.DJ IN THE MONEY: Some Small Cos. Get Physical To Fight Shorts
By Carol S. Remond
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--A growing number of small companies looking to stymie
short sellers have come up with a new strategy.
They're getting physical. Or at least in terms of how their shares are
delivered to investors.
And in the arcane word of delivery and settlement of trades, this is a big
step backwards. To make markets more efficient, the delivery and settlement
process years ago turned electronic, allowing for ownership of shares to take
place quickly without the need to physically transfer printed stock
certificates.
But now, a handful of tiny, development stage companies are accusing market
makers, brokers and other investors of using the electronic delivery and
settlement mechanism, known as book entry clearing and settling, to short sell
their stock, dampening their share prices.
So, instead of efficient, electronic trading, investors in these companies now
own shares in a less liquid market because actual paper certificates are passed
around, flowing through the brokerages involved in a transaction, back to
transfer agents that print new certificates and then sent them off to the new
owners.
There is another cost for investors. Transfer agents charge a fee from $16 to
$60 to issue stock certificates in the name of the new owners of the stock
So far, more than a dozen companies have said they would exit the global
clearing system managed by the Depository Trust Company, or DTC.
Regulators have yet to comment on this new trend. But the trade association
representing the securities industry is clearly concerned by the development.
"The industry is trying to move away from certificates all together," said Dan
Michaelis, a spokesman for the Securities Industry Association. The SIA sees
electronic clearing as a key element in streamlining the settlement process,
Michaelis said.
In fact, it's possible that companies mandating trading in physical form only
may be violating federal securities regulations that stipulate that
publicly-traded securities must be eligible for holding in a central depository
system.
A spokesman for the SEC declined to comment.
Another concern expressed by market observers about the move out of DTC is
that it creates a quasi-private secondary market in which transfer agents, who
are loosely regulated firms hired by companies to keep track of their
shareholders records, take on a central role.
Of the six companies that have exited DTC so far, four use a transfer agent
called Global Securities Transfer Inc. That means that this transfer agent now
must process all of the trades in those securities, receiving paper certificates
from the brokers of sellers and buyers, verifying their authenticity to make
sure that these transactions close within three days after a trade takes place.
Once a transaction is settled, Global must also issue new paper certificates to
shareholders and send them off to the new holders or their brokers.
But filings with the Securities and Exchange Commission show that the tiny
Denver-based firm, which first registered as a transfer agent with the SEC in
2001, seems to have little experience at the transfer business, with only a
handful of publicly traded clients.
Companies looking to exit DTC all blame short sellers for their depressed
stocks.
Short sellers sell borrowed securities in the hope of replacing them later at
a lower price. Short selling is generally limited by the ability of borrowing a
stock at the time of the sale. That rule, known as affirmative determination,
limits the ability of investors to short the stock of companies with small
amount of free trading shares since their stock is often difficult to borrow.
Only shares held in margin accounts can be loaned out. Shares held in cash
accounts cannot be loaned out.
Market makers are exempt from the NASD's affirmative determination rule when
engaged in "bona fide market making activity" because they provide needed
liquidity to the market.
The companies looking to exit electronic clearing say that market makers are
abusing the affirmative determination exemption and illegally short selling
their stock, in effect selling short more shares than are outstanding and
trading shares amongst themselves to avoid having to deliver them.
At least two of the companies that said they would exit DTC have filed
lawsuits against brokerages. JagMedia Holdings Inc. (JGMHA) last year filed suit
against more than 100 brokerage firms over alleged failure to close the
borrowing part of the short-sale transaction. GeneMax Corp. (GMXX) of Blaine,
Wash., filed similar lawsuits in British Columbia and Nevada.
Most recently, seven of nine brokerages named in a lawsuit filed by GeneMax in
the United District Court of Nevada, asked the judge to toss the suit out.
GeneMax has yet to answer the brokerages' motion to dismiss.
GeneMax has been the subject of three other "In the Money" columns. Those
columns questioned whether insiders would benefit most from limits on short
selling and GeneMax's connection to consultant Investor Communications
International Inc., or ICI.
Global Securities acts as a transfer agent for at least four companies with
connections to ICI: GeneMax, Vega Atlantic Corp. (VATL), Hadro Resources Inc.
(HDRS) and Ten Stix Inc. (TNTI). Global Securities' president Robert Stevens
wasn't available for comment.
A Securities and Exchange Commission filing shows that Stevens' registration
to act as a broker was revoked by the National Association of Securities Dealers
in 1995 for non-payment of a $10,000 fine relating to his failure to keep proper
registration information with the NASD.
The NASD subsequently found that Stevens recommended the purchase of
unsuitable securities to public customers, fined him $25,565 and ordered him to
restitute $12,308. In addition to his role as transfer agent, Stevens is also
acting as investor relations officer for Ten Stix.
Meanwhile, Eric Sundsvold, a large shareholder of Global, was sanctioned by
the NASD in 1990 for failing to place a restrictive legend on a private
investment stock certificate. Such a legend generally restricts the trading of a
security until a specific date. Sundsvold is currently working at Rocky Mountain
Securities & Investments Inc., a brokerage in Englewood, Colorado.
Transfer agents file annual reports about their activities with the SEC. But
the SEC doesn't have any provision stipulating any events that could prevent
someone from acting as a transfer agent.
Transfer agents are mandated under the Securities Exchange Act of 1934 to
turnaround within three business days of receipt at least 90% of routine items
received for transfer during a month. DTC, which when acting as global
depository keeps track of the turnaround percentage for transfer agents,
declined to provide Global's monthly results.
Some of the larger transfer agents have direct electronic connections with
DTC, acting as custodians for the global depository. That link, known as Fast
Automated Securities Transfer or FAST, helps transfer agents streamline the
clearing and settlement process.
Although Global Securities claims on its website to offer DTC FAST service,
the firm isn't one of the roughly 250 transfer agents offering the link.
Companies that have officially made the move out of the DTC system are:
GeneMax; Ten Stix; BlueBook International Holding Co. (BBIC); MidasTrade.com
(MIDS); MSM Jewelry Corp. (MSMJ) and Make Your Move Inc. (MKMV).
In addition the following companies have said that they would exit, or that
they were considering exiting DTC: Reeds Holdings Corp. (RDHC); Nutra Pharma
Corp. (NPHC); Critical Home Care Inc. (CCLH); Hadro Resources Inc. (HDRS); Jag
Media Holdings Inc. (JGMHA); International BioChemical Industries Inc. (IBCL);
SunComm Technologies Inc. (STEH); Bentley Communications Corp. (BTLY) and Nutek
Inc. (NUTK).
By Carol S. Remond; Dow Jones News; 201 938 2074; carol.remond@dowjones.com
(END) Dow Jones Newswires
14-01-03 1500GMT |
