The stocks of some target companies were hyped too high, and some companies deserved to be destroyed. Their managements and inside backers deserved disgrace. But some legitimate entrepreneurial efforts suffering the normal growing pains of emerging companies were subjected to such abuse that they were never the same again. Some lost their public credibility and their ability to raise money. Blocked, their management permitted their company to be acquired to survive or to finance future growth. Lyphomed and Vipont are recent examples.

2. The most frequent abuse is flattening a stock by spreading rumors which contain errors or untruths or give a misleading image of the company. False material to move stock prices down is just as wrong as when false rumors levitate a stock. Samples of rumors that smeared a company's image or undermined a management's credibility are: the abstemious ex chairman of Keystone Medical was rumored to be a drunk; the perfectly healthy one man band head of AT&E was said to have terminal cancer, and his stock dropped from 20 to 8. The board of directors of Occupational Urgent Care Health Systems were said to be crooks, its president was falsely accused of running a Ponzi scheme, its earnings were branded fake. The receivables of International Telecredit were said to be no good. A bank run was supposed to be occurring at Florida's Sunrise Savings on a July day when the branch was nearly empty. Proposed joint ventures with larger companies at American Surgery Centers were incorrectly labeled fictional and at AT&E collapsing which they weren't.

Lloyd Cherne of Cherne Industries is trying to replace the step test with his passive measurements in his Cherne Chair. This brave man is selling all his existing pipeline business to develop his chair. He has put all the chips on the table and will either win or be wiped out.

Perhaps he'll fail but he deserves better than to be hounded by shorts who label his honest effort a fraud, or have falsely claimed patients died in the Cherne Chair or he died himself. Unusual? Not at all. Shorts earlier also spread the rumor the chairman of Home Shopping Network was dead.

Several companies long since still in existence were said to be running out of cash and about to go bankrupt including cash rich SafeCard Services, CopyTele and Thousand Trails.

3.

Members of short selling networks interfere with target company operations. Here the shorts, often acting in a group, go beyond mere shorting to:

a) convince lenders to withdraw support

b) convince existing customers or suppliers to quit a company or po-
tential new ones not to join.

c) spreading rumors a product, service is no good or even toxic.

d) spreading rumors management is corrupt, earnings aren't real, or

the accrual accounting is false.

Often these charges are so similar the only thing that is different is the name of the new company and its industry.

Attached are the articles "How the Mortician Helped Bury Ask," October 1989 OTC REVIEW page 22, "Shorts Cry Ouch!" page 41 August/September 1989 OTC REVIEW and March 1988 "Ouch". Here two target companies were subjected to bear raids. Both received little help from the SEC and both resorted to RICO lawsuits.

It is clear operations were interfered with at both companies. Besides interfering with a secondary offering and Ask's banking relationship, Rusty Rose wrote several Congressmen and Senators encouraging them to eliminate or cut solar energy credits-without mentioning that he stood to benefit from such cuts, because he was short solar stocks. Another short seller Shad Rowe ghosted a letter implying a lawsuit if a mutual fund did not sell shares.

The key supplier of Occupational Health Care Systems (Ouch) was asked to shift to a competitor by a short seller, an act which could have bankrupted Ouch. Instead the supplier remained and now Ouch has a lucrative venture with General Motors and is very profitable.

To my knowledge the SEC has not come up with any guideline if such extra curricula activities by shorts is permissible or manipulative. Someone should. In fact, Ask reports the SEC was a hindrance in gathering material to defend itself from the attack which bankrupted it. Ask reports the SEC, which brought charges against its president, refused key portions of the SEC's Rusty Rose file because Rose was an SEC informant. So are the Feshbach brothers, who were also active. Small wonder many corporate managements worry that the SEC may be on the side of the short network.

4. Naked shorting is also a form of abusive shorting that must be stopped to restore public confidence. In theory, you borrow shares when you short. So if the float is 100 shares-the maximum which can be legitimately shorted is 100 shares.

But the highly professional network discovered if brokers don't ask for borrowing it doesn't have to be done. So they sell short limitless numbers of shares. So the instead of 100 shares above, they could short 1000, 10 times more. They can pulverize a stock. And in the OTC with no uptick rule, they make mince

meat of a stock price.

Many big shorts admit they have shorted naked. To its credit, the NASD has tightened up borrowing and buying rules. However, on a proposal the NASD wants which would prevent brokers who are not market makers from naked shorting the SEC has not cleared the reform. This category contains many raiders who have used naked shorting to overshort in the past. Why is the SEC continuing to let members of this network do what individuals cannot do?

5. Some bear raiders have developed symbiotic relationships with journalists so a question exists whether some stories serve short selling sources or readers. In reporting bear raids, some of the stories do not even mention the existence of the raiders. The raiding technique is simple. A highly valued company is researched, often for months by shorts, using private detectives and any other source. Next, shorts deliver the dirt-if they found any-such as past SEC viola

tions of management or investors or product problems to the SEC and perhaps State or Federal regulatory authorities.

All

Then a press outlet is offered scoop, on the condition that the short sources can remain anonymous. Then shorts alert market makers a negative company killing story is coming, and the company's defenders step aside in fear while packs of shorts short, some naked, killing the stock price. The story appears. Wall Street knows who the main short sellers are except the article's readers. No mention is usually made of the shorts, so the information in the article seems objective and not biased. Worse, no mention is usually made of the heavy prepublication trading. For instance, Houston Biotech traded 121% of its float in the three days before a Barron's blast. Float was only 440,000 shares yet 1.8 million shares traded from April 7 through April 29. The average daily trading of Carrington Laboratories stock soared 200%, 375%, and 800% before other negative Barron's articles. Trading in Pioneer Financial Service stock jumped 300% before a Barron's article last spring. This year similar jumps took place in Chase Medical shares and MIZLOU Sports Network before Barron's stories. Similar jumps occurred for Ask (American Solar), CopyTele and Thousand Trails before articles in the "Heard on the Street" column of the Wall Street Journal. According to security traders, the Feshbach brothers were short all of these stocks. The pattern occurs when other shorts give out information at other publications too. Government cannot and should not tell journalists what to print. As a journalist, I personally believe this prepublication trading and the shorts' activities to knock down a stock are part of the story.

Unfortunately, most stories inspired by the shorts rarely contain management's answers to the shorts' charges. I feel management deserves a chance to tell its side. If management has no answer, that is news too. Stories ideally should be balanced and fair and not one-sided. Often, the target company is called at the last minute. If top management is traveling or has left for the day and is not available, their defense is not included. Sometimes they are unfairly portrayed as having no defense.

All these points of attack are powerful, but when combined in a bear raid by members of a short selling network against an emerging company the result can be devastating. When the target deserves the attack and the shorts have their facts right, the public is served. However, where a developing company is a legitimate effort and it is killed or crippled by the bear raid, jobs are lost, reputations ruined, average investors hurt, just so a few secret short sellers can make a quick buck.

Where is the SEC when all this possibly abusive short selling is going on? Frequently, the shorts work with the SEC, providing them with material. Here too a symbiotic relationship similar to the shorts' one with certain members of the press appears to exist. The SEC brings many cases against upside manipulators and correctly so. But cases against short sellers are rare. Yet as brought by short targets reveal many examples of short activities worth looking into.

SUITS

In a

7

SafeCard Services bear raid a short seller later admitted giving incorrect material to several government agencies and triggering at least one investigation. Companies under attack report the SEC is not helpful. To defend themselves, a few companies have resorted to RICO suits against the shorts. These and earlier suits do appear to turn up shorting activities which could have been abusive or manipulative. Yet the SEC has shown little enthusiasm for pursuing any of this material. Perhaps the reason is the SEC for decades has permitted short sellers to serve as unofficial policeman. Shorts are useful. However, that shouldn't mean the shorts' activities shouldn't be scrutinized as carefully as the upsiders

are now.

Suggestions:

a) I realize the uptick rule on exchange listed stocks is frequently gotten around as members of the short selling network use new financial instruments or go offshore to do the manipulating the U.S. laws were passed to prevent. But that means to me the uptick rule should be strengthened so it does work. I personally feel an uptick rule for NASDAQ National Market System stocks based on the last reported sale might slow down the network's manufacturing of artificial shares and ability to relentlessly hammer down the price of a falling stock. In any case as long as exchange listed stocks have the benefit of an uptick rule, I see no reason for denying one to the managements of NASDAQ companies whose shares are traded on the National Market System where there is last sale reporting.

b) Let's have more disclosure of short seller's identity and let the sunshine in. Let's have filing when a short owns 2% of the float. This will be a big help in telling who is doing what to whom. Why in modern America should short sellers of a public company remain secret? There will be increased press coverage of the shorts' activities if these filing are required just as takeover artists received more press coverage when they had to file 13Ds. <)The SEC could be asked to take a more even stance between bull and bears and actually be encouraged to investigate alleged manipulative false rumors and interference with operations by shorts. Even if the SEC conducted an investigation and reached the conclusion the short sellers had done nothing wrong, company managements would feel they would get even treatment and have a level playing field. Right now many don't feel they have gotten an even break. They don't see the SEC as a referee or umpire but a cheerleader for some of the secret short sellers.