Re: 1/24/03 - Dow Jones: (DTC will not relinquish control of companies for the purpose of moving to physical delivery of stock)
NEW YORK (Dow Jones)--A tool some small companies have used to make it difficult for investors to short their stock has just been taken away. The Depositary Trust & Clearing Corp. (DTCC) has decided companies that clear and settle through it cannot exit DTC's global electronic system for the purpose of moving to physical delivery of stock.
After allowing six development stage companies to exit its electronic clearing and settlement system, the DTCC said that shareholders, not issuers, have the right to determine how to hold securities, in electronic form or physical form. Actually having to deliver stock certificates between buyers and sellers would make short selling difficult, if not impossible.
The decision by DTCC is sure to anger a dozen or so small companies that have said they want to exit the electronic clearing system, known as book entry. These companies say they want to revert to using physical stock certificates in order to fight what they call illegal short selling of their stocks. But DTCC said that, after consulting with the Securities and Exchange Commission, it will not allow any more companies to exit its stock clearing system managed by one of its subsidiaries, DTC.
"If the shareholders of any company wish to have their shares withdrawn from DTC and hold them in certificated form, they should submit that request to their broker and when that request is forwarded to DTC, it will be handled in the ordinary course of business in accordance with DTC's procedures," DTCC said in a statement to Dow Jones Newswires.
"DTC does not have any procedures for acting upon withdrawal requests by issuers," DTCC said in the statement, adding that the "Uniform Commercial Code provides that it is the shareholder that has a right to determine how his or her shares should be registered, not the issuer."
Following an "In the Money" column on the subject, several companies last week insisted that they companies had a right to exit DTC.
"A group of (Over The Counter) Bulletin Board listed companies that have exited the DTC system and have subsequently been the target of a media campaign that questions the validity and legality of the procedure have jointly confirmed the precedence for the use of this method and support by all governing bodies concerned," Investor Communications International, or ICI, said in a press release.
ICI represents at least six publicly traded companies that have either exited, or said they would exit, DTC, including GeneMax Corp. (GMXX) of Blaine, Wash. 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 ICI.
The move by some small companies to exit DTC contrasted sharply with global efforts to streamline securities trades clearing and settlement and do away with some of the costs associated with paper certificates.
A spokesman for Wall Street's main trade group, the Securities Industry Association, said last week that the securities industry "is trying to move away from certificates all together." In fact, the SIA is launching a publicity blitz this year to do away with paper stock certificates. So far, one company, AT&T Corp. (T) has dropped paper certificates all together.
A spokesman for the SEC declined to comment Friday on DTC's decision not to allow companies to exit its electronic clearing system. But asked whether the SEC was concerned about the recent moves out of DTC, SEC spokesman John Heine said earlier this week that the SEC is "concerned with any trend that runs counter to immobilization and dematerialization," two words used to describe the move to electronic clearing of securities.
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.
The DTCC insisted in a statement to Dow Jones that the companies' claim that the move out of DTC helps fighting short selling is without merit.
"The rules governing short selling are the same in a physical environment as they are in a book-entry environment. Moving to physical securities does not inhibit short selling in any way," DTCC said in its statement.
Companies that have officially made the move out of the DTC system are: GeneMax; Ten Stix Inc. (TNTI); 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); InternationalBioChemical Industries Inc. (IBCL); SunComm Technologies Inc. (STEH); Bentley Communications Corp. (BTLY); Nutek Inc. (NUTK); ITIS Holding (ITHH) ; FreeStar (FSTI) and Sionix (SINX).
By Carol S. Remond; Dow Jones News; 201 938 2074; carol.remond@dowjones.com |
