The lawsuits begin! (I wonder if Mr. Witt is/was an A&P fan)
CDNX member Union targets disastrous short client
Vancouver Stock Exchange
VSE
Shares issued 0
1899-12-30 close $0
Wednesday Feb 23 2000
See Canadian Venture Exchange (CDNX) Street Wire
by Brent Mudry
A suit filed by Vancouver brokerage firm Union Securities demonstrates the
breathtaking risks in shorting heavily-promoted Internet stocks fuelled by
chat-room banter. In a statement of claim filed Tuesday in the Supreme Court of
British Columbia, Union seeks court vindication for forcedly covering a United
States client's modest but disastrous short position in Ariel Corp. three months
ago.
Union seeks court declarations that its dispute with client Pete S. Witt of
Birmingham, Ala., is governed by the laws of B.C., and that it was entitled to
purchase shares of Ariel in Mr. Witt's account on Nov. 26. In the suit, Vancouver
lawyer Catharine Esson of Walsh & Co. notes the client's account was
undermargined by about $250,000 when the brokerage bought in the position.
The suit notes Mr. Witt opened an account at Union on June 22. It is unclear why
the Alabama resident picked a brokerage so far from home, but a longer
settlement period may have been the attraction. The Vancouver brokerage claims
Mr. Witt agreed to be subject to regulatory requirements, including provisions of
the B.C. Securities Act and Vancouver Stock Exchange by-laws, rules and
policies.
Mr. Witt allegedly agreed that Union would not be liable for errors and omissions
in connections with any share dealings, other than by gross negligence or wilful
misconduct. Mr. Witt also allegedly agreed that his account would be governed by
the exclusive jurisdiction of B.C. courts.
Mr. Witt's shorting of Ariel was disastrous. The stock enjoyed a phenomenal
high-volume run virtually overnight, soaring from $3.56 (U.S.) the day before he
shorted to a high of $57 (U.S.) two days later, when he was forcedly covered.
The volatile stock fell back to $11 (U.S.) just as quickly, and closed at $6.75
(U.S.) on Wednesday.
Ariel's runup was breathtaking and bizarre. After closing at $3.56 (U.S.) on
113,700 shares on Nov. 23, the normally-modest trader rocketed to an intraday
high of $13.31 and a close of $10.75 (U.S.) on Nov. 24, the day Mr. Witt began
shorting, on massive volume of 48.3 million shares.
The remarkable and highly-unusual trading spike was ostensibly prompted by
news that the tiny company was about to begin marketing modem cards to
compete with products from behemoths Cisco Systems and Lucent Technologies.
New York Times reporter Floyd Norris noted the stock run was particularly
impressive, as Ariel only had 9.76 million shares outstanding and it had been
forced to renegotiate its debts only a month earlier.
On Nov. 26, after the Thanksgiving holiday, Ariel resumed its trajectory, gapping
up $12.12 (U.S.) to open at $22.87 (U.S.). The wildly volatile stock peaked at
$57 (U.S.) that day, fell to $16.87 (U.S.), and closed at $37 (U.S.) on volume of
50.6 million shares, more than five times its outstanding shares.
Mr. Witt, already under water on his Nov. 24 short position, boldly extended his
short position on Nov. 26. Although his short-sell prices are not noted in the suit,
his short position reached 8,000 shares.
Shortly before the close on Nov. 26, Mr. Witt's account was undermargined by
about $250,000, and Union bought in shares to close out his short position. The
buy-in price is not noted in the suit, but the stock closed at $37 (U.S.) that day, a
Friday.
In his Saturday article, The Times's Mr. Norris noted that the chat rooms were
buzzing with Ariel banter, and at least some of the enthusiasm had been fueled by
bullish comments from Anthony Stoss, an analyst for EarlyBird Capital, an affiliate
of GKN Securities.
GKN had underwritten Ariel when it went public in 1995 in an offering of one
share and one warrant for $4. The Times noted Bloomberg quoted Mr. Stoss as
saying Ariel's product "will set the market on fire in terms of price."
After the weekend, the stock plunged to $14.50 (U.S.) on 27.9 million shares on
the Monday.
After mulling his massive loss for a few months, Mr. Witt alleged on Jan. 28 that
Union had acted improperly in buying in shares of Ariel in his account on Nov. 26.
The Vancouver brokerage hopes to resolve the dispute in B.C. courts, not in the
U.S. No statement of defence has yet been filed
(c) Copyright 2000 Canjex Publishing Ltd. canada-stockwatch.com
Nice Grub eh! |
