07/01/2008 336 STATUS REPORT. Doc 336 extract PART 5
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Allegations of naked short selling
Numerous Universal Express shareholders have sent repeated communications alleging that Universal Express was the victim of naked, and therefore, illegal short selling. The essence of such a claim is that shares have been sold short and the seller has not arranged to borrow shares to cover the short sales. They make this allegation based upon Altomare’s claim that it happened, the judgments obtained by the Company, and upon episodes of extremely high volumes of trades in Universal stock. They believe that the decline in the stock’s value is
attributable to naked short selling and not to the dilution caused by the issuance of over 20 billion shares of Universal stock since August 2004 nor to the fact that the Company never had a profitable quarter in its existence nor to the fact that the Company issued press releases announcing hundreds of millions of dollars of financing and/or acquisitions that never came to fruition.
There have been several organized email campaigns by these shareholders. A recent one involved their requests to have actual physical stock certificates to evidence their Universal shareholdings. According to e-mail traffic, this will thwart the naked short sellers. Moreover, these shareholders anticipate that Altomare is going to go back into business in a company that will trade on the London exchange and they will be able to trade these certificates for shares in that company. The Receiver paid the transfer agent to reinstate the Company with the transfer agent so that the shareholders could obtain stock certificates from the transfer agent.
Given the intense interest in this issue by some shareholders of Universal Express, the Receiver engaged a consultant with a long history as a compliance officer in the securities industry to investigate the allegations of naked short selling.[5] The consultant obtained a great deal of information from numerous sources showing that there were episodes when there were high volumes of short sales, but the task of determining whether any of these short sales were illegal could not be accomplished with the minimal funds held by the Receivership.
[5] When a group of shareholders sought an investigation by the SEC Inspector General related to the Company, the Receiver also joined in a request for a determination of whether the Company had been the victim of illegal short selling. See Exhibit E.
Short selling is not necessarily illegal, and even when shares are sold short without the seller having arranged for covering shares, there are numerous exceptions making that practice legal, including bona fide market making and broker to broker transactions. The SEC is currently seeking to promulgate a rule adding naked short selling to the antifraud provisions of Rule 10b-5 of the Securities and Exchange Act of 1934.
In any event, had the Receiver been able to document the existence of naked short selling of the shares of stock of Universal Express, the Receiver would not have had a cause of action against the short sellers. Section 10(b) of the Securities and Exchange Act of 1934 makes it "unlawful for any person . . . to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commissioner may prescribe." 15 U.S.C. §§ 78j (2000). Pursuant to this authority, Rule 10b-5 makes it unlawful for any person to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstance under which they were made, not misleading, or to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. §§ 240.10b-5. The Eleventh Circuit requires a plaintiff alleging securities fraud under Rule 10b-5 to plead (1) a false statement or omission of material fact; (2) made with scienter; (3) upon which the plaintiff justifiably relied; (4) that proximately caused the plaintiff's injury." Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1446 (11th Cir. 1997). To have standing to sue under Rule 10b-5, the plaintiff must be a seller or purchaser of the stock. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975). Universal Express was neither a buyer nor a seller of its securities. Thus, this cause of action, if it exists, has always been held by the shareholders.
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