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by Dr. Rachel Ehrenfeld and Alyssa A. Lappen

Human Events | Jan. 23, 2008

All presidential candidates promise to fix our economy, but no one
discusses the need to better safeguard our financial markets. The
Committee on Foreign Investment in the U.S. (CFIUS), approved Bourse
Dubai's purchase of 20% of the America's largest electronic exchange, New York-based Nasdaq, on Dec. 31, 2007.

This may soon give Dubai access to the troubled Boston Stock Exchange (BSE), through Nasdaq's proposed BSE acquisition, which is now pending before the Securities and Exchange Commission (SEC).

"Foreign ownership of our capital markets may make it more difficult
for shareholders to obtain information about the inner workings of the
stock market," notes Brent Baker, a former SEC Special Counsel. Nasdaq,
like most U.S. exchanges, 5,100 brokerage houses and registered
securities representatives, is regulated by the Washington, D.C.-based Financial Industry Regulatory Authority
(FINRA). The Philadelphia Stock Exchange (PHLX), however, and the
problematic BSE with its rather murky track record of non-compliance,
retained their independent self-regulatory organization (SRO) status.
Now, Nasdaq plans to purchase both.

"What do the regulators currently do to monitor the BSE, which up
until now had been sanctioned several times for failure to regulate
itself?" Baker wonders. Indeed, the SEC sanctioned the BSE in 1999 and
2007 for illegal practices. The September 5, 2007 sanction was for the
BSE failure to enforce its own rules or comply with a 1999 SEC
directive, and for illegal trading activities - including forward
trading, from 1999 through 2004. On the same day, the U.S. District
Court for the District of Massachusetts ordered former BSE President
James Crofwell, to pay a $75,000 penalty "for aiding and abetting the Exchange's failure to enforce its rules."

The BSE history raises especially thorny questions about market
manipulation and the possibility that unsupervised foreigner investors
and securities firms may borrow or manipulate U.S. company stocks,
adversely affecting domestic markets and further eroding investor
confidence.

Since Bourse Dubai promotes its status as the world's first and leading Islamic securities exchange,
its influence could affect the listings on Nasdaq. Dubai might leverage
the "sovereign immunity" of both the BSE and PHLX to list and delist
companies on Nasdaq. SEC rules in that case could be irrelevant, and
the effects on the U.S. capital markets and economy could be enormous.
For example, pharmaceutical companies producing Viagra and
contraceptives could be delisted, as could companies based in or doing
business with Israel.

"This is a slippery slope," says Baker, "if the SEC approves the
Nasdaq's purchase of the BSE and PHLX, and they both keep their SRO
licenses."

American regulators "believe in honest and complete disclosure and
people invest with the understanding that they will make or loose money
depending on their judgment, the markets and the economy," says John W.
Moscow, former Assistant District Attorney and Deputy Chief of
Investigations under New York District Attorney Robert Morgenthau.

"In England," where Dubai will shortly acquire Nasdaq's 28% stake in the London Stock Exchange, he says, "the governing philosophy is that if God did not want [investors] shorn, he would not have made them sheep."

The integrity of regulations in Dubai is a more important problem.
To attract business, "they are willing to omit the costs of regulation
and compliance that exist elsewhere." Dubai traders deal in arms,
women, drugs, and money laundering. "As long as [traders] deliver the
money, and so long as the market does what it is supposed to do, it is
sufficient," says Moscow.

The U.S. markets are already in big trouble, says Moscow, given the
high trading volume between U.S. and foreign exchanges through shadow
accounts to the Federal Reserve Board's Depository Trust Corporation
(DTC), Euroclear and other clearing systems. Nasdaq's acquisition of
the BSE only worsens the problem.

The same owner, through many different foreign corporate entities,
can buy majority stakes in many companies and manipulate the market.
With no regulation of these trades, no one would be the wiser. "The bad
guys are going to eat us alive," Moscow says.

Indeed, SEC chairman Christopher Cox has now proposed allowing foreign exchanges to sell directly
to U.S. investors through U.S.-based brokerage firms. Exchanges with
"comparable" regulatory oversight would no longer need to register with
the SEC, under the new proposal. But of course, having comparable
regulations alone in no way ensures that foreign exchanges enforce
their regulations with the same rigor as the SEC.

The U.S. markets remain the most highly and efficiently regulated in
the world, according to Moscow. Clearly, that is still not good enough.

- Rachel Ehrenfeld, author of "Funding Evil," is
director of the American Center of Democracy, and a member of the board
of the Committee for the Present Danger. Alyssa A. Lappen, a senior
fellow at ACD, is a former editor of Institutional Investor, Working Woman , Corporate Finance and Forbes. Her website is http://www.alyssaalappen.org.

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