Who Is The Real Winner In Host America Troubles, Asks InvestigatetheSEC.com / FinancialWire®
August 16, 2005 (FinancialWire) (By David Patch, editor, InvestigatetheSEC.com) Previously, I wrote about the opportunity the Securities and Exchange Commission has regarding the auditing of how a Regulation SHO threshold security stock is being settled.
August 16, 2005 (FinancialWire) (By David Patch, editor, InvestigatetheSEC.com) Previously, I wrote about the opportunity the Securities and Exchange Commission has regarding the auditing of how a Regulation SHO threshold security stock is being settled.
When the SEC halted the trading of Host America (NASDAQ: CAFÉ) on July 22, 2005, following press releases concerning Wal-Mart (NYSE: WMT) they also halted all trading activities that would need to take place related to the unsettled trades on the books of Wall Street. In a game of musical chairs, what firms were left standing with a position on the books but no shares to sit down with?
Host America had traded 46 times their reported public float in the 9 trading days between July 12, 2005 and July 22, 2005 and after the 9-days ended, Host America Corporation was once again a threshold security listed security with excessive fails showing up at the Depository Trust and Clearing Corp.
The rationalization the SEC presented for halting the stock on July 22, 2005 pertained to possible false and misleading statements made by the company in a July 12, 2005 press release. Other rumors, and Class Action lawsuits, claim that the SEC is also concerned about the insiders of the company selling the securities during the recent price run up from $3.00 a share to near $17.00 a share.
If data doesn't lie, let’s take a look at this data more closely. This time, let’s not just look at the Insider selling but the short seller activities as well.
According to the Form 4's filed with the Securities and Exchange Commission two officers of the company and a large shareholder unloaded shares during the extremely heavy trading activities taking place.
Gilbert Rossomando, listed as an Officer and Director of the Lindley Food Service Division, sold a total of 4,500 shares of CAFÉ stock on July 12, 2005 at a sale price of approx $6.45. Rossomando continues to be a shareholder of CAFE with holdings of slightly more than 42,000 shares. What is troubling here is that this sale is being considered part of a "pump and dump" when merely 10% of his personal holdings were being sold and sold at the near low point for the trading activities. CAFÉ traded to over $16.00 per share in subsequent days.
Also of note regarding Rossomando is that Lindley Food Services was not the division that put out the press release. The press release came from the GlobalNet Energy Investors Division.
I wonder if an Officer of General Electric's NBC Universal's Division would be so tightly scrutinized if he sold off positive news created by the Transportation Division of the company that resulted in an upward price movement.
Peter Sarmanian, listed as a Director of the company, sold 40,000 shares of CAFÉ at a sale price between $6.30 and $6.50 on July 12, 2005. Sarmanian continues to hold an additional 20,000 shares of the stock. Again, Sarmanian did not sell at the highs culminating at near $17.00/share but sold at the low points of the stock run.
Finally we come to the 10% owner category. Number 2 shareholder and private investor Roger Lockhart. Lockhart, while not an officer or director of the company, had control over personal and family accounts that reportedly amassed to a total of nearly 420,000 shares. As stated in the Form 4 filed with the SEC, Lockhart sold 392,000 of these shares on 7/18/05 at a price of $13.85.
By the end of trading on July 18, 2005 the shares trading in CAFÉ had reached 96 Million shares or 30 times the available public float. The stock had moved from a $3.00 stock to an intraday high of over $15.00.
On July 18, 2005 there was no SEC investigation notification in place either. So suffice it to say, Lockhart did not sell on insider information pertaining to an investigation. In fact, it was two days later that the Fort Worth office of the SEC initiated the informal investigation.
According to a Friday August 12 Reuters report, Lockhart claimed that he held many of these shares for a period of 3 years.
I guess I may be naïve but if I invested in something, and waited several years to see a payoff take place, it only makes sense that I would sell when the event finally happened. Isn't that what Wall Street is about. Paper profits have a way of disintegrating. Heck, hedge funds trade in and out of positions in days [ever hear of the mutual fund timing scandal] to make profits and now the SEC and Class Action lawyers want to prosecute a shareholder for putting three years of time and investment into a stock and finally selling for profit.
If you put the shares Lockhart sold in perspective, the shares represented by his sale amounted to less than 0.5% of the shares traded between July 12 and July 18, 2005. Shouldn't the SEC be going after those who sold the 99.5% of shares traded instead? The SEC should be even more focused if many of those shares traded never achieved settlement.
But here is where things get really interesting.
According to that same August 12 Reuters report that questions the insider selling, the report also identifies that Host America had a short position increase from 3,000 shares to 250,000 shares in the early days of July. The report even states that the result of the short sales was a drop in stock price.
"Through early 2005 the company issued a series of press releases about its lighting business. During the two-week period ended May 3, after Host hired a public relations firm and stepped up its promotional activities, the shares rallied as much as 28 percent to a then 52-week high of $4.84.
That drew the attention of short sellers. By early July, 250,000 shares were held in short positions, up more than 80 times from 3,000 the previous month, and the stock was driven back toward a two-year low."
Short selling drove a stock back to a new two-year low? No wonder Lockhart sold. If short sellers were to do it again, Lockhart and his family could profit on the high created by the excessive shorts squeezed on the news and repurchase the shares after they raided the stock once again. If it works for shorts to profit, it should work for longs to profit as well in my book.
So, was the SEC really looking out to protect investors or were their actions to step in due to the significant losses quickly accumulated by the short sellers. With 250,000 short in a stock that previously traded a daily average of less than 20,000 shares, any short squeeze that took place would take place at a premium to the shorts.
Depending on when these shorts started to cover, it could have even been the shorts themselves that started the tremendous rally in the stock. A gap open on July 12 forced margin calls that started a panic in covering and we were off to the races. A mini version of the dot.com bubble and why uncontrolled shorts can be dangerous to a market.
Remember, it was former SEC Chairman William Donaldson that asked the Fed Chairman earlier this year, "How much fraud are you willing to accept for liquidity?"
Will the SEC look into the trading activities of the stock itself and what really caused this meteoric jump in stock? Only time will tell but certainly with the stock halted the opportunity is there.
Once again Investors are left to guess what exactly the SEC will be doing with regards to Host America. While speculation looms large that the company did everything wrong, from submittal of a misleading press release to insider selling, the actual events, and data do not paint such a bleak picture. The Wal-Mart deal was confirmed by the Dow Newswire and the Insider trading was a mere burp in the overall trading of the stock. The real issue could simply be that shorts accumulated too stiff a loss, and a significant amount of settlement failures, and the SEC stepped in to protect them from future losses.
Who first brought this issue to the attention of the Fort Worth office of the SEC and who really started the Class Action Lawsuits that now loom large over the company? I would venture to guess we will never truly know.
For clarification purposes, I am not, nor have I ever been a shareholder in Host America Corporation.
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