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aware of any cases of market manipulation or abuses documented against a short seller which drive down the price of a stock that was not covered by existing SEC rules on market manipulation, anti-fraud, or insider trading."

If the National Association of Securities Dealers, Inc. had reached the conclusion that short selling was neutral in its effect on pricing in individual cases, their entire study would

unnecessary.

have been

that if these

In its conclusion, the NASD study indicates efforts are not successful in resolving short-selling problems even a tick test would be considered as an alternative,

Since July, 1986, when the Pollack Report was published,

two critical events have occurred. One that was not envisioned by the authors of "Short-Sale Regulation of NASDAQ Securities' was the Crash of October, 1987. The Crash prompted an overall investigation by the Securities and Exchange Commission delving into a wide range of short-selling abuses by virtually all elements within the securities industry customers and brokers alike. Because of these investigations, changes have been proposed by the Commission and concessions have been made by the securities industry.

-

The urgency for change had been compounded by the negative influence that the virtually unregulated Index Funds had on precipitating the stockmarket decline once it had begun. Proposed adjustments to the short-sale rules have been discussed almost on a daily basis since that time.

Possibly even more catalytic than these events in bringing about changes in the rules governing short selling is the emergence of technology that can cost effectively accomodate a NASDAQ uptick rule. This technology, while not available in July, 1986, is currently in place making a NASDAQ uptick rule not only feasible but practical as well.

The period from July, 1986, to the present has produced unprecedented short-sale-orientated market hardships. It is likely that Irving Pollack would have included a tick test in his proposal if he had envisioned the advances made in NASDAQ data transmission and the abuses that have occurred since his report.

considerations

Short sellers are faced with a number of after first determining that a security is a candidate for their further attention. Primarily they require a newsworthy chink in the company's armour in conjunction with an accounting, marketing, or regulatory problem. Liquidity must be fluid enough to make meaningful short sales and a supply of securities must be available to hypothecate if the seller does not want to be naked. Although these characteristices are theoretically

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available in the listed market, it is interesting to note that the majority of securities presently shorted by the Feshbachs are over-the-counter.

It may be argued that NASDAQ does not do a good enough job of monitoring the reporting of companies traded in its marketplace. The statistics speak for themselves. The Feshbachs, by their own admission, are right almost all of the time. This is further substantiated by the large amounts of money they attract and control. The Feshbachs concentrate in NASDAQ securities. An opposing argument would probably conclude that the Feshbachs are in that milieu because of friendly regulation and regulators as well as cooperative publications and hungry commissioned brokers. The abuses brought to this Subcommittee could not have consistently occurred on an Exchange with uptick rules and delivery requirements.

As Barry Adler was quoted in the February 8, 1988, issue of Forbes Magazine:

"If the seller's broker doesn't deliver, don't insist unless the customer actually demands delivery of the physical certificates, which few people do.... In all the 16 years I've been short selling stock, I've only once been bought in, that is, only once has somebody demanded delivery of the stock. (Head Trader-Drake Securities)

other. One

We must understand that the Feshbachs operate in a very friendly, old-boy arena in which one hand often washes the would certainly have expected the shorts to be represented by someone other than the regulators at these sessions; but, contrary to their desires, couldn't make it.

the Feshbachs

just

Barrons wrote on July 27, 1989:

"Kurt Feshbach of Feshbach Brothers, perhaps the largest firm specializing in short sales of equities, muses, 'I'm curious why I never get a letter or call from any of them.' Few if any studies of short selling apparently have contradicted short sellers directly. Feshbach, not a disinterested party, contends that if the investigating groups would talk to the short sellers, or to the stock loan departments that the short sellers deal with, 'they would find out that naked short selling is not a big deal. I doubt its done to the degree people complain about it.''

On November 27, 1989, the Commerce, Consumer Affairs Subcommittee received a letter from the said in part:

'Dear Mr. Tucker:

Thank you very much for

the information you sent

to us and the invitation to speak in

front of the

Subcommittee at its hearing on short selling.

Unfortunately, due to other commitments, neither
Kurt nor I will be able to attend the hearing."

In the May, 1990, issue of OTC Review, Bob Flaherty pointed out that 60% of the Feshbach's portfolio is traded over-the-counter, an arena left uncovered by the 1933 or 1934 Acts of the exchange laws. We are dealing in a primordial setting. Brokers are still short, and, even though they are not marketmakers in the securities they are shorting, they often do not make timely delivery. The NASD and SEC, while both agreeing something should be done about this loophole, have been complacent. For the Feshbachs, the non-regulations suit their purpose just fine shorting on downticks, ineffectual or inapplicable delivery rules, and antimanipulative punitive statutes that are either inappropriate or difficult, if not impossible, to prove.

The Cornell Law Review, in a scholarly review of the Uptick Rule, in 1989, concluded that "Bear raids succeed more often in thinly traded OTC stocks. Not as much public information exists about these firms and investors could more easily be stampeded into selling by false information. Joe Feshbach, a partner in a firm that does short selling states: "The whole bear raid thing is a joke unless there's a lot of stock owned on margin and you're able to pressure a margin call. For these smaller infrequently traded securities, firms' outliers in analysts' forcasts, could bias stock prices. However, the Uptick Rule does not apply to OTC stocks, If regulators were really worried about market efficiency and bear raids, they would consider eliminating the Uptick Rule from Exchange traded stocks and applying it to OTC stocks."

Mr. Feshbach is unaware of any documented cases against a business competitor short selling to depress the price of his competitors' securities. He seems to be unaware of SEC V. Bilzerian, Civil Action NO. 89-1854 (D.D.C.), Litigation Release No. 12144 (June 29, 1989), in which Bilzerian directed the sale of 350,000 shares of Hammermill he did not own in order to buy Hammermill shares at reduced prices. Bilzerian was convicted in related criminal proceedings. He is equally unfamiliar with SEC V. Zico Investment Holdings, Inc., No 87 Civ. 8487 (S.D. N.Y.) Litigation Release No. 11763 (June 13, 1988), in which Zico and two individual defendants depressed the price of the stock of Bancroft Conv. Fund, prior to a tender offer by Zico. They since signed consent decrees.

Feshbach also doesn't know his history. What of the historic bear raids of Messers Drew, Fish & Gould and their

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accomplices. According to the story as told in Poor Richard's Legacy by Peter Baida, Daniel Drew, while a co-director with Cornelius Vanderbilt of the New York & Harlem Railroad, sold short shares of his own company to wrest control from his adversary. "It would go down, Drew figured, because he would secretly invite members of the city's Board of Aldermen to take part in his scheme. On June 25, 1963, the Board rescinded the franchise for the Harlem to lay tracks south of forty-second street. On the day the franchise was repealed, the price of the Harlem dropped to a low of 73. Then it steadied, and then it began to rise. Vanderbilt and his associates were buying every share that was sold short, and buying every other share they could get their hands on. The short-sellers had made a gigantic blunder. They had sold more shares than existed.. When the last of the short sellers covered their sales, it was at a price of 179, up from 73. Drew had not learned his lesson. In 1864 he made a second attempt at a bear raid on the Harlem, this time with the help of members of the state legislature. Again Vanderbilt out manuvered the short-sellers, cornering the market and forcing them to pay $285 for shares once available for $100. "We busted the whole legislature, Vanderbilt boasted....

.....

If the Harlem incident had not been enough, a new low in competitors' short sales was reached in the Saga of the Erie. .The battle of 1868 began quietly, with the purchase of the judiciary, Judge George G. Barnard, the agent of the Vanderbuilt groups, granted an order that forbade the Erie board from issuing any new capital stock, temporarily suspended Drew from his position as treasurer and forbade Drew from trading Erie stock until he returned the securities he had received as collateral for a loan two years before. Not to be out done, the Erie group produced its own judge, who canceled Barnard's injunctions as quickly as he could issue them."

Now, with misplaced confidence based on Judge Barnard's orders, Vanderbilt began to buy Erie stock. Drew and his associates sold. Indeed, they sold shares as fast as they could print them for Fisk and Gould had gotten hold of a printing press. "If this printing press don't break down," Fisk said, "I'll be dammed if I don't give the old boy all he Erie."

wants of

disturbed in

Judge Barnard ordered the arrest of the Erie trio. They promptly packed up $6 million in cash, along with the records of the company, and, in the words of Charles Francis Adams, Jr., "looking more like a frightened gang of thieves, the division of their plunder, than like the wealthy representatives of a great corporation" made a dash for the ferry arriving in New Jersey. They took up residence at Taylor's Hotel in Jersey City. To discourage any thoughts of violence that the Commodore might have entertained, a small army of Jersey City policemen and hired thugs was placed on permanent guard. Three twelve-pound artilley pieces offered additional discouragement.

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"Judicial action having produced a stalement, the battle moved to the New York State legislature in Albany. There, as in the courts, cash was the weapon that carried real weight. In the view of one newspaper, the legislature of 1868 was the 'worst assemblage of official thieves that ever disgraced the Capital of the Empire State' no small distinction, considering the competition."

"it

many of us never pays

Vanderbilt's conclusion after the Erie was one have learned to live with in the stock market to kick a skunk."

-

Bank who

urging all that

And then we have the chairman of Chase National sold short bank stock with bank funds while would listen to buy in 1929.

G.C. Hanson's view of Wall Street in 1887 seems to still be worth exploring 'an old Rat, whose long residence in the city had given him great knowledge of the wiles of civilized life, observed one evening a tempting bit of cheese close by his favorite hole in the wall. Instead of greedily rushing at it, he called a young friend, saying, 'Whiskerando, some kind person has prepared a feast for us. Help yourself.' The guileless innocent rushed on the cheese, which he devoured voraciously: rolled over on his back, stone 'My experience in Wall Street has stood me in well,' mused the old rat as he turned into his hole. It is safer to give other folks pointers, and pocket your commission, then to risk your all on wild cat investment.

But alas! In a few minutes he dead. The dainty was poisoned.

Mr. Feshbach has not given us

has given us a

red

herring, a

discusses laws that deal in

壽

a piece of tainted cheese, he one, just as tainted. He generalities while, himself, concentrating in specifics. He uses examples quoted by many with the same vested self-interest as himself. He would have us believe that the interests of the few should be paramount to the interests of the many and offers examples of those that serve those few to make his point. The arguments do not address the specific issues with which we are involved. His arguements send us into blind alleys that contain Wall Street's tainted cheese.

The issue of whether a new supply of stock affects its price seems to bother the Feshbachs and they find it hard to understand that we should be concerned whenever those stocks the Feshbachs have shorted have gone up. If the question is one of pure mathematics and economics, there is no doubt that with constant demand for any product coupled with increasing supply the price will drop. Although, on an overall basis, for each share sold, theoretically, a share must be repurchased later. Excessive supply, especially when created with no intent deliver, is considered a serious problem by all regulators and most business publications as well. The following represent selected feelings on the matter:

to