Fl, here is an article coming from a real expert, Chris Byron. He decribes very well how it works. Evidently, the price collapsed after the warrants have been called...
(Needless to say I first learned it by making mistakes myself...)
Message 12544819 [Emphasises added]
What was the fuel
for Eurowebîs takeoff?
Thereîs little in evidence to justify stockîs jump
from $1.50 to $21 in just over a monthîs time
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
Jan. 11 ¦ Just before Christmas, on Dec. 22, the Nasdaq Stock Market issued an interesting, though little noticed, press release regarding a New York-based, Nasdaq øsmall-capñ company bearing the name Euroweb InternationalCorp.
THE PRESS RELEASE said that Nasdaq regulators had contacted Euroweb and asked it to issue a public statement regarding any explanation the company might have for what appeared to be some unusual trading activity in Eurowebîs shares. In recent days, the company had issued some press releases about snapping up tiny Slovakian and Hungarian Internet companies, but nothing that would explain why the companyîs stock had soared from $4 to nearly $17 in just 10 trading sessions.
By the time Nasdaq took notice, Euroweb sported a Wall Street market value of $116 million, even though the 34-employee company had reported less than $500,000 in revenues for the first nine months of 1999 and lost every penny and more.
The first of the many interesting things about this press release is that the company ¦ which gives its address as an office in a swanky building, 445 Park Avenue ¦ basically just blew the regulators off, saying ¦ according to the press release ¦ that it was Eurowebîs policy ønot to comment on unusual market activity.ñ Whereupon Nasdaq simply dropped the whole matter, winding up its press release by advising readers that if they wanted to learn more they could øcontact the company directlyñ ¦ presumably to get the same stonewalling treatment that the regulators themselves had received.
UNUSUAL ACTIVITY
End of story? No, only the beginning. During the next 10 trading days, the øunusual market activityñ in Euroweb did not just continue but actually intensified, with the stock eventually touching $21.25 per share. This for stock in a company that barely a month earlier had been trading for a mere $1.50 ð and for the three years prior had not changed hands above $3.20 per share.
Now let me say at the outset that the kindly old gang here at Eye to the Keyhole is perfectly happy to accept that a 34-employee firm with an office on Park Avenue might be worth a mere $14.8 million on Nov. 10, and then suddenly be worth 14 times as much only 39 trading days later. And, being the tolerant sorts that we are, weîll go so far as to accept, against all evidence of human nature and experience to the contrary, that the folks at Euroweb might well be possessed of good, sound and proper reasons for not wanting to crow about their good fortune ¦ those big new products that Euroweb might have in the pipeline, letîs say, or the new contracts or deals theyîve got in the works.
For example, they might have said, øOh, weîre negotiating this big new deal to sell half our company to a Dutch phone company and make a lot of money for our shareholders.ñ A company shareholder meeting is set for Jan. 12, in New York, to consider just such a transaction and will probably be completed by the time you read these words. But, no, not a peep from Eurowebîs Park Avenue headquarters.
NAME RING A BELL?
Euroweb International Corp. (EWEB)
price change
$14.94 unch
Full quote data:priceunch% change:0.00%volume:1,369,700day high:$16.25day low:$14.50
Data: MSN MoneyCentral Investor and S&P Comstock
When it turns out that Euroweb International Corporation, which claims to be in the Internet connections business in Eastern Europe, happens to be run out of precisely the same office that not so long ago housed a now-disgraced penny-stock company called Hungarian Broadcasting Corporation ¦ which in turn happened to see its stock soar in a manner startlingly similar to the way Eurowebîs share price has been behaving ¦ well, letîs just say that a smell is starting to waft from this situation, and it ainît the scent of Chanel No. 5.
If the name Hungarian Broadcasting Corporation rings a faint bell for you, that may be because we wrote about the company in this space back on Oct. 12, 1998. Thatîs when the stock, trading under the symbol HBCO, leaped from pennies to more than $8 per share, then abruptly crashed in a series of convulsions that had all the earmarks of a classic øpump-and-dumpñ scam.
Following our story, a lawyer for the head of the company sent us a letter to complain of ømisleading statementsñ in the story and to request that we publish a follow-up to øset the record straight.ñ We respectfully declined, saying that nothing in the story seemed to need straightening out. Now, of course, itîs all rather academic, anyway, since Hungarian Broadcasting has been delisted from Nasdaq for failing to file audited financials and currently trades at 20 cents per share in the so-called øpink sheetsñ ¦ the ultimate subbasement of the stock market.
Hungarian Broadcasting was started back in 1994 by three men ¦ only two of whom need concern us here: a fellow named Robert Genova and a Park Avenue lawyer named Frank Cohen. Both those men have now resurfaced as key figures in Euroweb International ¦ Mr. Genova as the companyîs president and chief executive, and Mr. Cohen as its chairman of the board.
As a business, Euroweb is a joke. In one form or another the company has been around for more than seven years, and, before it morphed into an Internet operation, was a small-beer builder of apartment buildings in Hungary. Nonetheless, youîd think a decade would be enough time for a businessî management team to get its act together. But Eurowebîs filings to the Securities and Exchange Commission are frequently late and regularly amended, and its assets seem to consist of almost nothing but what it has raised in stock and warrants deals.
Whatîs more, its actual financials are ridiculous ¦ a mere $489,782 in revenues during the nine months ending Sept. 30, with losses for the period running $521,318.
The company itself is in fact run out of Mr. Cohenîs own law office at 445 Park Avenue ¦ the same exact address, and phone number, that had been used by Hungarian Broadcasting Corporation in its financial filings to the SEC before it stopped filing them altogether and was thrown out of Nasdaq and into the pink sheets last June.
When we called the phone number for comment on what might have caused Eurowebîs stock price to soar, a man answered and refused to say who he was or what firm he represented. He then said, øWe only know about stock prices from what we read in the papers,ñ and then hung up.
A CLASSIC SCAM
So, what caused Eurowebîs stock price to explode so dramatically, and who was behind it? Thereîs no way to know for sure who the actual individuals were, but if the SECîs enforcement division wants to perform a useful public service, it can start by subpoenaing the trading records in the common stock and warrants of this outfit, beginning early last autumn, and see precisely which individuals or entities have been gaming the market with a classic øpump-and-dumpñ scam ¦ namely, øbuying the warrants and shorting the common.ñ
To understand how the scam works, you need to know for starters what a so-called øwarrantñ actually is. Basically, it is nothing more than a piece of paper giving the holder the right to buy a share of stock at a fixed price for a specified period of time ¦ the next three years, for example.
Warrants are sometimes packaged along with stock in the initial public offerings of junky, speculative companies because they give the sharpies of Wall Street something to play with.
Hereîs the game they play: Letîs say some cruddy little over-the-counter stock is selling for 25 cents and there are warrants in the stock that give the holder the right to buy a share of the underlying common stock for $1.
The warrant is said to be øout of the moneyñ because, well, what would be the point of paying good money for the right to acquire a 25-cent share of stock for $1? Under such circumstances, a $1 warrant for a 25-cent stock might sell for no more than a penny a share.
Thatîs where the fun begins, because if you can buy an out-of-the-money warrant for 1 cent, and then somehow get the price of the common stock to rise from 25 cents to, say, $2, youîd have paid one cent to buy something for $1, which you could then turn right around and sell for $2. Youîd have made a 9,900 percent profit on your one-cent investment.
After that comes the really big money. You donît cash out for a mere 9,900 percent profit ¦ no way! If the stock is thinly traded, and only a handful of individuals control most of the public float, all you have to do is start øshortingñ the common. In a short sale, you borrow stock from your broker and sell it in the open market. Normally, this represents a bet that you think the price will decline in the future. If youîre right, when itîs time to return the borrowed shares, youîll be able to go into the market and buy them at a cheaper price than you sold them for in the first place and pocket the difference as a profit.
But in the øbuy the warrant and short the commonñ scam, youîre betting exactly the opposite: By aggressively shorting a stock youîre setting up a situation in which the price of the common can soar through the roof. If the real owners of the shares start demanding their shares back, you, the short seller, will be forced to go into the market and buy the stock at whatever price the holders may demand. In other words, you are totally at the mercy of the most fierce price-gouging imaginable, and you can be wiped out in an instant.
Not, however, if you happen to own the warrants! Remember, if you own the warrants, the higher the price of the common goes ¦ and the more you lose on your short position ¦ the more you make on your long position with the warrants. If you paid $1 to buy 100 warrants for a penny apiece, exercisable at $1, in shares of common stock that go to $10 in a short squeeze in which
you participated by shorting one share at $1, you would have lost $9 on your short position in the common, true enough ¦ but youîd have made back an incredible $899 on the rising value of the warrants.
Thatîs what the evidence suggests has been going on with Euroweb International: A colossal market rig has been unfolding to jam up the price of the warrants by aggressively shorting the underlying common.
Consider the fact that during 1998 and 1999, Euroweb issued a total of more than 2.8 million warrants in various private-placement stock deals, giving the holders the right to purchase shares in the company at prices ranging from $1.10 to $2.25. Little if any trading seems to have taken place in the warrants all the way up until early November, which is not surprising when you consider that the price of the common hadnît moved much above $2 during the entire period, so that exercising the warrants was basically pointless.
But then on Nov. 5, and with no news backdrop of any sort to explain the action, a startling 261,600 warrants changed hands at roughly 50 cents apiece. Exactly seven trading days later, on Nov. 16, the underlying common stock awoke from the dead and abruptly quadrupled in value to an intraday high of $8.62 per share.
What sent the price skyrocketing? The most likely explanation is aggressive short-selling of the shares. Thus, Nasdaq market data show that as of Nov. 15, and for the previous 30 days, a mere 775 shares in the stock had been sold short, meaning that with at least 10,000 shares a day changing hands in the open market, any short seller needing to cover his position would have had no trouble doing so.
But the very next day, Nov. 16, volume exploded to nearly 25 million shares, or close to three times the total Euroweb shares in existence, and the stock took off. Not long afterward, Nasdaq reported short interest data for the period that included Nov. 16 and ended Dec. 15, and guess what: The number of shares sold short in the market had jumped from a mere 775 to an incredible 472,016, or close to a third of the average number of shares changing hands in the open market each day. Is it any wonder the price of Euroweb had soared? It was being forced up by a short squeeze ¦ a squeeze that was making millionaires out of holders of the warrants.
Now I for one have no idea who those holders were, or are. And though I should say at this juncture that I have absolutely no evidence whatsoever to suggest that either Messrs. Genova or Cohen are among them, it is indisputable that somebody held the warrants ¦ someone who may well have acquired them by way of Eurowebîs stock placement deals ð somebody who got them knowing that while the company itself might not have been worth bupkes, the warrants could turn out to be worth gold.
Be that as it may, whoever that person is (or more likely, was), he has made a fortune in what looks to have been a spectacular and totally obvious rig of the market, and any government agency with subpoena power can find out easily enough who they are. Want to wager that the SEC will be stepping up to the plate on that one any time soon ¦ or that the weak-kneed bunch at
Nasdaq will issue any more press releases on the matter so that the folks over at 445 Park Avenue can tell them to get stuffed? I, for one, wouldnît take that bet.
You can reach Chris by e-mail at cbyron1@home.com.
This column appears courtesy of The New York Observer, where it first appeared. For more of the Observer, visit its Web site at observer.com |
