Shorting and Power Play... A lesson to keep in mind.
If you don't believe this story, ask the Presstek shareholders about all the
manipulations since last years and as recently as last week. The media
have been printing loads of misinformation and rumors about the company,
prompting Presstek to go public several times to correct the misinformation
and "rumors".
I think most longterm IOMG investors can relate to the following article.
This is from May 1996 edition of the "Growth Stock Letter", by Bill Nordstrom,
Managing editor. (714-645-2511). I think it 's around $60 a year.
Young.
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Special Report on Solv-Ex Corp. - By Bill Nordstrom.
Presumably, the purpose of a stock exchange is to provide for the systematic,
orderly and gentlemanly trading of securities. What happened to Solve-Ex last
month wasn't orderly or gentlemanly at all - it was systematic, though,
and apparently designed to bail out a buch of traders who were on the short
side of Solve-Ex. I tell you this story because it is a mistake to invest in a
stock market with the assumption that there is a high level of orderliness
and common decency in the securities business. What you can count on is
that raw power will be used, without notice or forewarning, to the singular
benefit of a particular person or group, with wanton disregard for maintaining
on orderly market place. If you happen to get caught in it, you can see your
money shrink in a hurry.
We put Solve-Ex corp in our porfolio in October of 1994 at 3.62 per share.
They were testing a new process for extracting oil and other base elements
from oil sands, particularly the oil sands in the Athabasca region of Alberta,
Canada, where Solve-Ex owns a couple of leases. I thought their technology
was a major breakthrough, and expected the market to discover Solve-Ex
within two years. Sure enough, the stock started to move up, and in March
of this year, reached a high of $38 per share. Well, when a stock like this goes
up that much, that quickly, there are market traders who will short the stock,
betting on a pull back. I think the short sellers started doing their things when
the stock got to around $15 per share at the end of 1995. But the stock didn't
pull back. In fact, the company was successful in funding its ongoing development,
and the scientific community began giving credibility to the Solve-Ex process.
By February, the stock had gone all the way up to $38 per share. Of course,
Solve-Ex was marginable. (Here's somthing you might not have known about
marginable stocks: your brokerage firm can decide, any time it wants to and
for any reason whatsoever, to drop a stock from its marginable list. If you happen to
own that sotck on margin, you'll get a margin call, or may be the firm will just
sell your stock to cover the margin call without notifying you until after it's done.
But, back to the main theme.)
Well, as you can imagine, all those people who had been selling short since $15
a share were looking at big losses. Continued selling pressure wasn't
bringing the stock down. It kept going up. They needed a power play.
Within a day of each other, Dan Dorfman, Barrons and the Wall Street Journal
published negative stories on Solve-Ex. presumably, a Grand Jury in Los
Angeles was looking into some sort of stock manipulation scheme by a former
director of Solve-Ex. This former director, by the way, hasn't been anywhere around
the company since 1984, over 12 years ago. During all of this, Solve-Ex was
completing their negotiations for another $31 millions equity placements,
based inlarge part on the current price of of the stock, which was still well above
$30 per share.
The day after this financing was announced as having been agreed upon, the power
play occurred. A major Wall Street brokerage firm, whom shall remain
nameless (bu their initials are P.W.), decide dto drop Solve-Ex from their margin list,
and began to liquidate shares of Solve-Ex in theri margin accounts, without notifying
the owners of those accounts. Within the space of about two hours, more
than three million shares of Solve-Ex were put into the market, and the price
dropped like a rock, finally bottoming out at $7 per share. Then the short seller
started covering, and the stock has since rebounded to around $15 a share. With
the short sellers cleaned out of the mix, I think the stock is headed back to $30.
You might wonder, as did I, what happened to the $31 million financing when all
hell broke loose. It went on hold, as you would suspect. However, it has since
been completed, and Solve-Ex has the cash in the bank, on essentially the same
terms and conditions - valuing Solve-Ex at 32.50 per share. Further, I think the
company is about to conclude a major debt refinancing to complete the
construction of their plant in Alberta.
The newspaper columnists, particularly USA Today, described what happened
as "a classic short squeeze." It was nothing of the kind. It was a blatant power
play by some columnists of questionable character and a purposeful decision
by a major brokerage firm to "de-margin" Solve-Ex and start dumping stock for
the benefit of a special group of short sellers. The selling frenzy fed on itself
for awhile, but it was not a "short squeeze" at all.
What's the lesson? First, don't ever put all your eggs into one basket. Second,
there is no such thing as a managed, orderly securities market - no the New York
Stock Exchange, not the American Stock Exchange, and certainly not the
NASDAQ. Third, when and if it happens to you, don't panic. And fourth, if you
have a margin account, make absolutely certain your broker knows you won't
tolerate any unauthorized activity in yout account - and that F. Lee Bailey is a
really good friend of yours.
End of article (Whew!)
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