?

Does this reality not indicate that the real criminals might be those supplying this disparaging information since there is no legal monetary incentive to do this? Are all of these Internet bashers we see by the thousands really philanthropic billionaires trying to save investors? We can only hope that the SEC is aware of the fact that those handing all of this "maybe not so accurate" disparaging information to the Enforcement Division usually have personally amassed or are co-conspiring with those that have amassed immense illegal naked short positions which make it economically feasible to launch these investigations/witch hunts and to hire their co-conspiring Internet bashers while incurring the risk of jail time for racketeering activity.

When addressing the potential size and breadth of this fraud referred to as naked short selling, we might offer the following "metric" relevant to the current market frauds being perpetrated. We recently saw the frauds being perpetrated by the "specialists" on the national exchanges. A specialist is basically a single market maker of a stock who everybody knows the identity of and who has no anonymity whatsoever. Now consider the typical OTC: BB or Pink Sheet stock with 15 MMs that operate in total anonymity and have plenty of opportunity for collusive activity. In fact we know that many of them collude using instant messaging to coordinate their actions.

One might conservatively anticipate perhaps 10 times the "hanky panky" going on here as compared to the fraud being committed by the specialists operating in the light of day. Now compare the existing delivery in rules in Canada versus those in the U.S. One might conservatively anticipate 10 times the chicanery going on behind the doors of the Canadian broker/dealers as it relates to naked short selling as opposed to that within a U.S. b/d.

We've seen the recent chicanery going on with the mutual funds that must file disclosures as per the 1940 Investment Company Act. Now let's consider the amount of chicanery in regards to naked short selling going on within unregulated offshore hedge funds that fly under the radar and let's put another 10-fold multiple here. You at the SEC are very up to speed on what goes on with these hedge funds as you just finished an exhaustive study on them.

Now let's imagine the typical naked short selling consortium that involves certain MMs, certain hedge funds, and certain Canadian b/ds working in complicity and taking advantage of all of these synergies. Can you get a picture of the magnitude of this fraudulent behavior in comparison to the other modern day frauds being committed in our securities markets that have just recently been unearthed? In studying the recently exposed frauds involving the mutual funds, specialists, and analysts, one could make the analogy that these frauds are like roof shingles of the "Wall Street house" blowing off in a violent windstorm. In the naked short selling fraud wherein the basic ownership unit of a public company, the "share" and its associated package of rights, is counterfeited and stripped of its attached rights, then the entire foundation of this "Wall Street house" starts crumbling and the repercussions are much more far-reaching.

Notice that the common denominator of all of these new fraud investigations is the Wall Street "professional" taking advantage of his superior knowledge of, access to, and visibility of the markets while picking the pockets of mom and pop investors. Naked short selling is no different except for the neighborhood it occurs in, namely that of the OTC: BB and Pink Sheets. It doesn't much matter whether it be mutual funds allowing hedge funds to "market time" their trades in exchange for their business or specialists inappropriately interposing their orders when both buyers and sellers were present and their services were not needed. The common theme holds true. It's the Wall Street "professionals" against the mom and pop investors.

All in all, the fraud being perpetrated is extremely brilliant in its design. Investors don't have a clue as to why their investment went "kaput". There is a steady supply of new victims willing to throw their money onto the table as they sense a bargain in being able to buy shares of a company trading perhaps at 10% of its book value. Unfortunately, these new investors, as well as their predecessors, have hopped onto a "down" escalator heading towards the basement floor of bankruptcy of the victim company. Some just happened to have gotten on at higher floor levels and others at lower floor levels, but a 100% loss is still a 100% loss. These "bear raids" can become particularly catastrophic when management teams and shareholders successfully diagnose the existence of the naked short selling attack and decide to outwit the perpetrators of the fraud by digging deep into their own pockets and buying and attempting to register every share in sight.

Typically this approach only increases the financial losses as it is impossible to "outmuscle" a $127 trillion institution and hedge funds with over $760 billion in assets. In these cases the usual result is that the deliveries of the demanded certificates are stalled via what the DTCC refers to as a "DTCC chill" on the delivery of the issuer's certificates. The fraudsters then continue to sell nonexistent shares into each and every buy order until the loyal shareholders and management teams spend themselves into financial distress.

There is a definite self-fulfilling prophecy to these naked short-selling attacks. The deep pockets of the DTCC participants and hedge funds will easily be able to post the margin maintenance requirements and net capital reserves needed no matter how much buying the shareholder and management groups can come up with. THE DEEPEST POCKETS ALWAYS WIN THESE BATTLES, THE ONLY QUESTION BECOMES HOW LONG THE VICTIM COMPANY CAN SURVIVE THE ONSLAUGHT BEFORE GOING BANKRUPT. Only the SEC can combat this financial terrorism, IF YOU ARE WILLING to do so by implementing real regulations with real teeth, that is, severe punishments for violators. Half measures are nothing more than complicity, when you know what is going on and are unwilling to stop it.

Further, it is not only the financial "critical mass" that can't be overcome, but the synergies created by this vast amount of money as well as the ability to utilize market maker manipulation techniques as well as the giving and taking of "back scratches" amongst the participants at the DTCC, result in a playing field so tipped in favor of the DTCC participants that it's a wonder any companies on these trading venues survive at all. The oxygen lines to these incubators are being stepped on by some very heavy boots.

It is our opinion that the solution to this problem must come in two phases. The first would be to address pre-existing naked short positions or "failed deliveries" and loans made to cover-up "failed deliveries" in companies with "open positions" in excess of the NASD Rule 11830 "benchmark" set at 10,000 shares or one half of 1% of the shares issued and outstanding. Please don't forget that "failed deliveries" refers to the arithmetic sum of "failures to deliver" on the books plus loans made to mask "failures to deliver". None of this even addresses the "open positions" held "in-house" from the "desking" of buy orders from a brokerage firm's own client right at the trading desk.

We believe that the DTCC is walking a very thin line when they put in a Press Release to the U.S. investing public, that deliveries are not allowed to fail at the DTCC. We believe that most securities lawyers would find this to be perhaps extremely misleading.

Naked short selling abusers need to be pointed to the open market and made to buy back under a "guaranteed delivery" basis each and every "share" that they sold with the very same zeal they showed when they sold these nonexistent shares at much higher levels. They have a very large pile of defrauded investors' cash with which to do this. This would hopefully prevent any further bankruptcies in the near term, as there are hundreds of victim companies currently teetering on the edge.

The second phase would address "leveling the playing field" for the future. Part of the wording of the proposed rule was very troublesome when addressing securities that were not successfully delivered within two days of settlement. In addition to the 90-day "jail sentence", a mandated buy-in should be immediately effected. What is needed is deterrence. We're dealing with human beings here, deterrence is everything.

The SEC must require that if delivery fails within a given timeframe then the buying broker/dealer buys-in the failed delivery and hands the bill to the offending seller's broker/dealer and/or clearing firm which then passes it on to the individual naked short seller. Phase 1 cleans up all of the existing fails to deliver and those masked by loans at the DTCC and phase 2 prevents this from ever happening again. Theoretically there would be no need for a listing of issuers with "failures to deliver" in excess of the Rule 11830 parameters once phase 1 is over. We sense a bit of a defeatist attitude on the part of the SEC in this regard and it concerns us. THIS IS FRAUD, LADIES AND GENTLEMEN, TAKING PLACE UNDER YOUR NOSES AND ON YOUR WATCH, WHEN YOU HAVE THE POWER-INDEED THE MANDATE UNDER THE 1934 ACT-TO STOP IT. THIS IS AN EMERGENCY AND TIME IS OF THE ESSENCE. Action must take place before any more dividend processes are hijacked or any other shareholder votes and proxy solicitations are sabotaged.

One other aspect of this travesty of justice needs to be looked at. The SEC has had both the power and the mandate to address this form of securities fraud but for some reason hasn't even started chipping away at this iceberg. Why? If the problem was the lack of money or manpower then the recent allocation of the funds to hire an additional 710 lawyers, accountants, and investigators by the SEC should remove this as a possible excuse for inaction.

The civil service vetting process was even waived so that these new employees could come aboard quicker. If the problem involves the complicity of certain regulators with these fraudsters, then this would have to be addressed appropriately.

If the problem centers around not knowing the modus operandi of the perpetrators of the fraud, then we would love to help out in the education process. Before you attack this problem, please address the reasons for the inactivity in the past so that history doesn't repeat itself. The reality is that the DTCC and its 11,000 participants represent the single largest financial cartel-indeed by far the largest cartel-on earth. The political power and influence that this body wields is beyond description. Hopefully the SEC is not intimidated by being a "David" against this "Goliath". Especially when you at the SEC have regulatory authority over the battlefield.

The typical scenario we see day after day is that a victimized company and its shareholders file hundreds of complaints with the regulators. The louder they complain, the more important it becomes to silence them. The regulators get approached by Wall Street insiders with disparaging information about the issuer. The regulators take this information as gospel truth and go after the victim company. Officers and directors of the victim company then often find themselves the subject of various types of "sting" operations, for instance, the recent "Bermuda Short" sting.

Shareholders see the regulators targeting their investment and they dump their shares. The price per share tanks and the company soon thereafter dies from over-dilution. Game over! Most often the SEC and the Department of Justice don't even realize that they're doing the dirty work for the perpetrators of the naked short selling fraud and that the information they were given was totally bogus. Remember the alleged manipulator/extortionist Amr "Anthony" El Gindy and his bribery of FBI agents? When Aunt Edna writes to the SEC and complains that her OTC: BB investment is being heavily naked short sold, nothing happens. When a Compliance Officer from the dirtiest market-making firm in history complains that the CEO of Aunt Edna's investment is doing something naughty, a full-scale investigation is opened. Please question the motives of those supplying disparaging information.

Have we reached the point in time where market makers should go the way of the dinosaurs? Does a buyer and a seller really need a middleman to find each other? The Electronic Communication Networks (ECNs) and Alternative Trading Systems (ATSs) seem to work well in uniting a buyer and a seller without a middleman. Is the "injection of liquidity" by a market maker theoretically acting in a bona fide capacity worth the conflicts of interest and fraudulent behavior this role brings with it? Should stocks really be trading at artificially low levels below the intersection of real supply and real demand in order to suck in new victims into the trap?

If there aren't many "real" shares available at the offer, then perhaps the buyer should have to step up and pay more for "real" shares. Please don't think that the system is doing an investor any favors by allowing him or her to buy shares below the market dictated intersection of the supply and demand graphs. Nothing could be further from the truth. You refer to the market makers as "injecting liquidity" into the markets of thinly traded securities. In order for the system to have INTEGRITY, this "liquidity" would have to be "injected" BOTH when buy orders outnumber sell orders and when sell orders outnumber buy orders.

Not only is there basically zero liquidity being "injected" on the buy side when the share price is falling, there is actually a "net negative" liquidity in the system as long shareholders wanting to sell into the buy orders that do appear are beat to the punch by these fraudsters with their superior visibility of buy orders selling nonexistent shares into these buy orders. These long shareholders are prevented from taking intermediate sized losses as they have trouble hopping off this down escalator heading to the basement floor represented by the bankruptcy of the victim corporation. The bids injected by abusive market makers during the collapse of the share price are usually made for the legally minimum size and when they sense a seller in the market they'll typically take him or her out on their hands and knees. This "sell a million and buy a dozen" routine is not exactly "bona fide market making activity". The question often arises; can an ethical market maker even make an honest living in this post-decimalization environment? Is this how they mentally justify fraudulent behavior allowing them to sleep at night?

Two aspects of naked short selling that are often overlooked have to do with both national security issues and organized crime issues as they pertain to money laundering from offshore sources. As you know, the Canadian brokerage system is often used as the "conduit of choice" to introduce naked short sell orders in an effort to circumvent tougher U.S. laws against naked short selling. Since the accepting of naked short sell orders of U.S. stocks trading under $1 is an ultra high risk and ultra high payout endeavor, Canadian broker/dealers must charge usurious margin maintenance requirements to collateralize these high risk positions should something go awry in the intended bankrupting of the victim company.

Typically, margin maintenance for the naked short selling of a 5-cent stock necessitates putting up the market price of the stock, 5-cents, plus 50-cents per share margin maintenance. To most investors, that is a usurious amount of money to put up just to naked short sell an issuers stock. That is unless you have large piles of illicit money in need of laundering. In that case it is a perfect way to introduce large amounts of dirty money into the system for laundering and then later returning it to its offshore tax haven home once the victim company has been successfully bankrupted. Whether the money is from illicit drug deals or is aimed at terrorist financing (and the SEC knows that this goes on, as do the FBI and DOJ), naked short selling margin maintenance money is an excellent way to launder tremendous amounts of money in a fairly tough to detect manner. Notice in the Sedona case the associations that some of the alleged co-conspirators have with organized crime and drug money.

Since many of the frauds being perpetrated in naked short selling involve shares held in qualified retirement plans safeguarded by the 1974 ERISA Act, perhaps the Department of Labor that oversees the ERISA Act could be looked upon as a resource if the SEC is handcuffed by monetary or manpower constraints. Shares held in qualified retirement plans are, of course, forbidden to be in margin accounts and expressly forbidden from being loaned out; yet hundreds and hundreds of investors in the U.S. are being refused delivery of their shares after making demand, even for the 60-day rollover period.

Retirement shares are an ideal target for these loaning frauds as they are usually held for a very long term and are seldom demanded for delivery due to tax implications. Committing these frauds against the invested funds designed to allow for a comfortable retirement at a time when the investor can't work is a particularly heinous crime. Attacking biomedical companies with highly prospective cancer cures and medical advancements is also a totally reprehensible practice although very common.

When broken down into its component parts, naked short selling by the participants of the DTCC, i.e., every firm on Wall Street, involves investors purchasing securities and paying a commission to his broker/dealer who is a participant at the DTCC. Unbeknownst to the investor, his broker/dealer that just took a commission check and therefore owes a fiduciary duty of care, takes these very same shares and rents them to the investor's mortal enemy, the naked short selling broker/dealer. The middleman in this loan is the NSCC division of the DTCC. Does this break the fiduciary duty chain?

The investor's shares thus provide "good delivery" and allows the naked short sale order to "clear" and "settle." This, in turn, creates counterfeit electronic book entries at the DTCC that apply downward pressure to the share price of the issuing company via an increase in the shares available to be sold at any instant in time. The buying broker/dealer that owes this duty of care to the investor then gets paid another "commission" by the naked short seller in the form of a "rent" payment, again unbeknownst to the investor. The goal of the naked short seller is to bankrupt the company that the investor bought shares in but in order to do this he needs the help of the investor's broker/dealer who safeguards the investor's shares.

All of this fraudulent activity is masked by allowing the 11,000 broker/dealers and banks on Wall Street to coalesce themselves into a quasi-public Self Regulatory Organization set up as a limited purpose trust company under the banking laws of the State of New York and the immunity associated therein. The buying b/d doesn't directly rent his client's shares to his client's enemies, he throws them into an anonymous pooling format from which the NSCC branch of the DTCC effects the borrow. The middleman role that the NSCC takes on helps to mitigate any liability of an individual b/d that owes the fiduciary duty of care to the original investor. Thus the duty of care gets lost in the shuffle from the masking effect provided by the middleman, the NSCC, which is in effect the 11,000 participants at the DTCC.

If you're going to commit crimes and perpetrate frauds it is very clever to do it as an amalgamation of individual entities with a tremendous amount of anonymity, critical mass, and political clout. The duties owed and the identities of the individual guilty parties get lost in this smokescreen. Well, we guess that we figured out what the "limited purpose" of this "limited purpose trust company", the DTCC, ended up being. Perhaps it was to take advantage of the DTCC participants' superior visibility of, access to, and knowledge of the U.S. system for the clearance, settlement, and delivery of trades done on Wall Street. The current system has CONFLICTS OF INTERESTbeyond description and allows the DTCC participants to steal perhaps trillions of dollars FROM THOSE TO WHOM THEIR INDIVIDUAL PARTICIPANTS OWE A FIDUCIARY DUTY OF CARE. It is difficult to believe that the SEC would allow such criminal activities to occur under their auspices, with the arrogant impunity DTCC and its participants currently exhibit.

But while DTCC needs to be a major focus of your enforcement and prosecutions, please also realize that naked short selling occurs in places other than the DTCC. We see plenty of "pairing off" wherein two brokerage firms will mutually agree not to demand the delivery of shares bought and sold between the two firms. They form their own little "no need to deliver" duet. The phenomenon known as "desking" is also very prominent especially when buy orders come from offshore. "Desking" is a form of naked short selling in which the broker/dealer of the buyer takes the buyer's money and pockets it. They then send out a purchase confirmation to the would be buyer stating that his order got filled. The trade never did get cleared or settled and of course there was no delivery. When the company being invested in goes bankrupt then the host broker/dealer just keeps the money and nobody suspects a thing.

In a nutshell, the current system for clearance, settlement, and delivery in place at the DTCC allow fraudsters to sell nonexistent entities for literally billions of dollars. The Automated Stock Borrow Program at the DTCC converts these nonexistent entities outside the DTCC into "Counterfeit Electronic Book Entries" (CEBEs) inside the DTCC via "the borrow" which creates "good delivery" which, in turn, allows the trade to "clear and settle" (C and S). C and S allows the DTCC to earn fees, its participants to earn commissions, and its participating market makers to earn "mark-ups". The CEBEs can then be sold to anybody because they are commingled with real shares and until all real shares have been removed from the DTCC via share registration programs any sale is PRESUMED to be that of a real share.

The actual counterfeiting "printing press" is the Automated Stock Borrow Program, which converts a nonexistent entity into a "CEBE". Once within the system, CEBEs can be recognized EITHER as a "Failed delivery" OR as a "Loan" cleverly made with the NSCC acting in the intermediary role as both the "nominal" lender and the "nominal" borrower. The "actual" lending b/d is handsomely compensated for loaning out his client's shares to "the cause" by receiving the marked to market value of the securities being loaned, which is preferable to a stock certificate or electronic entry gathering dust.

The SEC's allowing market makers to sell entities that don't exist to micro cap investors makes no legal sense at all. The intention to inject liquidity is honorable but allowing people to do it without borrowing genuine "shares/package of rights" is tantamount to endorsing counterfeiting especially when every single shareholder of a company is victimized by the sale of nonexistent entities masquerading as shares. A public corporation cannot be forced by the SEC to issue new shares or to amend its Articles of Incorporation to allow the authorization of new shares just to keep the market makers happy.

The undermining effect that naked short selling has upon the '33 and '34 Acts, Corporate Articles of Incorporation and By-laws, and the Corporate Statutes of the various states domiciling these corporations is incredible and quite frankly the SEC does not have the mandate to allow policies that break these laws or all of the common laws that are being broken. Think for a moment, what is the "par value" of the entities being sold? How should an auditor account for them on the "Shareholder Equity" portion of a balance sheet? Why don't they show up on a prospectus? Should issuers file an 8-K warning investors that their share structure is a total mess-not as a result of corporate malfeasance but as a result of securities industry fraud and regulator indifference? Should auditors be sued for not detecting these massive imbalances or not addressing them in a footnote to audited financials?

We warn you not to be fooled by untrue allegation that the Automated Stock Borrow Program at the DTCC has anything to do with a legitimate "borrow". In legitimate short selling, the "borrow" or the making of an affirmative determination in writing of the "borrowability" of the shares/"packages of rights" comes first and later comes the sale of the borrowed securities. In the fraud known as "naked short selling", the sale of a nonexistent entity is done first and then an illegitimate "borrow" is done to quickly convert the nonexistent entity sold into a "counterfeit electronic book entry" suitable for hiding at the DTCC by commingling it with real shares in an anonymous pooling format.

This illegitimate "borrow" is not even a distant cousin of a legitimate borrow used in legal short selling. Not only did it come out of sequence but at the DTCC the same "share" can be loaned out in many different directions at the same time because it is not sequestered off to the side in a separate account, as it should be, until the loan is repaid. That's why these naked short positions can become 300 or 400% the size of the issued and outstanding number of shares. Please note also that these nonexistent shares are not "depositary receipts" because there is no real certificate in existence justifying its validity. Nor are these nonexistent entities derivative instruments. Financial derivative instruments are "derived" from a valid security that really exists. They "resemble" a legitimate share just enough to allow an investor to lay down good money for it.

Please note also the nature of those "real" shares being loaned out in various different directions at the same time. U.S. securities laws dictate that shares can only be loaned out with the permission of the owner, as is typically contained in a margin agreement. Retirement plan accounts subject to the 1974 ERISA Act, fully paid for securities in cash accounts, and "excess" margin securities are expressly forbidden from being loaned out. The shares of the companies usually falling victim to these "bear raids" are typically non-marginable securities trading under $1 yet the supply of shares being loaned out seems to be unlimited and shareholders holding these shares in qualified retirement plans can't even get delivery of demanded certificates. Are the broker/dealers hiding behind the notion that since all of the shares in "street form" are technically held in the name of "CEDE and Co., which is the nominee of the DTCC, then TECHNICALLY the DTCC participants are the "nominal/legal" owners and they can do anything they want with their possession? What happened to the parameters of Rule 15c3-3 forbidding the loaning out of fully paid for securities and excess margin securities?

In reviewing some of the comments submitted to the SEC, we notice that some proponents of naked short selling raise the issue that without naked short selling "pump and dumpers" will have a field day. This argument has been used for decades to justify fraudulent naked short selling but it lacks in substance when a deeper analysis of naked short selling is done.

The SEC has done a decent job in reigning in "pump and dumpers" that run the price per share of a stock upwards on inaccurate press releases and sell their own shares into the run up. The recent study by Aggarwal and Wu reviewed 142 SEC Litigation Releases between 1990 and 2001. The overwhelming majority of these cases targeted frauds wherein the perpetrators were attempting to increase the share price rather than decrease the share price of an issuer i.e. the classical "pump and dump". LESS THAN 1% OF THE CASES THE SEC TOOK ON HAD TO DO WITH FRAUDSTERS ATTEMPTING TO DECREASE THE SHARE PRICE OF A SECURITY. Why are the statistics so skewed? Should it not be closer to 50-50? The answer is that naked short selling amongst DTCC participants and their co-conspirators is a systemic issue that is out of control. Everybody knows about it but nobody wants to address a "hot button" issue like this. Nobody wants to open up Pandora's box, thus legitimate development stage companies on the OTCBB and Pink Sheets, as well as the investments made therein, will just have to assume the role of "collateral damage" in order to obfuscate the identity of the bad apples in the barrel.

The irrefutable stereotype on Wall Street is that ALL companies on the OTCBB and Pink Sheets are BY DEFINITION "scams" and not worthy of the attention of the regulators. Naked short selling fraudsters are almost looked upon as deputy sheriffs in the fight against securities fraud. That is until they misdiagnose a legitimate company as a "scam". After this is done and the company bankrupted, the only thing left to do is say "OOPS!"

Keep in mind that the SEC, the NASD, and the DTCC are all SROs or "Self Regulatory Organizations". They all wear "badges". One of the tenets of any "Profession", whether it be medicine, the law, or the securities industry, is the right to self-govern. It's tough for any SRO to take an introspective look at what might end up revealing malfeasance amongst the "deputy/participants" at the DTCC, especially if the malfeasance is pandemic.

Pump and dump frauds are analogous to the roof tiles blowing off of the "Wall Street house" as mentioned earlier. Using the fraudulent sale of nonexistent entities to reign in "pump and dump" frauds is ludicrous. You don't fight a fraud with a fraud. Selling nonexistent "shares/packages of rights" with no intent to cover is 100% illegal.

This goes well above and beyond securities laws and the creation of "an artifice to defraud". It is a form of counterfeiting as well as a securities fraud. Again the term "naked short selling" is a total misnomer. The crime is much more heinous than that title reveals. Crooks have actually "hijacked" probably trillions of dollars from micro cap investors via the selling of entities that don't exist to them. The "printing press" of the counterfeiters is provided by the "Automated Stock Borrow Program" or "Lending pool" at the DTCC created subsequent to Addendum "C" of the Rules and Regulations of the NSCC. The scale of the 2 crimes must also be considered. Naked short selling is a systemic problem with damages probably well up into the trillions of dollars. Remember there is currently $127 trillion sitting at the DTCC. Does it seem out of line to estimate that these frauds involve 1% of the assets of the DTCC?

Don't get us wrong, the pump and dump fraud carried out by crooked insiders is a terrible securities fraud with plenty of victims. The SEC has done a credible job in rounding up these hoodlums but the punishment doled out is so weak that there is no deterrent effect. Pump and dumpers need to do jail time in a cell right next door to the bank robber's cell-and to the naked short seller's cell. As far as the relative scale goes between these two crimes, it is not wise to use nuclear weapons against pickpockets. The 10b-5 rules, the Rule 144 stipulations, as well as the enhanced Sarbanes-Oxley parameters will address the pump and dumpers quite well.

The "pump and dump" fraud and the "naked short selling" fraud both involve aberrations in supply and demand mechanics. In the "pump and dump" fraud the demand variable is increased via aggressive promotion and misleading press releases. The magnitude of the demand increase is muted by investors using common sense and doing their due diligence. In the "naked short selling" fraud, the supply variable is grossly magnified in a limitless and undetected manner and the demand variable is diminished by the loss in the credibility of management attendant to Internet basher activity and a share price in free fall. Unethical DTCC participants and their co-conspirators have a lot more "critical mass" than a rogue promoter working with crooked insiders in a "pump and dump."

Don't forget also that the victims of naked short selling include a whole lot more than the investors that lost all of their investment and the bankrupted companies; the integrity of the entire financial system as well as the efficacy of the '33 and '34 Acts that protect it are undermined. Regulation SHO will also help curb "pump and dump" frauds by not allowing crooked corporate insiders to sell restricted shares NOW and let the failed deliveries and loans made to mask failed deliveries simply stay on the books until the restriction period is lifted. Naked short selling totally undermines the purpose and efficacy of the Rule 144 restriction period. There is no restriction period if you can just find a crooked b/d, market maker, and clearing firm to process that sell order and sit on the failed delivery. Everybody on Wall Street needs order flow.

The point needs to be emphasized that the only people in the system that can legally sell "nonexistent entities" to U.S. investors are "bona fide market makers" while acting in the capacity of a bona fide market maker, as allowed by Rule 3370. Bona fide market makers allow these delivery fails to exist only for a day or two, as addressed in Addendum "C" to the rules and regulations of the NSCC, and as you state in the Notes to Proposed Regulation SHO. They then promptly go back onto the bid and repurchase these securities.

"Bona fide market makers" sell into markets predominated with large buying imbalances WITH THE SAME ZEAL that they buy into markets with large selling imbalances. Please don't mistake any of the activity of the perpetrators of this fraud with "bona fide market making activity". In the example above, there was no imbalance of buy orders over sell orders at the $5 level that needed addressing. They had no legal right to sell nonexistent entities at the $5 level. Rule 3370 didn't apply. Where were these very same market makers' buy orders when the stock was trading at the $4.60 level? They were nowhere to be found on the bid but instead were selling even more on the offer. Again, they had no right to sell nonexistent entities to U.S. investors and place the investors' money on top of the ever-growing mountain of money in front of them. Market makers are supposed to be the "middlemen" used to bring the buyer and seller together, not market manipulators who destroy companies and rob legitimate investors of their money.

The typical sequence of events we witness time and time again goes something like this. A stock is trading at let's say $5 and a certain group of Wall Street DTCC participants and their co-conspirators judge that the $5 level is a bit too generous for this particular stock. Perhaps they, in their infinite wisdom, think that the $2 level would be more appropriate. They then sell, let's say, one million nonexistent shares at $5 into one million shares of real buy orders over the course of a month or two. There wasn't really an imbalance between too many buy orders and not enough sell orders to address, it was more that the market makers have a superior visibility of these buy orders coming in and they can easily beat a real seller of shares to that buy order. This is no way, shape, or form bona fide market making.

They now have access to a pile of $5 million, the same $5 million that investors just paid for what they thought were legitimate "shares or packages of rights attached to a public company". As the price per share tanks, a bona fide market maker would take that $5 million and buy back shares at perhaps between $4.80 and $4.60 and pocket a quick $300,000 profit without lifting a finger. Abusive market makers don't see it this way, the $300,000 "free" dollars courtesy of naïve investors just doesn't quite make it. This fraud is way too easy to pull off to settle for a measly $300,000. They saw how easy it was to sell a million nonexistent shares and raise $5 million and so they get greedy and instead of taking money from that pile of $5 million to buy back shares, they decide to add to it by selling yet more nonexistent shares on the way down to maybe $1 or so. Why not, nobody's keeping score back at the DTCC, all of those "failed deliveries" are now safely in the "counterfeit electronic book entries" column hidden amongst the real shares. Now perhaps they have $10 million in front of them from the selling of nonexistent shares.

With more of this behavior the $10 million becomes $15 million as the price per share now approaches a penny. At a penny per share there really are many more buy orders than sell orders. Their continued selling at a penny really does start to resemble "bona fide market making", at least for new buyers anyways. At a penny per share they might decide to go ahead and cover but they notice that they're the only seller around. Who's going to sell shares to them at a penny so that they can cover? They've been the only seller from perhaps $1 on down. All of the real investors are so far "underwater" on their investment that they can't afford to take that big of a loss. Besides, most of them don't even follow the stock anymore unless it's at a year's end and need a capital loss. No new naked short sellers are dumb enough to start attacking a stock that just went from $5 to a penny. They'll go find a different $5 stock to attack.

These market manipulators soon learn that they can't cover because the second they take their finger off of the selling trigger, the stock gaps upward and they haven't even started to buy back shares yet. Since they can't cover without driving the PPS up violently they soon learn that all they can do is to continue leaning on the stock in an attempt to suffocate the company to death by constantly knocking out any bids that are posted. This phase of the overall fraud is where the necessity of Rule 201, the Uniform Bid Rule, comes into play. Without protection from this constant "bid banging" these victim companies will have a tough time fighting off bankruptcy.

What really is frustrating to the corporation mentioned above is that perhaps recent corporate developments perhaps have made the $5 share price level an appropriate valuation but it's too late. With all of the dilution caused by the "bear raid", any future earnings are now divided by an inordinate number of shares to calculate earnings per share and stocks usually trade at multiples of earnings per share. Thus the damage incurred is permanent.

The question we would have in regards to the proposed Regulation SHO is what will be done with the "open positions" in excess of the Rule 11830 parameters? If a corporation has 100 million shares issued and authorized and all held at the DTCC and the DTCC has a total of 200 million real shares and counterfeit electronic book entries in house, how will the proposed Regulation SHO address the 98.5 million share aggregate "open position" in excess of Rule 11830? Will the SEC do as the NASD spokesman said and claim that it's beyond their civil injunctive powers and let the fraudsters keep that mountain of investors' money they have in front of them from selling the investors nonexistent entities while illegally using the exemption from borrowing before selling entrusted to bona fide market makers only who, by definition, would have bought back these sales shortly thereafter and who by definition sell "shares" into markets predominated by buy orders with the same zeal that they buy shares when sell orders predominate.

We might remind the SEC that in order to calculate the number of shares in "open positions" within the overall system, they must determine the arithmetical sum of "open positions" at the DTCC, the Central Depository for Securities in Canada, in house "open positions" amongst the 11,000 participants at the DTCC from "desking" activities, and "in house" open positions held in offshore broker/dealers especially non-NASD participants. We must stress that the DTCC isn't the only place where this game is played.

If the NASD and the SEC choose to ignore these preexisting "open positions" in excess of the Rule 11830 benchmarks, then those accusing the regulators of being in complicity with these naked short selling fraudsters right from the get go will have made their point. U.S. INVESTORS HAVE BEEN BUYING NONEXISTENT ENTITIES FROM WALL STREET "PROFESSIONALS" TRYING TO HIDE BEHIND A RULE 3370 EXEMPTION FROM BORROWING THAT DOES NOT APPLY SINCE THEY WERE IN NOW WAY, SHAPE, OR FORM ACTING IN A BONA FIDE MARKET MAKING CAPACITY. THE 1934 SECURITIES EXCHANGE ACT HAS SEVERAL BUY-IN MANDATES THAT APPLY HERE. THE BANK ROBBERS HAVE BEEN CAUGHT AND THE PROCEEDS OF THE HEIST HAVE BEEN LOCATED. PLEASE ENFORCE THE 1934 EXCHANGE ACT YOU WERE SWORN IN TO UPHOLD NO MATTER HOW INTIMIDATING THE LARGEST FINANCIAL INSTITUTION ON EARTH, THE DTCC, CAN BE.

In a recent article in a financial periodical that has been closely following the Sedona case after the initial arrest, the author noted that an NASD Enforcement Staff Member, speaking anonymously, described forced buy-ins as outside of the SEC's civil injunctive powers. Other NASD staffers went on to say that the NASD considers the buy-in rules to be "contractual obligations" among its member broker/dealers and not codified law or Federal Regulation. These NASD staffers went on to say that the contractual nature of the short rules places enforcement of short trade settlements outside of the NASD's purview as well.

Can you see the flight to middle ground occurring? We have reviewed all of the possible solutions to this debacle and all roads lead back to the necessity to first buy-in all of the preexisting "open positions" greater than the Rule 11830 benchmarks. If one didn't demand this then the alternative would be to list out the victim corporations on the Rule 11830 "restricted lists". THIS LIST WOULD HAVE TO BE MADE PUBLIC IN ORDER TO WARN PROSPECTIVE INVESTORS THAT THEY ARE WALKING INTO AN AMBUSH. Investors would then avoid buying shares of these victim companies like the plague and the regulators would then, hopefully unwillingly, be aiding and abetting the naked short selling fraudsters into bankrupting these victim corporations. Can you regulators not see that these naked short selling scams are now so far out of control due to regulator naiveté and neglect that there is no longer any middle ground to take. This issue has been conveniently swept under the rug at the NASD and the SEC for so long that the ceiling fans no longer turn at either institution. Some regulator or legislator has to eventually come to the aid of the victims of these frauds instead of coddling to the perpetrators of the fraud no matter how politically powerful they are or how much economic critical mass they have attained with investors' money. The robbers have been caught red-handed and the stolen money has been located. The various sets of buy-in rules in the 1934 Exchange Act are crystal clear. Let's address the problem and move on and bring some integrity and investor confidence back to the world's largest financial markets.

I don't think that we really have to remind you of this fact but just in case, please be aware that as Regulation SHO implementation approaches, a lot of the "open positions" currently at the DTCC are going to "sprout wings" and fly into the "in-house proprietary accounts" of the perpetrators of this fraud as well as to "in house" accounts of the offshore non-NASD broker/dealers. This will be effected via wash sales and matched trades just like in all of the "death spiral" version of naked short selling cases.

For those instances of Canadian and U.S.-based naked short selling related to the laundering of money to be used by terrorists and those involving the proceeds of illicit drug activity, please make these criminals IMMEDIATELY cover their outstanding naked short positions BEFORE these funds can be used against the American people. By terrorist we refer to the type seen on TV of late, although garden variety naked short selling is indeed a form of "financial terrorism". The Canadian version of the "know your client" rules have been universally ignored for decades. Canada is the only advanced industrialized country on earth that STILL doesn't have a national securities regulator. They have a "patchwork" of 13 provincial and territorial regulators. All you have to do is set up shop in the Province with the weakest securities laws concerning your particular securities fraud of choice and off you go. There is no more efficient way to launder this "dirty" money than to post huge amounts of cash to make the usurious Canadian margin maintenance requirements necessary to carry gigantic naked short positions of stocks trading under $1. These people WANT TO put up huge sums of money, albeit "dirty" money, to maintain margin. In fact a self-fulfilling prophecy is set up wherein the more nonexistent shares that they sell necessitates yet more margin maintenance to be posted and it also seals the victory in easily bankrupting the company through the massive dilution involved. Study the cases going on in Canada currently and see the types of people working through these 13,000 Canadian naked short-selling accounts due to the virtual nonexistence of delivery rules. The mechanics involved in naked short selling through Canada couldn't possibly provide for a better money Laundromat.

Since drug consumption and national security issues are at play here, we feel that the U.S. market makers and clearing firms acting as conduits in this activity OWE THE U.S. PEOPLE BIG TIME IN THIS REGARD. WE UNDERSTAND THAT SOME HONEST U.S. MARKET MAKERS AND CLEARING FIRMS HAVE BEEN PLAYED LIKE A FIDDLE. THE DISHONEST ONES ARE, OF COURSE, COMPLICIT WITH THIS ACTIVITY AND ARE IN COLLUSION WITH THESE CRIMINALS. WE BELIEVE THAT MANY BASICALLY ETHICAL MARKET MAKERS HAVE JUST FAILED TO RECOGNIZE THE EXISTENCE OF VICTIMS, BOTH U.S. CORPORATIONS AND THE INVESTORS THEREIN, IN THESE HIGHLY COMPETITIVE POST-DECIMALIZATION MARKETS AS WELL AS THE DELETERIOUS EFFECTS ON HOMELAND SECURITY AND THE INTEGRITY OF OUR FINANCIAL MARKETS IN GENERAL.

We feel that the SEC is in a once in a lifetime position to bolster the intent of the USA Patriot Act. Please buy in these "open positions" now and you will be accomplishing a lot more than improving the integrity of the largest financial system on earth. As we mentioned earlier, we're fresh out of "middle ground", it's time to make a stand. The SEC has had a recent history of beingREACTIVE to the States Attorneys General leading the way on these types of frauds. Perhaps as it relates to naked short selling frauds, the SEC can take the lead and act in a morePROACTIVE manner.

SOLUTIONS TO THE PROBLEM

1) Realize that there is indeed a problem, and then locate its source. Look at the DTCC records showing the age and magnitude of outstanding loans made to hide all of these failed deliveries for companies trading on the OTC: BB and Pink Sheets. Keep in mind that these naked short "open positions" are constantly being "kited" by wash trades and matched orders made in an effort to "rejuvenate" the age of the "fail".

2) Make the commitment to act quickly so that no more victim companies go bankrupt while the DTCC participants try their best to stall the implementation of Regulation SHO. TIME IS OF THE ESSENCE!

3) Quickly formulate the list of all victim companies whose arithmetical sum of "failed deliveries" and "loans made to mask failed deliveries" exceed the Rule 11830 parameters.

4) Demand that these excesses above the Rule 11830 parameters be brought into compliance within a given amount of time via the guaranteed delivery buy-in of "real" shares from "real" shareholders. The good thing about guaranteed delivery buy-ins is that the bill will, as if by magic, land in the lap of the guilty party or the clearing firm that cleared for the guilty party. The identification process is an automatic. This addresses the preexisting naked short positions prior to Regulation SHO's implementation. ANY INDUSTRY PLAYER THAT OBJECTS TO THIS SOLUTION IS IN ON THE SCAM. ASK YOURSELVES, WHY SHOULD THEY CARE IF THEY ARE NOT IN ON IT? WHY WOULD THEY WANT THE MANIPULATORS TO GET AWAY WITH THEIR CRIMES? The next job is to pass Regulation SHO to level up the playing field for future investors.

5) This solution should not at all be seen as burdensome to those perpetrating this fraud because it does not even address the damages done to those thousands of victimized corporations and their millions of shareholders which have already gone bankrupt. There, the crooks have already won.

6) The SEC has to dig deep and do the right thing to make up for their complacency in the past. If those DTCC participants that perpetually claim that there is no such thing as abusive naked short selling are correct then there will be no buy-ins. Please do not have the audacity to approach a company whose share price has just tumbled from $5 to a penny and try to arbitrate a solution involving the victimized corporation selling the perpetrators of the crime large blocks of stock at a penny or two. We don't think the investors that bought shares at $4.90 will look upon this too favorably. Keep in mind the immense amount of money sitting in front of those that sold these nonexistent entities to these investors because it matches to a penny the amount of money these investors have lost on paper or have realized by selling at a loss.

We thank you for this opportunity to help address this massive fraud being perpetrated on U.S. micro cap investors and look forward to working closely with you on its solution.

Sincerely,

Dr. Jim DeCosta and Associates 
Consultants to Victim Corporations 
(503) 692-0650