From: RGM Communications Inc. [rgodwin@rgm.com]
Sent: Friday, January 02, 2004 3:53 PM
To: rule-comments@sec.gov
Subject: File No. S7-23-03

January 2, 2004  

 

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Subject:  File No. S7-23-03.

"The Security Exchange Commission (SEC) administers and enforces the U.S. federal 
securities laws in order to protect investors and to maintain fair, honest, and 
efficient markets."

The above quote was taken from your web site  http://www.sec.gov/

A song lyric from the 1970's stated, "Two out of three ain't bad". But with 
reference to regulatory enforcement by the SEC, it's one out of three and it sure 
is bad. The trading of microcap companies is not fair and not honest. But, truth 
be told, it's very efficient at allowing money to be stolen from the pockets of 
the investors.

The consumer, the investor, is the victim of a commercial fraud and if this were 
any other business, the brokerage house officials and the brokers would be in jail 
for fraud. I paid my money but where's my goods/chattels/stock and why can't I get 
timely delivery or any delivery at all? How did the brokerage industry get this 
"special" status and why are they exempt from the fraud laws? In the interest of 
plain, full and complete disclosure, shouldn't every client opening a new brokerage 
account be given a prospectus letter detailing the fact that they in the future may 
be sold fraudulent shares?

History is proving that the SEC has become a Trade Association catering to the 
interests of its members, the brokerage industry, rather than to the interests of 
investors. As shown by the public record, the large brokerage houses penalized for 
wrongdoing pay a small fine without having to admit or deny the charges (the 
proverbial "parking ticket"),  and proceed with business as usual. 

The SEC has now joined the Depository Trust and Clearing Corporation (DTCC) and 
the North American Stock Dealers (NASD) association to become the enemy of many 
public companies. Not because the public companies are crooked or looking to do 
anything dishonest, but because the SEC by their inaction regarding trading abuses, 
specifically naked short selling, have helped shave the dice to insure that honest 
speculation based solely on business risk is not possible. The companies and their 
shareholders not only have to fight their business environment but a dishonest 
public share market condoned by the SEC and run by the brokerage houses and their 
market makers. The SEC is a co-conspirator to consumer fraud and should be 
investigated by an independent United States Congress or Senate commission. To 
aid this purpose, we have started an on-line petition to allow the public a venue 
at http://www.investigatethesec.com/ to register their displeasure with the SEC 
and to aid the institution of an investigation into the SEC misconduct.

Its evident that the 1,000 or so lawyers working for the SEC, and writing the 
regulations regarding the market and short selling, have no brokerage experience 
and have never worked as a desk trader making market and running a pro trading 
account. The SEC therefore, with no experience at the job that they're trying to 
regulate, is like a man telling a woman how she should feel during childbirth.  

Having spent many years as a broker for a full service brokerage house, and now 
as a director of a microcap company, I've witnessed first hand the hypocrisy of 
industry management covering up an employee firing offence for the expediency of 
profit. How can the public expect the SEC to oversee the honesty of the marketplace 
when not only does the SEC not know how the brokers play the game, they don't even
know what the game is? 

To an outsider it's obvious that the SEC hasn't the interests of the public investor 
at heart. Daily they allow their friends at DTCC, NASD and the brokerage houses to 
tell them lies about what's really going on inside the industry. And as recently 
seen, the SEC only gets active when outside pressure by politicians and people like 
Eliot Spitzer gets too great and pushes them into action. For a small public company, 
trying to work with the SEC to solve the current problems is like dealing with the 
hypocrisy of the pious or the arrogance of an Emperor without clothes.

How many SEC employees don't do their job because:

6.    They've forgotten the mandate by which the SEC was created and under which 
they were hired;  
5.    They have become too buddy-buddy with the people they're supposed to regulate;  
4.    They, or their bosses, are cowards and don't have the courage to do their job;  
3.    They're incompetent, should be fired, but for various reasons can't be kicked 
out;  
2.    They want to quit the SEC and go to work for the brokerage industry and don't 
want to bite the hand that's going         to feed them in the future;  
1.    They are being paid off and are corrupt.  
 

The SEC SHO rule changes are a band-aid for a gangrenous limb. They don't go far 
enough for the future and certainly don't address the problem of non-delivery of 
the naked short sale trades prior to 2004. What about all the previous "fail to 
deliver" trades? Are they going to be settled and if so, when? Will there ever be 
a mechanism developed allowing a corporation to reconcile the true number of their 
shares issued with the number supposedly "owned" by investors?

Again, these proposed rules show a lack of courage by the SEC in their Trade 
Association coddling of the brokerage houses. They're half measures, rule based and 
fall far short of instituting any meaningful change to the ethics by which the 
trading should be done. What happens to the client, the end purchaser, after all 
these changes? Is he better served? Will these rules stop the naked short selling 
abuse? Will his brokerage house "buy in" the client's non-delivered purchases? I 
don't think anything will change with these rules. 

Having a brokerage license is a privilege, not a right. If the SEC has a brokerage 
house that doesn't want to follow the proper short selling rules, why doesn't the 
SEC, for example, restrict the brokerage house license for a day and only allow 
them to sell or short cover equity shares? Make the punishment hurt and fit the 
crime. If they abuse the rules again, restrict their trading for a week. And if 
they fail to learn their lesson, pull their right to conduct business in the 
financial markets forever. Their clients will be much better served moving their 
accounts over to a honest brokerage house.  

For specific responses to your SHO rule changes, I refer you to and support the 
comments of the November 21, 2003, SHO submission by H. Glenn Bagwell, Jr., 
Attorney at Law, reproduced below.

 

Sincerely,

Russell Godwin

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