Stockwalk lost big bet, firm wonders if deck was stacked
Neal St. Anthony
Published Oct 2 2001
The management of Stockwalk Group placed some big bets in
the past year in an attempt to build the business.
First an online trading strategy was implemented through
Stockwalk.com. Then the company, led by CEO Eldon Miller,
merged three small full-service brokerage firms into one,
Miller Johnson Steichen Kinnard. All eyes were watching to
see if those operations -- which cost more than $57.6 million
to assemble -- could pull the consolidated firm into
profitability.
What no one foresaw is that one bad transaction with another
firm could derail the whole effort.
Now stunned Stockwalk executives are trying to regroup and
find answers, their firm having been rendered insolvent until a
government-supervised overhaul can bail it out from the $60
million hit its stock-loan department took last week.
How did what the firm depicts as a routine "stock loan"
operation turn into a disaster? Stockwalk is implying that it got
snookered.
"Let's just say there were a number of unanswered questions
that point in the direction of some sort of impropriety," said
Matthew Kyler, a Stockwalk senior vice president and
spokesman.
Securities regulators are trying to sort out what happened, but
Stockwalk clearly took on far more risk than it bargained for in
handling shares of a now-illiquid California telemarketing firm
called Genesis Intermedia.
According to securities market observers, Stockwalk acted as a
huge principal in the "conduit" loan of shares in Genesis, a firm
best known not for its products but for the identity of its major
shareholder -- Saudi arms dealer Adnan Khashoggi.
Stockwalk's stock-loan department handled 7.2 million shares
of Genesis in recent active trading, which saw the stock drop
from $15 to $4.50 before trading was halted. Genesis has said
the drop was simply because of a misunderstanding among
traders about a planned 3-1 stock split that the company
decided not to enact.
Securities regulators have kept the stock halted, though, and
there has been no indication of when trading will resume.
In essence, Stockwalk got caught in the middle of a string of
transactions involving the loan of Genesis shares from firm to
firm. Stockwalk borrowed the shares from the now-insolvent
Native Nations firm in New York. Stockwalk, in turn, loaned
the shares to other brokerages. Along the way, clients of the
various firms were buying and selling Genesis shares.
When the shares fell sharply Sept. 21, Stockwalk had to
advance $60 million in additional capital to the firms to which
it had loaned Genesis stock to make up the difference between
the price at which the shares were loaned and their new, lower
value. Stockwalk then turned to Native Nations, the original
source of the shares, and asked it to also come up with the $60
million necessary for capital reserves.
Native Nations said it didn't have the money. Stockwalk's MJK
Clearing called the regulators to report its suddenly dire capital
situation.
Stockwalk executives defended their stock-trading department,
saying the series of transactions seemed fairly routine.
Competitors, however, say the firm never should have made
such a large commitment to a single controversial stock with a
small brokerage on the other end of the transaction.
An appropriate cap would have been $3 million or $4 million in
total stock loans, they suggest, not the $100 million-plus that
Stockwalk took on.
The SEC and other agencies could be sorting out this story for
awhile, looking for any signs of manipulation in Genesis shares.
Meanwhile, the government-assisted sale of Stockwalk's
clearing operations to Southwest Securities will permit
Stockwalk's online brokerage and the Miller Johnson Steichen
Kinnard retail brokerage and corporate finance business to stay
alive.
This disaster won't help Stockwalk retain clients. The company
still has a future, but the stock market isn't very high on it of
late.
Stockwalk's shares, once $15 each, were going for 25 cents
before trading was halted last week.
-- Neal St. Anthony can be reached at 612-673-7144 or
Nstanthony@startribune.com.
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