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Microcap & Penny Stocks : TGL WHAAAAAAAT! Alerts, thoughts, discussion. -- Ignore unavailable to you. Want to Upgrade?

To: LANCE B who wrote (63580)	9/15/2000 12:50:01 PM
From: SSP	Read Replies (1) \| Respond to of 150070

GREAT LETTER! >Subject: DD UPDATE: "Investor Protection......rule change evolution" >Date: Fri, 15 Sep 2000 11:5:11 > >Many changes have been instituted by the SEC in the last year in respect of >the OTC BB and Nasdaq Small Cap electronic exchanges. No Doubt we can blame >many of those changes on the Internet and the accelerated evolution of how >stocks are now bought and sold, and researched vs. several years ago. >But as with a "fine wine" it "takes time". The initial changes saw >non-reporting companies delisted. That indeed boosted the integrity of the >OTC BB....but also saw the numbers of the listed companies reduced by over >50%. Small Cap Nasdaq companies which fell below minimum compliance levels >were subsequently moved to the OTC as well. The investing public now has >many more tools (via the internet) to research fully companies, as they all >must be fully reporting and therefore disclose certain information. (at >least the honest ones.....pardon the sarcasim.) > >One particular area which has yet to be addressed by Rule changes is short >selling and the possibility of Market Maker (as well as Promoter) >manipulation. >We herein enclose a letter to the SEC (which has been in circulation for >some time). It is the most coherent and well written article on the matter >we have seen. It addresses many questions we have read from subscribers. We >couldn't have written it better ourselves and therefore must give full >credit to the author; > >Robert Bumbalough >2461 Lindale Ln. >Mesquite Texas, USA >Postal Code: 75149 > > >Jonathan G. Katz >Secretary, Securities and Exchange Commission >450 Fifth Street, N.W. >Washington, D.C. >20549-0609. >rule-comments@sec.gov. >reference to File No. S7-24-99 > >Greetings: > >I am submitting, for your review, the following comments in regards to >extending short sales protections for the individual investor to NASD >OTCBB quoted issues. In the past when there was very limited trading on >the NASD OTCBB quotation service, market making firms making markets in >OTCBB issues could act in unethical and morally wrong manners with >impunity. Technology has changed the way we all trade and invest. No >longer can it be tolerated for the NASD OTCBB to remain a bastion of >immorality in the markets. Many Americans and citizens of other >countries as well invest in and trade the micro-cap issues of the >OTCBB. This increased participation compels the SEC to take action to >fulfill its fiduciary duty to the Congress and the Public Trust of the >United States of America. > >Some NASD member firms making markets in OTCBB traded securities while >acting as "Bona Fide" market makers will naked short sell OTCBB >securities under the provision of NASD rule 3370 (b)(2)(B). This allows >them to make a short sale without having to make a "positive >determination" that securities are available to borrow for delivery by >settlement date. As a result of this, some OTCBB securities that are in >high demand by the investing public have been excessively sold short by >NASD member firms making markets in those OTCBB securities. This in >turn often results in situations where many millions of shares of a >particular OTCBB security that do not exist have been sold to the investing >public. > >By the phrase, "shares of a particular OTCBB security that do not >exist", I mean those shares of the security in question that NASD member >market making firms have sold short under NASD rule 3370(b)(2)(B) which >cannot be enumerated amongst the outstanding issued or registered shares >of the security. For example, suppose 1,000,000 total outstanding >shares of the securities of the XYZ Corp., XYZ, had been issued by the >company and that those shares are traded on the OTCBB market. Then the >total number of outstanding shares in existence would be 1,000,000 >shares of XYZ. If the shares of XYZ are in high demand, and the NASD >market making firms acting as "Bona Fide" market makers sell 10,000,000 >shares of XYZ then under NASD rule 3370 (b)(2)(B), then there would have >been 9,000,000 nonexistent shares sold to the investing public. > >Since OTCBB stocks are not marginable, (ie: cannot be used as collateral >for a loan), a NASD member market making firm is not required to "cover" >or "buy back" those "shares of a particular OTCBB security that do not >exist" that it has sold short under NASD rule 3370 (b)(2)(B) if the >price of the issue were to rise. This effectively means the market >making firm can sell an infinite quantity of said OTCBB stock to the >investing public. This robs the small company of the ability to raise >capital and dilutes the investor's investment to near worthless. This >is very unethical and morally wrong. > >The alleged notions that the OTCBB and NASD market are fair and freely >trading markets create a standing contradiction as the conditions that >prevail in the market maker industry are plainly apparent. This can and >eventually will lead to a loss of investor confidence in these markets. >A confidence the very existence of the self-regulatory organization, the >NASD, was designed to promote is undermined by: > >(1) The existence of NASD rule 3370 (b)(2)(B) that allows market maker >firms to sell millions of non-existent shares of OTCBB securities. > >(2) The limited scope of NASD rule 3350 "The Short Rule" which is >supposed to prohibit the practice of "Bear Raiding " and "Piling On" but >due the "Primary Market Maker" exemption is completely negated for >NASDAQ stocks. Rule 3350 has not applicability to the OTCBB securities >at all. > >(3) The limited scope of the Limit Order Display Rule which does not >apply to OTCBB stocks. > >(4) The lack of Limit Order Protection for OTCBB stocks allows NASD >member market making firms to trade against their customer's orders. > >These conditions create an environment where legalized and systemic >constructive fraud flourish. The NASD, the SEC, and the Securities >regulative bodies in our legislature have a fiduciary duty to protect >the interest of the investing public. To carry out that duty >faithfully, they must either accept responsibility for reform or make >broad based public disclosure of the inherent unfair nature of the >NASDAQ Small Cap and OTCBB markets. The later course would completely >destroy whatever foundation of trust the NASD has garnered through its >Self-Regulatory efforts. This in turn could be widely perceived as a >case of the Fox guarding the Hen-House. The former course would be more >in line with past regulatory administration and legislation. > >To correct the current wrongful situation regarding NASD member market >making firms that make markets in OTCBB stocks the following changes >must be put into effect. > >1) OTCBB stocks must be made marginable so market makers would be >required to cover short positions when the stock price rises above the >maintenance requirement level. > >2) Short interest in OTCBB stocks must be protected by allowing >individual US investors to short sell this type of issue. Margin >maintenance requirements suitable to economic conditions as determined >for listed stocks should be put in place. > >3) NASD rule 3370 (b)(2)(B) must be modified to prohibit NASD member >market making firms from naked short selling OTCBB issues. > >4) A Limit Order Display and Limit Order Protection rules must be >implemented for OTCBB issues. > >5) NASD rule 3350, "The Short Rule" must be modified to extend short >sales protections to OTCBB issues by prohibiting short sales on a down >tick and the practices of "Bear Raiding" and "Piling On". > >6) Market making firms must not be allowed to arbitrarily set prices. >Instead supply and demand must be allowed to work in a free and fair >market. When majority buying or majority selling from the investing or >trading public occurs, the issues price trend should reflect that >condition. Creation of a suitable trading algorithm could be >accomplished. The engineering expertise is readily available. > >If you need clarification of my questions or need further information, >please do not hesitate to email or call me. > >Best Regard for Continued Success >