lasvegassun.com
Today: October 22, 1998 at 11:55:49 PDT
LV health supplement firm in complicated battle
By John Wilen <wilen@lasvegassun.com>
LAS VEGAS SUN
Las Vegas herbal medicine company Amazon Natural Treasures Inc. is locked in a
legal battle with a group of off-shore brokers it claims stole and began
illegally trading shares of its restricted stock.
At the same time, the company is orchestrating a "short squeeze" against
investors who have sold the very same shares of stock short.
This planned squeeze was helped along by a federal court's Oct. 2 decision
granting an Amazon demand that two brokers stop trading some 4.48 million
restricted shares the company says it was hoodwinked into issuing to offshore
brokerages earlier this year.
If the squeeze works, said Amazon President Mike Sylver, it "is going to end
all short selling in this country as we know it."
In short-selling, an investor makes money if a stock declines. The investor
borrows shares of a stock, typically from a broker, and sells them at the going
rate. After the stock declines, that investor repurchases the shares at the
lower price, returning them to the broker from whom they were borrowed. The
investor's profit is the difference between the higher price at which he or she
sold the borrowed shares and the lower price at which he or she bought the
replacement shares.
Short selling can backfire. If the investor guesses wrong and the stock
increases in value, the borrowed shares still have to be replaced, or "covered"
in investment parlance.
In a short squeeze, a company deliberately limits the supply of its stock,
driving up the price and forcing all investors with short positions to cover
their borrowings at highly inflated prices. The goal is to punish short
sellers, who many companies believe intentionally push stock prices down to
make profits from short selling.
Amazon's Sylver claims unscrupulous investors are short-selling Amazon shares
that are not even supposed to be trading in the first place. Sylver claims the
company was tricked into sending 4.48 million shares to Joseph Andy Mann,
managing director of First Concorde Securities Ltd., a brokerage with offices
in Nevis, West Indies, and Cancun, Mexico.
In a complaint filed in U.S. District Court last month, Amazon says it agreed
in March to sell two First Concorde clients -- Whitecliffe Investment Fund Ltd.
and Shoreline Securities Ltd., both also of Cancun -- 4 million shares for $1
million.
Amazon sent the shares, along with 480,000 shares Mann asked to borrow, to
Whitecliffe and Shoreline, but the money was never paid, Sylver says. Sylver
explained the shares were marked restricted, and were not to be re-sold until
40 days after Mann sent Amazon the money.
However, alleges Amazon's complaint, Mann unilaterally removed the restricted
legend from the shares, transferred them to First Concorde, and began selling
them on the open market through brokerages JB Oxford, of Beverly Hills, and
Canaccord Capital Corp., of Vancouver, British Columbia.
When Amazon found out the shares were being traded, the company threatened to
cancel them. That prompted Mann to file suit in California demanding that the
company honor its agreement. Mann claims he and Sylver orally renegotiated the
sales price to $78,000 in cash and 200,000 shares in a company called Back &
Neck Inc., a renegotiation Sylver denies ever occurred.
Amazon does not accuse any of the brokers named in its suit of short-selling.
But short selling became possible only after the shares hit the open market in
March, says Sylver. Before that time, the company's stock was closely held and
did not trade very often. From March to July, the company's stock declined from
nearly $3 to as low as 5/32. Trading volume, which had never passed 200,000
shares per day before March, has risen that high or higher numerous times
since.
Since the company filed its lawsuit in September, the New York Depository Trust
Corp. (DTC) which holds most physical stock certificates, has frozen trading of
Amazon shares. Investors, anticipating a squeeze in which short sellers will
have to scramble to cover their positions at any price, bid the stock back up
to nearly $2 in early September. The stock closed at 1 5/16 Wednesday.
On Oct. 2, Las Vegas District Court Judge Lloyd George denied a request filed
by Mann to dismiss the suit and instead ordered JB Oxford and Canaccord to
cease selling Amazon shares.
That ruling will have minimal effect until the DTC releases its freeze on the
stock. When Amazon filed its lawsuit, the DTC agreed to the company's request
for a freeze, a move that essentially makes it impossible for short investors
to cover their positions. Amazon will now ask the court to order the DTC to
release the freeze, and return the disputed shares to Amazon. At the same time,
Amazon is asking all shareholders to ask for physical copies of their share
certificates, and requiring all shareholders to exchange their shares with the
company for new shares with a new registration number.
According to court documents, more than 700,000 shares have been sold on the
open market through JB Oxford and Canaccord. The remainder of the 4.48 million
shares are held in accounts by those two brokerages. Sylver claims 2.8 million
shares have been sold short.
If the DTC-held shares are returned to Amazon, the number of free-trading
Amazon shares will drop, presumably forcing the price up further and making it
extremely difficult for short sellers to cover. For instance, an investor who
borrowed 100,000 shares of the stock at 50 cents hoping to profit from a
decline would have to come up with $150,000 to replace those shares if the
stock rises to $2. Investors who sold more shares short, or who borrowed at
even lower prices, would have to come up with even more cash to cover.
The squeeze will be completed by the company's request that stockholders place
requests for physical share certificates. Sylver anticipates that many brokers
will be unable to fulfill their requests. The reason: the investors who
borrowed the shares won't have the cash to replace them.
Sylver anticipates shareholder lawsuits against brokers, and broker lawsuits
against borrowing investors who can't replace the borrowed shares. And the
bottom line, Sylver says, is that many brokers will be very reluctant to loan
shares to short sellers in the future.
Whether all this works as Sylver plans remains to be seen. Several contributors
to message boards on the Silicon Investor stock information Web site contend
that Amazon is unscrupulous itself, and that the company is being investigated
by the Securities and Exchange Commission and NASDAQ stock exchange. Sylver
denies these charges and alleges himself that the Silicon Investor contributors
are short selling investors trying to drive down the company's stock value who
are being investigated themselves. |
