CMKM Diamonds Inc. (fka CMKX)

[Ignutz]

Zero Tolerance? When regulators define zero as greater than 1.

In September of 2000 Barry Goldsmith, Executive Vice President of NASD Enforcement, spoke in a Congressional Hearing before a House sub Committee on Finance and Hazardous Materials. His testimony was with regards to Organized Crime and other criminal enterprises infiltrating our markets. The Executive Vice President, in that Hearing vowed that the NASD would adopt a policy of "Zero-Tolerance". (http://www.nasdr.com/1420/goldsmith_04.asp) We now know "Zero-Tolerance" to fraud means something different between Mr. Goldsmith, the NASD, and the Investors being abused.

The NASD is presently reconsidering a proposal (Short Selling Settlements) that they submitted to the Securities and Exchange Commission in March of 2004(http://www.nasdr.com/filings/rf04_44.asp). The rationalization to reconsider this proposal is quite clear. The NASD is about to retain a tolerance for fraud. At least when it is beneficial to the members they are to regulate.

The proposal submitted to the SEC is with regards to trade settlement requirements on short sales. The NASD submitted this proposal some 5 months after the SEC put out their short selling reform package dubbed Regulation SHO. Clearly the NASD was aware of the SEC's proposal when they submitted theirs to the SEC for public comment and approval. So, why does the NASD's proposal sit idle?

From Communications with both the SEC (Peter Chepucavage, Division of Market Regulation [phone]) and Teri Reicher (NASD's Office of General Council [phone]) it appears that the NASD and SEC are blaming each other for the failure in having this reach public comment. The SEC claims that the NASD has discussed with the SEC that they are reconsidering this proposal while the NASD claims the SEC has it for review. Eventually the story leaks out that maybe the NASD is really reconsidering this proposal but has not yet decided ? They are biding for time. In the mean time they are informing the public through their web page that it is at the SEC for review. Semantics! They Both hope we all forget it is there and thus the manipulation will continue.

So what is it about this proposal that needs to be reconsidered? Simple. This proposal was drafted with "Zero-Tolerance" in mind against fraud. It was drafted before the SEC finalized Regulation SHO and thus the NASD was unaware of the Regulatory backpedaling the SEC was about to incorporate. Suddenly when SHO was released in June the NASD proposal, which calls for "Zero-Tolerance" became too strong. The NASD could back off from the pain they were about to impose on the member firms because the SEC did. The NASD found an out that would allow them to achieve "Partial-Tolerance" as the SEC defined an acceptable level of settlement failure abuse.

The Securities Act of 1934 (Sections 17A) specifically states that all trades shall be settled promptly. That Securities Act is the "Constitution" that the SEC must set forth their regulations to comply with. The Securities Act does not allow for threshold levels of failures. It does not provide for minimal abuse. It does not allow for Member grace periods. It does not identify two sets of rules for trades above a threshold level and below a threshold level. The Securities Act states that ALL trades shall be promptly and accurately settled for the protection of the Investor and the Industry. The NASD took this to heart and the SEC did not. The SEC, in Regulation SHO VIOLATED the constitution of the securities Industry and now the NASD is being pressured to do the same.

When does "Zero-Tolerance" mean something other than ZERO? When taking a "Zero-Tolerance" approach bites the hand that feed you. A "Zero-Tolerance" policy will only impact the members who reap the benefits of settlement failures and thus the "Zero" became "some" tolerance The SEC claims today that 4% of all publicly traded companies have settlement failures above the Settlement Failure threshold they identified in Regulation SHO. That represents some 600 Companies. Who abused these companies, who reaped the benefits of these excessive trade volumes that resulted in failures? The Industry Members! The very people the SEC is willing to violate the Securities Act to protect and the very people the NASD are directed to regulate. Instead the NASD and SEC backpedal and violate the rights of Investors.

Call up Peter and Teri and ask them why this proposal, now 5 months released by the NASD to the SEC, has not yet reached public comment. See if they put you into the game of hot potato they like to play. In the end, try to understand why a simple reform package that simply defines a clear set of guidelines on how trades must be executed and settled cannot get through the beginnings of an approval cycle. Then ask yourself what "Costs cannot be a factor in justification of Settlement Failures" really means. Is that what this is about? That the Industry is not settling trades because of COSTS and thus the Investors rights are being sacrificed?

Barry Goldsmith stated that there would be a "Zero-Tolerance" to fraud. When will that "Zero-Tolerance" be enforced against a corrupt industry and failed regulatory activities?

Dave Patch
www.investigatethesec.com