Re: 10/7/02 - [GMXX] Dow Jones: IN THE MONEY: Genemax Battles The Shorts, Who Benefits?
IN THE MONEY: Genemax Battles The Shorts, Who Benefits?
By Steven D. Jones and Carol S. Remond
1,439 words
7 October 2002
11:25
Dow Jones
A Dow Jones Newswires Column
NEW YORK -(Dow Jones)- Try the smell test on this one.
Biotech company GeneMax Corp. (GMXX) volubly protests short sellers attacking its stock.
But trading restrictions on most GeneMax shares plus legal action by the company against selected brokerages used by short sellers have enabled GeneMax to control the float in its stock, or the number of shares free to trade. The result is that the group with the largest block of tradable shares is Investors Communication Inc., or ICI, a management firm with close ties to GeneMax.
As the price of GeneMax has risen to $8 from $4 in early September, ICI has seen the value of its 580,000 GeneMax shares and 1 million options climb to more than $12 million. But while most of GeneMax's founding shareholders are restricted from trading their shares, ICI is free to exercise and sell its options.
In an interview Friday, GeneMax director and ICI consultant Grant Atkins confirmed that ICI held options on 1 million shares and those options could be exercised at any time, but he said ICI wouldn't do so. "ICI has a contract with GeneMax to provide a wide range of services, and it does not want to have a negative impact on the company," Atkins said.
A pooling agreement locks up 9.1 million of GeneMax's 15.2 million outstanding shares. Rule 144 restrictions apply to all but 268,000 shares that remain free to trade, Atkins said. Nevertheless, 1 million shares of the stock changed hands in August, or about 52,000 daily. In September, turnover rose to 1.16 million, or about 56,500 shares daily.
The recent rise in price and volume suggests that short sellers are buying shares to cover their positions, commonly referred to as a short squeeze. The only holders with large blocks of stock to sell are insiders. But Atkins denied any GeneMax insiders were selling, loaning or shorting their shares.
"It's the shorts," Atkins said. "They are now at the point that they have to keep going." Atkins termed such trading "manipulation."
Whatever the case, people associated with ICI have in the past had problems with securities regulators.
Some background: according to Washington state records, Marcus Johnson is the executive officer of ICI. Johnson is also listed as the contact on recent GeneMax press releases. Securities filings list Atkins as a consultant with ICI. Others associated with the management consulting company include Gino Cicci and Brent Pierce, who is identified in securities filings as ICI's president and sole shareholder.
Cicci and Pierce have both had run-ins with securities regulators in British Columbia, Canada.
In 1995, the B.C. Securities Commission banned Cicci from serving as an officer or director of a public company for three years in connection with promotion of a company called DNI Holdings Inc. in Canada.
In 1993, the commission prohibited Pierce from serving as an officer or director for 15 years. The ruling also stipulated that Pierce cannot serve as an officer or director of a company "that provides management and administration, promotion or consulting services to a reporting issuer for a period of 15 years."
The commission handed down the decision in connection with Pierce's directing funds to his personal use from a public offering of shares in Bu-Max Gold Corp. of Canada.
Atkins said Johnson is the executive officer of ICI and that both Cicci and Pierce are connected with ICI. "I think they consult to the company."
Common History
GeneMax Pharmaceuticals Inc. was founded in July 1999 as a Delaware corporation with a wholly owned research subsidiary in British Columbia. The company licensed a cancer-fighting compound from the University of B.C. and received a U.S. patent on the compound in April 2002. News of that patent carried the shares to $10 in early May from 25 cents where they began the year.
Then several changes took place.
On May 9, a Nevada company named Eduverse.com changed its name to GeneMax Corp. and announced it was acquiring GeneMax Pharmaceuticals Inc. in a "share exchange agreement."
Atkins was president of Eduverse.com, which was in the educational software business until 2001 when it sold all its assets for about $50,000 and settled $768,000 in other debts by issuing stock. After more reorganization and a reverse stock split ICI had ownership of 40% of the company, with the balance held by two individuals and a private company, all of B.C.
As part of the acquisition, the new GeneMax investors and ICI agreed to "advance" $700,000 to the company. It delivered the first $250,000 on July 18 three days after the acquisition closed.
Most important, the new and old shareholders in GeneMax struck an agreement that restricted trading on 9.16 million shares, or 95% of GeneMax's 9.5 million shares. The agreement releases 10% of the shares in July 2003, and an additional 10% every three months thereafter.
But that lockup didn't include options in the hands of ICI and other former Eduverse investors.
On April 5, before its reorganization into GeneMax Corp., the directors of Eduverse granted 1 million options to ICI exercisable at 50 cents a share anytime between the date of issue and April 2004. Then on May 9, the same day the company reorganized into GeneMax Corp., directors of Eduverse expanded the program to include additional 900,000 options to be offered to "key personnel" at a price to be set at the time the options were issued.
So far, those options have not been granted to anyone, Atkins said.
Short sellers borrow shares and sell them on the hope of repurchasing the shares at a lower price in the future and pocketing the difference. Selling shares short without first borrowing the stock, or naked short selling, is a riskier practice. While the practice is permitted in the U.S. and Canada, recent legal challenges cast doubt on the fairness of brokerages that permit clients to sell millions of shares short, which floods the market with shares and drives the price down.
GeneMax has attempted to halt short selling in a couple of ways.
On July 30, GeneMax announced that it had amended its by-laws so that it would recognize transactions backed by paper stock certificates only. Such "certificate only" or "custody only" transactions flush the naked shorts out of the market because owners of those shares are unable to produce certificates.
Last month GeneMax went a step further and sued two Canadian brokers, Global Securities Corp. and Union Securities Corp., both of Vancouver, B.C. The action appears to be working.
Pacific International Corp. said last week that it's not permitting any short position in GeneMax stock because of the risk of litigation. Octagon Capital Corp. and Wolverton Securities Ltd., two other Vancouver brokerages widely used by short sellers, have also reportedly halted shorting GeneMax shares.
Thursday, GeneMax widened its legal fight with the brokers to U.S. courts with a suit against 11 U.S. brokerage firms. Filed in U.S. District Court in Nevada, the suit alleges the brokerage firms engaged in fraud and racketeering. The suit names Knight Trading Group Inc. (NITE), Charles Schwab Corp. (SCH) and nine others and seeks injunctions to prevent the firms from shorting GeneMax shares and unspecified damages.
A spokeswoman for Charles Schwab said the company hadn't seen the suit yet. A Knight spokeswoman had no comment.
Both the U.S. and Canadian suits attack the back office by claiming that brokerages fail to properly close short sales by completing the borrowing transaction, which results in an illegal secondary offering of shares, the suits claim.
Art Smolensky, chairman of Global Securities, said GeneMax's attempt to impose certificate-only trading has "scarred off" some investors concerned that the change may soon make the shares illiquid. Now the suits against brokerages are dampening short selling, too, said Smolensky, whose firm continues to short the shares for clients. The result is the share price is moving up, but not because of the fundamentals of the business.
"My hat is off to them," said Smolensky. "This is a novel approach." With the stock now trading at more than $8, the company has a market cap of nearly $80 million for what amounts to one unproven cancer compound, Smolensky added.
-By Steven Jones and Carol Remond; Dow Jones Newswires;
steve-d.jones@wsj.com; carol.remond@dowjones.com |
