September 8, 2005
Dear Mr. Patch,
Although REG SHO is a solid first step in eliminating certain abusive practices, a significant number of issues remain with respect to naked short selling. As you know, the emphasis of REG SHO is, by and large, the “threshold” stocks traded on the NYSE and the NASDAQ. It appears that the SRO's have begun to pay attention to naked short selling now that it has become an SEC rule. Nevertheless, it seems clear that had the SRO's and the SEC exercised greater diligence in enforcing pre-existing rules, REG SHO would likely have been unnecessary.
The most egregious abuses pertaining to naked shorting are occurring on the bulletin board and pink sheets. This fact is particularly troubling because REG SHO fails to address or provide any meaningful reform in these marketplaces. I believe this failure is due, in large part, to the lack of resources committed to these markets and the resultant lack of transparency.
Regulators must devise and implement solutions that will offer the maximum effect without hindrance to the legitimate financial marketplace. REG SHO, once enhanced, should have such an effect. However, there remains a substantial distance between REG SHO and the ultimate goal of including substantive protections for small business issuers.
It is these small businesses in our communities who take entrepreneurial risks to grow their companies through listings on the OTCBB and Pink Sheets. These small businesses not only provide employment for the residents of their communities, but also offer the general public the opportunity to invest in local businesses with promising products or services.
While it may be true that a number of small companies lack the financial depth to succeed, they are nonetheless entitled to succeed or fail by their own honest business decisions and not as a result of the corrupt acts of abusive short sellers.
Without transparency, we cannot, as yet, precisely identify each small business that failed as a direct result of abusive naked short selling nor quantify the exact number of jobs lost to our local economies when these companies are forced to close their doors. However, we can say to a certainty that the impact on many of our local communities has been injurious. As a result, we have observed an unmistakable loss of investor confidence by the arguably millions of investors who have lost their monies.
Members of Congress are confronted with a myriad of constituent concerns, many of which may, at first blush, appear to have a more direct affect on constituents than the problem of abusive naked short selling. In fact, abusive short selling poses a direct threat to the economic well being of small business and the entire community.
Congressional legislators want and, by necessity, must have the utmost confidence in governmental agencies’ capacity to carry out their legislative mandates. The SEC is moving slowly forward as REG SHO in its current state is studied and debated seemingly ad infinitum. While slight modifications to the existing Rule may result from such an approach, a far more threatening pattern of abuse is certain to continue unless wholesale reforms are made to remedy the concerns of the small business community. Without further substantive reform to REG SHO, many more small companies in our communities will succumb to failure - not through the mechanism of the marketplace but at the hands of manipulators.
The fact that you, along with an ever-growing group of concerned citizens, have continued to champion the issue of reform in the naked short selling area for so long is the primary reason we are beginning to see reform of any sort. I would caution people not to assume that because reform has begun that the issue of abusive short selling will soon become a thing of the past. Without both a concerted effort to inform and educate those in power on what issues remain and a commitment to implement real, workable solutions we are unlikely to see any meaningful reform.
Your determination and persistence in seeing that this wrong is righted is in part responsible for my interest, as well as that of other state regulators. We have established a working project group in this area and have been meeting with SRO's and issuers alike. We will continue to exert substantial effort to remedy the remaining abusive practices in naked short selling until we are confident at the state level that the companies in our communities and citizens that invest in them will no longer be the possible targets of abusive naked short sellers.
Sincerely,
Ralph A. Lambiase
NASAA Past-President and
Director, Connecticut Division of Securities
CC: Tanya Solov, Director, Illinois Securities Department
Tanya Durkee, Deputy Commissioner, Vermont Department of Securities
Rex A. Staples, General Counsel, NASAA
AI
