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Strategies & Market Trends : Anthony @ Equity Investigations, Dear Anthony, -- Ignore unavailable to you. Want to Upgrade?

To: jlib who wrote (78264)	6/20/2002 12:45:07 AM
From: PartyTime	Respond to of 122087

Excerpts from a highly interesting court case: Message 17625553 [NOTE: From the short side of things comes a begging question: Did Amr Elgindy's U.S. broker, Salomon Smith Barney, help toss innocent companies and investors (mom and pops even) deep into the tigers' dens and snakepits or maybe they were just shorted into the mouths of allegators?] Any guesses? Here 'tis: "... One plaintiff, a legal-research outfit known as Internet Law Library, says it has identified more than 100 companies damaged in convertible-securities schemes, resulting in billions of dollars in lost market value ...." "...In malevolent hands, this kind of convert could produce a windfall for the owner of the preferred and disaster for the company that issued it. Suppose a company's common stock is trading at $10 and you provide $5 million in convertible financing. In a conventional convert deal, the preferred would be exchangeable for, say, 400,000 shares. In the death spiral variety, the holder of the convertible is entitled to $5 million worth of shares, whatever their price. So you might buy the convertible preferred and immediately short 500,000 shares of common stock. If the stock sinks, you could short more. You might run the stock down to $1, pocketing, say, $20 million on the short sale of 10 million shares. Now you convert your preferred shares, demanding the 10 million common shares you're entitled to and using them to cover short sales. You have shelled out $5 million and collected $20 million ...." ".... So he agreed to take down $10 million in convertible preferred financing. It seemed to be a better deal than selling common at $3 a share. "As soon as JagNotes booked the investment, the share price began to fall. Much to Valinoti's puzzlement, the stock continued falling, in good times and bad. He was further baffled by the list of large shareholders, required to disclose their holdings each month, which showed no selloffs. And yet by February 2001, the stock was trading at 10 cents. "Everybody I knew was buying, but who the hell was selling?" Valinoti wondered. "He concluded it had to be naked short-sellers. Instead of suing his tormentors, Valinoti decided to call their bluff. In February 2002 he announced a recapitalization plan, reconstituting JagNotes common stock into new Class A and B shares. To receive new issues, shareholders had to hand in their old stock certificates. "The recap took effect Apr. 8. As brokerages began sending in certificates on behalf of their clients, gaps appeared. Citibank's beneficial holder list, for example, accounted for 6,300 shares; one investor claimed he owns 1.2 million shares through his Citibank account. "Brokerages that didn't bother to demand certificates when clients bought JagNotes shares are in a jam. Morgan Stanley has a deficit of 500,000 shares, reports JagNotes. UBS Paine Webber seems to be missing 252,000 shares. Eventually brokers must collect from whoever sold them the phantom shares. Meantime they may have to buy on the open market to cover their clients' positions. That should drive up the shares of JagNotes and generate a windfall for Valinoti, who owns 5 million shares. Recent price: 39 cents."