September 16, 2008

Today the SEC Must Step Up

It has been just over one month since the SEC allowed its Emergency Order to
lapse without putting in place an alternative means to address heightened market volatility and
illegal short selling practices. This was a huge mistake. Under the Emergency Order, traders
were not able to short a security without borrowing shares or entering into “bona fide” agree­
ments to borrow them. In today’s markets, short sales continue to be at record levels, there are
false rumors in the marketplace about the demise of financial firms, bear raids and abusive short
selling are taking place, and there is significant disruption in the fair and orderly functioning of
the securities markets. The markets are in a crisis.

Immediate bold measures by the SEC today are needed to constrain the abusive
short selling and rumor mongering, to dampen volatility and to restore confidence in the markets.
As the Federal Reserve Board and Treasury Department have done, the SEC must act now to en­
sure the stability and integrity of the markets. First, the SEC should heed market participants’
calls to immediately re-impose under its emergency powers the “Uptick Rule” (see our memos of
July 1, 14 and 16). The Uptick Rule was effective for over 70 years in addressing abusive short
selling and manipulative conduct. The decision to eliminate the Uptick Rule, after a pilot pro­
gram, was prompted by the SEC’s view that market changes had rendered the Rule less effective.
The limitations of the SEC’s pilot program, which was conducted in a period of a rising market
and unusually low volatility, are painfully clear. The risks associated with unrestricted short sell­
ing in these periods of high volatility and large market declines were necessarily beyond the pi­
lot’s scope.

Second, the SEC must today adopt a market-wide rule similar to the Emergency
Order that recently lapsed. This was an effective measure to temper heightened market volatility
and address abusive and manipulative short selling and should be reinstituted.

In July, the SEC announced that it, FINRA and NYSE Regulation would immedi­
ately begin examinations of broker-dealer and investment adviser supervisory and compliance
controls, with the goal of stemming the spread of false rumors intended to manipulate security
prices. Shockingly, nothing further has been heard from the securities regulators. The SEC
should promptly issue a public report of the results of those examinations and provide clarity on
the extent to which abusive and manipulative short selling and spreading of false rumors is tak­
ing place (see our memos dated July 1, 14 and 16). Moreover, the SEC should promptly bring
enforcement actions against those who are engaged in abusive and manipulative short selling.

All these measures are vital to any attempt to maintain investor confidence in the
fairness and integrity of the markets. It is a time for action.

Edward D. Herlihy
Theodore A. Levine

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W/1294900v1
 September 17, 2008

Too Little Too Late

The SEC today announced three actions addressing short selling. Its actions are
too little too late.

First, the SEC adopted a rule requiring short sellers and their broker-dealers to de-
liver securities by the settlement date (three days after the transaction date) and imposing penal-
ties for failure to do so. In addition, the SEC eliminated the option market-maker exception to
the three day delivery requirement. Finally, the SEC adopted a new anti-fraud provision making
it unlawful for sellers to deceive specified persons about their ability or intention to deliver secu-
rities by the settlement date. This last rule is not necessary and will not help eliminate abusive
short selling practices.

The measures adopted by the SEC today fall far short of the type of bold meas-
ures needed to constrain the abusive short selling and rumor mongering taking place. The securi-
ties markets continue to be in a crisis and there continues to be a significant disruption to their
fair and orderly functioning.

As we have previously said, the SEC should immediately re-impose, under its
emergency powers, the “Uptick Rule.” In addition, the SEC must now consider other very
strong measures such as using its emergency powers to place limitations on short sales for a pe-
riod of time to restore a fair and orderly market. Also, it is essential for the SEC to scrutinize
short sellers and their related transactions, including options and credit default swaps to deter-
mine whether these strategies are contributing to the severe dislocations taking place in the mar-
ketplace.

Finally, the SEC should promptly make public the results of their examinations of
the short selling activities and take immediate enforcement action against those who are engag-
ing in this abusive manipulative conduct.

Time is of the essence and the SEC must act now.

Edward D. Herlihy
Theodore A. Levine

If your address changes or if you do not wish to continue receiving these memos,
please send an e-mail to Publications@wlrk.com or call 212-403-1487.
 September 18, 2008

Bold SEC Action is Needed

Last evening, the SEC announced two initiatives to address short selling abuses.
First, Chairman Cox announced that he was asking the SEC, on an emergency basis, to adopt a
new disclosure rule that would require hedge funds and other large investors to disclose their
short positions in order to provide transparency in short selling. Specifically, managers with
more than $100 million invested in securities would be required to promptly begin public report-
ing of their daily short positions. The SEC also announced that its Enforcement Division would
be subpoenaing from “significant hedge funds and other institutional traders” information, in-
cluding e-mails, concerning their past trading positions in specific securities.

The SEC most recent announcements, while important steps, do not go nearly far
enough. Immediate and stronger SEC action is necessary.

The SEC needs to consider the following measures:

• The SEC should use its emergency powers to halt short selling in the securi-
ties of financial services firms and banks for a 90-day period. This action is
consistent with the action taken by the FSA today. The SEC needs to do this
now. The FSA announced that it is prohibiting the “active creation or increase
of any short positions” in publicly quoted financial companies from this eve-
ning until January 16, 2009 (although the ban will be reviewed after 30 days).
The FSA also announced that a complete review of the rules on short selling
will be published in January, 2009. Hector Sants, chief executive of the FSA,
said:

“While we still regard short-selling as a legitimate investment tech-

nique in normal market conditions, the current extreme circum-
stances have given rise to disorderly markets. As a result, we have
taken this decisive action, after careful consideration, to protect the
fundamental integrity and quality of markets and to guard against
further instability in the financial sector.”

• The new disclosure rule the SEC is considering should be modeled after
Regulation 13D and should issue the rule immediately. It should require
hedge funds and other institutional investors to publicly report their daily
short positions if those positions exceed ¼ of 1% of the outstanding shares of
a public company and should also disclose publicly whether the short sellers
have any oral or written contract, arrangement, understanding or relationship
(legal or otherwise) with respect to those securities. The short sellers also
should be required to report to the SEC on a next-day basis if they fail to de-
liver securities by settlement date.

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 • It has been publicly reported that California Public Employees' Retirement
System (CalPERS) will no longer lend shares of Goldman Sachs and Morgan
Stanley. CalPERS stated that “[w]e don’t want to inadvertently contribute to
the instability of these companies or the market.” The SEC should undertake
a voluntary initiative among lenders of securities pursuant to which the lend-
ers would agree for 90 days not to lend securities of any financial services
firms or banks.

• The SEC, in cooperation with the Federal Reserve Board, the FSA and the
Treasury Department, should undertake a 60-day comprehensive review of the
credit default swap market in order to determine what rules and regulations
are needed and whether there has been any improper or violative conduct by
those engaged in CDS transactions. In this market crisis, it is unacceptable
that there is no regulatory structure to oversee the extraordinarily important
CDS market sector. At the same time, the International Swap and Derivatives
Association should seek to have its members voluntarily forebear from writing
any new CDS’s except if they own the underlying security.

• As we have previously suggested, the SEC, under its emergency powers,

should immediately re-impose the “Uptick Rule”.

Consideration of these additional steps are vital to restoring investor confidence in

the fairness and integrity of the markets and to address the crisis of confidence that now exists.

Edward D. Herlihy
Theodore A. Levine
Carmen Woo

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 September 22, 2008

Inter-Governmental Review of CDS Market and Permanent Solutions Are Required

Emergency Orders

The SEC late last week and over the weekend issued Emergency Orders (1) pro-
hibiting short selling of any publicly traded securities of certain financial institutions selected by
the listing markets, except in certain limited circumstances, (2) requiring institutional investment
managers to disclose by filing Form SH with the SEC their short positions if certain thresholds
are met (which filing will initially be non-public but will be made public two weeks after its fil-
ing date), and (3) easing restrictions on the ability of securities issuers to repurchase their securi-
ties by altering certain conditions of the Rule 10b-18 safe harbor. All these Orders will terminate
on October 2, 2008 unless extended.

The Order prohibiting short selling in securities of specified financial institutions

has limited exceptions, including an exemption for market makers, which initially expired last
Friday, when selling short as part of their market making and hedging activities related directly
to market making in derivatives, exchange traded funds and exchange traded notes. As origi-
nally written, market makers could create a synthetic short position using the exemption by es-
tablishing derivatives with short exposure to the securities of the specified financial institutions
and hedging their exposure by shorting the underlying stock. Yesterday, the SEC amended the
Order to extend the exemption for the life of the Order but addressed the potential loophole by
providing that the exemption does not apply to market makers who know that a derivative trans-
action will result in the customer or counterparty of such transaction establishing or increasing an
economic net short position in the issued share capital of a specified financial institution.

The new disclosure requirements have a significant gap that the SEC should ad-
dress immediately. Under the Emergency Order, an institutional investment manager with sig-
nificant short positions can avoid the disclosure requirements by holding less than $100 million
of Section 13(f) securities. The SEC should require all institutional investment managers to pub-
licly report on their short positions unless a short position has fair market value of less than $1
million and constitutes less than one quarter of 1% of the outstanding shares of the issuer.

Next Steps

We believe that a critical next step is for the Federal Reserve Board, the Treasury
Department, the SEC and the CFTC to undertake on an urgent basis a 30-day comprehensive re-
view of the credit default swap market. It is indefensible that the CDS market, with trillions of
dollars of notional value, has virtually no regulatory oversight. The CDS market has experienced
exponential growth over the last several years without transparency and other structures normally
present in such a market. The CDS market is being used by speculative traders to purchase CDS
protection relating to the debt of an issuer even though they have no risk of loss in connection
with a credit default by such issuer. Why should we allow these CDS speculators to bet against
the future of American business? Due to the limited transparency and other factors in the CDS
market, speculators can affect the CDS market by quickly purchasing small amounts of CDS

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please send an e-mail to Publications@wlrk.com or call 212-403-1487.
protection to drive up the spreads of such CDSs, thereby sending a misleading signal to the mar-
ketplace that the credit default risk of an issuer has increased. At the same time, the traders ei-
ther have or establish a short position on the common stock of the issuer. These trading activities
may drive down the prices of the securities of that issuer. We urge that a 30-day review be un-
dertaken immediately and the results of such review be publicly issued, along with recommenda-
tions for comprehensive changes to address the problems and issues identified in the review.

In addition, the SEC needs to find a more permanent, market-wide solution to

constrain the abusive short selling, market manipulation and rumor-mongering that have ad-
versely affected the markets. The SEC should consider the following:

• As we have previously suggested, the SEC should re-impose the “Uptick Rule” on a tem-
porary basis (see our memos of July 1, August 14 and September 17, 2008).

• The SEC should adopt a permanent disclosure rule which would require public disclo-
sures of any oral or written contract, arrangement, understanding or relationship (legal or
otherwise) with respect to short positions in securities in addition to the information re-
quired by Form SH. The SEC should consider expanding its disclosure requirements to
include disclosures of any CDS contracts and option transactions that are based on issuers
with securities in which the institutional investment manager also has short positions.

• It has been publicly reported that California Public Employees’ Retirement System
(CalPERS), the asset management division of Bank of America, and the New York and
New Jersey state pension funds have stopped lending shares of certain financial compa-
nies to short sellers. We urge the SEC to encourage a voluntary initiative among lenders
of securities pursuant to which the lenders would agree for 90 days not to lend securities
of any financial services firms or banks.
 The SEC’s Investment Management Division should also examine whether
there is a potential conflict of interest for a mutual fund or a pension fund to
lend securities to a short seller when the results of the short seller’s trading
may adversely affect the NAV of the mutual fund or the value of the pen-
sion fund’s portfolio.

As we have previously noted, the SEC must promptly complete its ongoing inves-
tigations into abusive and manipulative short selling and the spread of false rumors, bring en-
forcement actions against those who have engaged in such practices, and issue a public report of
its findings.

Edward D. Herlihy
Theodore A. Levine
Carmen Woo

-2-
 November 20, 2008

Reinstate the “Uptick Rule”

The worldwide securities and credit markets continue to experience unprece-

dented meltdowns and volatility. Millions of investors are losing their life savings and retire-
ment assets. There continues to be widespread manipulative short selling and bear raids. The
investing public is losing confidence in the integrity of our markets.

For the past 5 months, we have called on the SEC to reinstate the “Uptick Rule”
which helps limit downward spirals by allowing a stock to be sold short only after a rise from its
immediately prior price. Despite widespread market participants’ calls to do so, the SEC has
failed to act. The SEC must reinstate the Uptick Rule now to address the short selling, bear
raids, and the spreading of false rumors. Nearly all the reasons that the SEC gave for repealing
the Uptick Rule in July 2007 are not valid in today’s turbulent markets. In fact, the very same
conditions that led to the adoption of the Rule in 1938 exist today.

Historically, the SEC has placed a leadership role during market crises to assure
that the markets are fair and orderly. The SEC has not hesitated in the past to be creative and
innovative in protecting the securities markets and the financial intermediaries from manipulat-
ive conduct. Decisive action cannot await the appointment of a new SEC Chairman. The SEC
must take a leadership role in restoring investor confidence. It is long overdue. The SEC and
Chairman Cox must act now. There is no tomorrow. The failure to reinstate the Uptick Rule is
not acceptable.

Edward D. Herlihy
Theodore A. Levine

If your address changes or if you do not wish to continue receiving these memos,
please send an e-mail to Publications@wlrk.com or call 212-403-1476.