Heard On The Street: You Can't Sell Shares You Don't Own
Dow Jones Online News, Friday, June 25, 1999 at 00:55
(Published on Thursday, June 24, 1999 at 21:51)
By Patrick McGeehan and Rick Brooks, Staff Reporters of The Wall Street Journal
Investors who agreed to buy shares in CheckFree Holdings' 3.8-million-share secondary offering this week cheered when the company canceled the deal yesterday.
Unless they had already sold them.
In an unusual twist, some investors found out the hard way that they didn't really own the CheckFree shares that showed up in their brokerage accounts after the market closed Monday. That evening, Merrill Lynch, the lead underwriter for the stock offering, priced shares of the electronic-payment processor at $39 and allocated them to customers. Some of those customers rushed to sell the shares Wednesday as CheckFree's stock price plunged in reaction to news of a rival effort by an alliance of three large banks to jointly steer electronic bills to consumers and businesses. CheckFree's stock plunged 24% Wednesday in trading on the Nasdaq Stock Market, to close at $28.125.
But those who sold to cut their losses found out they instead may have compounded them. After Wednesday's sell-off, CheckFree decided to cancel the stock offering and take back all the shares that investors thought they had bought -- even if the investors already had resold them.
Here's the rub: Technically, the offering hadn't yet closed,
the company and its investment bankers explained. (It typically takes three days for an issue to close.) So the shares never were formally issued. That's significant, because investors who buy shares in an offering and quickly unload them actually sell shares they don't yet own and, under unusual circumstances, would have to buy the shares back in the market to replace them. A Merrill customer with poor timing could have sold the shares near their low of $27.25 on Wednesday, then rushed to cover that "short" position yesterday morning as the stock spiked back up to $34.50. Those trades would have resulted in a loss of $7 a share.
Indeed, Merrill told its brokers that their customers who had
sold shares they thought they had just bought from Merrill had "created a short position. A decision must now be made about covering the short position." Securities lawyers echoed Merrill's view. Joseph McLaughlin, a partner at Brown & Wood in New York, said it was "very unusual" for a company to withdraw a stock offering after pricing shares and allocating them to buyers. But he noted that standard language in the prospectus for any stock offering says the stock will trade on a "when issued" basis.
William Halldin, a Merrill spokesman, said: "We support the company's decision" to withdraw the stock offering. As for Merrill's clients, Mr. Halldin added: "The transactions were not executed as short sales because the clients had a reasonable belief that the shares would in fact be delivered." But Mr. Halldin declined to say whether Merrill customers who lost money will be made whole.
CheckFree believes it had no choice but to yank the offering. Officials say they needed to puncture suspicion that they knew about -- but failed to disclose -- their rivals' plans while meeting last week in the preoffering roadshow with more than 50 institutional investors. Many of those institutions requested an allocation of shares from the offering.
"That's an asinine suspicion, but human nature is human nature," Allen L. Shulman, CheckFree's general counsel and chief financial officer, said in an interview. Peter J. Kight, CheckFree's chairman and chief executive, asserted in a statement that the banks never gave CheckFree an inkling of their plan to join forces. Mr. Kight added that he was "stung" by suggestions that CheckFree tried to hurry through its follow-on offering in order to "beat" Wednesday's announcement by the banks. "As good as this company is, and as powerful as our opportunities are, I am not going to permit us to be distracted by a senseless controversy," he said.
Meanwhile, some of CheckFree's institutional investors are concerned that the newly formed electronic-bill venture could pose a continuing threat. "These people are in the business," said Robert Gintel, chairman of Gintel Asset Management, which has hung on to its CheckFree stake, which was about 1.4 million shares as of March 31. "They are trusted financial institutions, and they probably have been working together for a number of months now." The rival venture, by Chase Manhattan, First Union and Wells Fargo, have some 60 million consumer and small-business customers. Their large East and West Coast presence, already likely to be attractive to billers such as large utility companies, could grow even more if the venture can sign up other banks after its launch by the end of the third quarter. Any banks that join forces pose a "very, very serious" challenge
to middlemen like CheckFree, because there "would be no reason
for CheckFree" if banks can essentially build their own bill aggregation and presentment service, says Gary R. Craft, managing director of investment research at E-Offering. This would leave CheckFree out of the bill-processing loop. Says Mr. Craft: "There is some sugarcoating that has occurred in the reaction by management."
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