TSX-V member Octagon dragged into GeneMax shorting fray
2002-09-12 12:47 PT - Street Wire
by Brent Mudry
Vancouver brokerage Octagon Capital faces a $125,900 suit from Howe Street player Garth Braun. (All figures are in U.S. dollars.) In a statement of claim filed Wednesday in the Supreme Court of British Columbia, Mr. Braun claims Octagon failed to deliver 29,500 shares of GeneMax, a tiny biotechnology company listed on the OTC Bulletin Board and based in the border town Blaine, Wash.
The allegations in the suit, filed by Vancouver lawyer Geoffrey Howard of Gowling Lafleur Henderson, have not yet been proven in court and a statement of defence has not yet been filed. (In other cases, Mr. Howard has served as Vancouver counsel for the United States Securities and Exchange Commission in its pursuit of alleged securities violators in Canada.)
The Braun suit is the latest development in GeneMax's naked shorting saga. By coincidence, this suit was launched the same day two other Vancouver brokerages, Global Securities and Union Securities, filed parallel statements of defence and counterclaims to a naked shorting suit GeneMax launched against them a week ago, on Sept. 4.
Despite considerable volatility, GeneMax has done a commendable job keeping its stock in the $5 range since it began trading July 15 at $6 after a reverse takeover of Eduverse.com, one of the penny shells in the stable of Brent Pierce and his long-time associate Grant Atkins.
In its own suit, GeneMax claims seeks unspecified general, punitive and special damages against Global and Union, which it alleges were participants in a market manipulation scheme involving naked shorting, in which clients sell shares short without offsetting share borrowing to cover the positions. In court filings, GeneMax offers a broad outline of the purported scheme, without any details to support the serious allegations, including the identities of other parties in the scheme, the duration, the amount of shares and the value.
In their defences, filed Wednesday by lawyer Henning Weibach of Campney & Murphy, Global and Union deny they have any obligation to ensure shorted sales can be borrowed or delivered, as these obligations are only owed by the short seller client to the purchaser in the trade. Both brokerages deny doing any shorting themselves of GeneMax beyond minimal levels.
Union and Global also claim that short selling in a public market is both lawful and legitimate. "Short sales in closely held and thinly traded securities provide both market liquidity and pricing efficiency and actually reduce the risk that the price paid by investors for thinly traded shares will be artificially high because of a temporary contraction of, or restriction affecting, supply," state the defences.
The two brokerages also claim that GeneMax's stock price has been artificially high, as major shareholders have locked up 9.15 million shares in a pooling agreement, leaving a paper-thin free-trading float of just 250,000 shares. "As a result of this artificial restriction of the supply of the plaintiff's shares the plaintiff has, based on the prices paid for the plaintiff's shares when the writ was filed (approximately $5US per share), a market capitalization of approximately $45,000,000US against total stockholder equity of approximately $400,000US or approximately $0.04US per share," states lawyer Mr. Weibach in the defences.
Global and Union have also filed counterclaims against GeneMax, based on its Sept. 5 press release accusing them of manipulative trading abuses. "The press release disparaged the reputation and character of Union (and Global) in the community and was intended by the plaintiff to do so. The plaintiff knew and ought to have known that the plain meaning or innuendo of the words was defamatory and libellous of Union (and Global) and that the words, their meaning and their innuendo were untrue," state the counterclaims. Both brokerages seeks unspecified general, aggravated, exemplary and punitive damages.
Mr. Braun has now entered the fray with his own suit against Octagon. Mr. Braun is no stranger to Howe Street. Between 1988 and 1990, he served as a director and spokesman for Trasco Wind-Force Technologies, a wind turbine promotion, during an unfortunate period. In mid-1998, Investors World of Monaco, which had been promoting several Canadian stocks including Trasco and Rich Coast Sulfur, suffered the misfortune of being shut down amid the arrests of its publisher Maurice Schelvis, its manager Jan Pierre Ivaldi and two women on allegations of fraud. At the time, Mr. Braun, told Stockwatch that Trasco had not had any contact of any kind with Investors World.
In recent years, Mr. Braun has been a private placement investor in numerous Howe Street deals, including controversial Arakis/Delgratia promoter Terry Alexander's Nortran Pharmaceuticals in 1995. Mr. Braun also served as a director of DataWave Systems until July, 2001.
In his current suit, Mr. Braun claims he opened an account at Octagon Capital on July 18. (By coincidence, GeneMax began trading three days earlier, on July 15.) The suit claims that five days after opening his account, Mr. Braun embarked on a small-scale GeneMax trading spree, in which he made "net purchases" of 29,500 shares between July 23 and Aug. 2.
Fate soon intervened. "On or about July 30, 2002, GeneMax announced that it was no longer participating in registration of ownership of its shares through the Canadian Depository System and other depository systems and encouraged all shareholders to become registered shareholders by requesting their broker provide them with a physical share certificate," states lawyer Mr. Howard in the suit.
Alas, poor Octagon was caught short, no pun intended. Starting on Aug. 5, the settlement date for his final share purchase, Mr. Braun sought delivery of a physical share certificate but Octagon has failed to, or been unable to, comply. "The defendant has purported to explain such failure by short trading in shares of GeneMax. Such short trading included short trading by the defendant," states the suit.
Mr. Braun claims that as a result of Octagon's inability to deliver him his share certificate, he has suffered damages, including "irreparable harm," as he is unable to resell his shares to avoid a loss or make a profit. The suit seeks an order for specific performance, that is delivery of the share certificate, or a refund of the $124,921.52 which Mr. Braun calculates he paid for his net GeneMax purchases. |
