Letter to William H. Donaldson, Chairman of Securities and Exchange Commission

December 9, 2003

William H. Donaldson
Chairman
Securities and Exchange Commission
450 Fifth Street, NW
Washington D.C. 20549

Dear Chairman Donaldson:

I am writing to request an investigation by the Securities & Exchange Commission (SEC) of the trading patterns of Corinthian Colleges, Inc. shares on Friday, December 5, 2003. While Corinthian Colleges is a small company, the problems it revealed are large and could further erode investor confidence in the basic operation and governance of our securities markets.

According to market reports, shares of Corinthian Colleges fell 32% from $57.45 a share to as low as $38.60 in a 8-minute time frame beginning at 10:46 am Eastern time. This extraordinary drop caused the Nasdaq Stock Market to halt trading of the stock from 10:58 am to 11:55 am. Since Corinthian is traded on several different markets, not just the Nasdaq, other markets also halted trading. However, the Archipelago Exchange, an electronic trading network affiliated with the Pacific Stock Exchange, allowed trading to resume 26 minutes before Nasdaq. In addition to halting trading, Nasdaq also took the unusual step of canceling hundreds of trades that took place between 10:46 am and 10:54 am, although it did not cancel option contracts that took place in that same time frame.

To date there is no definitive explanation for Nasdaq's decision. Some reports indicate that the sharp change in Corinthian's share price was due to a computer malfunction that incorrectly posted numerous sell orders. Other reports indicate that a single trader from a large brokerage firm mistakenly entered in Corinthian's stock symbol when intending to sell the shares of a different company. Still other reports indicate that the trader got the company right, but entered a much larger sell order than intended.

Mr. Chairman, I am sure these events raise as many questions and concerns in your mind as they do in mine.

First, we need to understand exactly what happened and why Nasdaq took this unusual action. If Nasdaq halted trading in Corinthian's shares due to human error, and subsequently canceled trades already executed, we need to understand why a trader or firm received such unprecedented support from Nasdaq for a clerical error. It seems the trader should have been held responsible for his or her mistake, just like an average investor. If Corinthian's shares fell due to a computer system error, it begs the question of how often these system errors have occurred in the past, how many other stocks have experienced similar problems, and what systems are in place to prevent such occurrences in the future.

Second, we need to determine who is and should be governing these kind of major market decisions. While there was an apparent reliance on the authority of Nasdaq for regulatory decisions, the fact that a market made the unilateral decision to resume trading before any others reveals a need for tighter regulatory standards and compliance. I am also interested in better understanding the role of the SEC in these kinds of decisions.

Third, these events reveal some troubling weaknesses with our electronic trading networks. In this case, a single clerical error or computer "glitch" created enormous volatility and market disruption. I am concerned that if we continue to move towards only utilizing electronic networks, as some are advocating, we risk putting our markets on electronic platforms that are not yet fully battle tested.

Fourth, and most importantly, these events reveal the risks to investors from an overly fragmented market, where a single set of rules is difficult to follow and enforce. This case illustrates the benefits to investors of a single, deep and liquid market where share prices are transparent and decisions are standardized and centralized.

Mr. Chairman, the case of Corinthian Colleges, in fact, may be a blessing in disguise. If this situation had occurred with the shares of a large company like Microsoft, rather than a small company like Corinthian, and the error had been with 10 million shares rather than just 10,000 shares, the market disruption could have been catastrophic.

I appreciate the SEC commencing an investigation into this matter, and I look forward to hearing your conclusions.

Sincerely,

Charles E. Schumer
United States Senator