Dale,
First I'll post a response from a more experienced investor than I on the subject of warrants, etc.
I've retained the original header of the message.
-------------------------------------------------
Date: Tue, 22 Apr 1997 17:55:29 -0500
From: "Michael E. Strupp" <strupp@domenet.com>
To: realtraders@list.listserver.com
Subject: Re: STKS: a mistake made with SSII
Message-ID: <335D41E1.53CD@domenet.com>
Jolie --
To follow up on your question regarding the market performance of SSII
by Boston Group LP, I don't know enough about Boston Group's specific
case to really provide comments but I do remember reading something a
few weeks ago how the Boston Group was claiming that short sellers were "unfairly" short-selling the stock and driving down the price. As I recall, Boston Group is basically staffed by veterans of a brokerage firm called AS Goldmen & Co., based in Iselin, New Jersey. I believe both of these companies basically underwrite and then make markets for stocks that trade primarily on the Nasdaq Small-Cap Market.
The thing about Boston Group's claims about "unfair shortselling" is
that they sound very familiar to the same claims made by a "penny
stockbroker" called Hanover Sterling & Co. which went defunct in the
beginning of 1995. In that case, the proprietors of Hanover Sterling
claimed that short-sellers had "sold" more shares of the stock then were currently in the stock's float, a very illegal thing to do since a broker-dealer MUST be able to borrow a stock before trying to sell it short for a customer, etc. Either way, when Hanover Sterling went bust, most, if not all, of the stocks that it "made markets" in went kaput.
Some of these stocks included All-Pro Products, Panax Pharmaceuticals,
etc. Since Hanover Sterling made markets in some pretty obscure issues that it peddled to its customers, when it vanished, the liquidity vanished and there was no one there to make sure the markets stayed intact. You should check out an EXCELLENT article written several months ago in Fortune Magazine which details this incredible story of the "seamy side" of Wall Street at
pathfinder.com@@jXDZwQcApK5sWJye/fortune/magazine/1996/960722/sel.html.
(really - it's a great article!)
As for question #1, "how could a market maker simply stop making a
market?" -- the National Association of Securities Dealers require that all market makers for Nasdaq NM and Small-Cap markets maintain a certain level of capital to ensure their financial integrity -- if they fall below this "net capital" requirement, as its called, they simply MUST close their market making operations UNTIL they get their capital levels back in line with requirements.
As for question #2, "what are warrants?", they are basically like
long-term options that permit the holder to buy stock at a certain price between now and some time in the future (usually around 5 years).
Usually, these warrants are attached to a stock in a unit as a
"sweetner" to attract buyers to the initial public offering. The thing with warrants is that they represent additional "supply" of stock which, when released upon the market, could wreak havoc if a lot of shares are bought from the company via the warrants and then sold into the open market. This may be why no new market makers want a piece of SSII, because they don't want to get run over by a huge onslaught of stock being sold. Such an action would obviously devalue the stock of SSII that any market maker would normally accumulate as part of their market making activity.
Indeed, in some cases where market fraud has occurred, insiders at a
brokerage firm and the issuing company are sold the warrants at a
ridicuously low price (like $.25 per share), and then the brokerage
hypes up the stock incredibly (to like $10.00+) and then these insiders "dump" the stock onto the brokerage firm's sucker clients. Brokerage firms like Hibbard Brown, First Jersey Securities and other dubious firms did these types of operations. I'm NOT saying that this is what Boston Group or Hanover Sterling did, but only to explain how warrants can be used to screw shareholders and brokerage firm clients.
I hope this information helps -- let me know if you need any more info
or clarification.
Michael Strupp
strupp@domenet.com
---------------------------------------------
Hope Michael does not mind me re-printing his post here! |
