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Technology Stocks : ITRA INTRAWARE -- Ignore unavailable to you. Want to Upgrade?

To: Kurthend who wrote (911)	8/25/2000 9:32:46 AM
From: Maya	Read Replies (1) \| Respond to of 937

More on those toxicx: thestreet.com Tales From the Toxic-Convert Castle By James J. Cramer 8/25/00 8:34 AM ET Click here for the latest from James J. Cramer. I am addicted to learning more about these death-spiral converts. Below are two letters from readers that shed more light on the topic. The first is a simply fantastic letter that balances my words on these converts with insights from a true insider, someone who trades this kind of paper. I am printing it in its entirety. I am a hedge fund trader who used to traffic in toxic converts. I handled and traded dozens of these converts, mostly small as we limited ourselves to a couple million size (I no longer work for that firm and no longer trade these instruments). I completely agree that any CFO is a fool to get involved in these deals, however, I would argue with your characterization of the buyers of these instruments as devils incarnate and the sellers as hapless victims. I can't tell you the number of times companies blamed us for their stock decline (even when we agreed to or were not able to short the stock). In many cases they did not give us shares upon conversion because they didn't want to. They got our money and then we never heard from them -- they did not live up to their agreements to deliver our shares. The characterization that we ever wanted to short the stock to pennies so we could take over the company is a joke. Sure, we hedged whenever possible, but we never tried to hammer the stock down, in fact we wanted the stock to go up. I was involved in maybe 50 deals. We made the most money in the few cases where the stock went up, not down. Rarely could you actually get 100% hedged and if the stock did crap out, all kinds of bad things happened -- like the company not fulfilling their promises. I will admit, there were probably more unsavory characters out there buying these instruments, but my point is -- except in a few cases -- we were much better off with the stock going up. The thing I learned after maybe six months of trading these instruments is that the primary reason the stocks tended to go down was the company sucked and should not have been public, as well as conversion pressure (similar to a lock-up). So, we started shorting almost all deals we were not involved in. In fact, we made a couple million shorting Hayes. We thought the deal size was way too large relative to the market cap. (Editor's note: This is the deal Cramer lost a boatload on.) Even if the buyers did not short, they would be selling upon conversion -- and in large size. And, I thought the stock was worth 1, not 5. I think the company goes bankrupt without the convert, as the modem biz died. My point in this letter is there is scum all around these deals. The leading scum are the selling agents (these are the biggest whores on Wall Street), certain buyers are scum -- we were not because we lived by the spirit and letter of any agreement we signed -- and also the sellers were often scum. They wanted your money. This money often was used for payroll (on smaller companies, not the size of eToys (ETYS:Nasdaq) or Log On America (LOAX:Nasdaq). Once they had your money, you often had to get the lawyers involved to get your shares -- even in cases where you did not short and the stock was not crushed. Lastly, eToys and Log On America did have options, probably. Their CFOs should be fired. But the sellers of these bonds usually have no other options. Their company is worthless and the only option is to allow a sophisticated hedge fund to get the value that is embedded in the stock by borrowing it from the fools that own it at 1 and sell their stock. The second letter is one of several true confessions I received from the toxic-convert front. Looks like some folks are feeling remorseful about their actions and don't want any other common stock holders to get hurt. Seems fair to me. The following letter is from inside the toxic fortress, written by someone who actually structured this kind of paper: I enjoyed your article on death-spiral converts. I used to work in this crummy business -- as soon as I understood what was going on, I got out and went to work for a real investment bank to help, not hurt companies -- so please do not publish my name, email address or firm, not that you would. Why not expose these guys and name names? Entrade (ETA:NYSE - news - boards) (again, a decent company run by nice, but unsophisticated guys) got crushed by a toxic deal where not only did the convertible preferred securities reset, so did the warrants! The worst part is that they were represented by a supposedly legit investment bank, J.C. Bradford -- what were they thinking? Another lovely feature of these deals is that, typically, the company cannot issue more equity without a full rachet reset on the convert. This is after the investors have shorted the dickens out of the stock and driven the price down! Many times these companies only trade 100,000 or so shares a day, so as you sat, the conversion process itself buried the stock as the bids dried up. There are a ton of moving parts, resets, "liquidity penalties", rights of first refusal -- you name it on these deals -- all of which serve to allow the investors to suck every drop of juice out of the company, leaving a dry husk behind. You hit the nail on the head when you said (I paraphrase here), "Rather than do a toxic deal, just sell the company." Why leave all the shareholder equity in the hands of these bloodsuckers? Anyhow, these "investors" like to hide in the shadows. They don't want anyone to know who they are. They create shell companies with different names to disguise their identity and their participation in these deals. ...I think you could do a lot to publicize what these guys are doing -- the more the awareness level goes up, the more CEOs, CFOs and boards of directors will avoid these toxic deals. No one benefits from these deals but the toxic convertible holders. Again, a recurring theme: Shed sunlight. I could not agree more. Billions have been lost in this style. It must end.