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KBIO :November 27, 2015 09:37 PM UPDATE: KaloBios short sellers facing squeeze as CEO Shkreli says will no longer lend stock

Nov 27, 2015 14:09:00 (ET)

By Ciara Linnane, MarketWatch

KaloBios is reminding investors of the Volkswagen short squeeze from 2008

The trader who appealed for help on GoFundMe after a short bet on KaloBios Pharmaceuticals Inc. left him with a $106,445.56 loss may soon have company.

Shares of KaloBios (KBIO) surged another 31% Friday, after its new chief executive, Martin Shkreli, said in a Twitter exchange that he wouldn't lend any more stock to those looking to short sell it.

Blogger The Fly cited Markit data that indicates 49% of KaloBios stock is short, meaning investors have been heavily betting the shares will go down.

(

I spoke with my counsel & advisers and decided to stop lending my $KBIO shares out until I better understand the advantages of doing so. 1/2

— Martin Shkreli (e/acc) (@MartinShkreli) November 26, 2015

)

(

I apologize for any inconvenience this may create in lending markets and I will probably resume lending at some point. Happy Thanksgiving!

— Martin Shkreli (e/acc) (@MartinShkreli) November 26, 2015

)

To short a stock, an investor borrows it from someone who is long. To cover the short position, the investor must buy the shares back. The bet is that the stock will fall in price, allowing the short seller to buy it back at a lower price, and then pocket the difference. But if the share price instead rises. the short seller is left facing unlimited losses.

Read:Why you should never short-sell stocks (http://www.marketwatch.com/story/why-you-should-never-short-sell-stocks-2015-11-19)

KaloBios has been surging since Shkreli bought a 70% stake in the company earlier in November (http://www.marketwatch.com/story/kalobios-soars-800-after-martin-shkreli-takes-control-2015-11-18), rescuing it from insolvency. The company had announced just a week earlier that it was winding down operations because it was running out of cash while developing two potential cancer drugs.

The stock exploded, running up about 800% on the news. It has gained more than 1,700% on the month to close Friday at $34.83. As recently as Nov. 16, the stock hit a low of 44 cents, before recovering to close at $1.72.

Trader Joe Campbell (http://www.marketwatch.com/story/help-my-short-position-got-crushed-and-now-i-owe-e-trade-10644556-2015-11-19)asked for help on GoFundMe, when his short on the stock went wrong. Campbell says he went to bed with some $37,000 in his trading account at E-Trade on Nov. 18 and woke up to a debt of $106,445.56.

Read:Trader calls off appeal for help with $106,445.56 E-Trade debt (http://www.marketwatch.com/story/trader-calls-off-appeal-for-help-with-10644556-e-trade-debt-2015-11-20)

(https://w.graphiq.com/w/bFKU27jBitL)

Now other shorts will scramble to cover their positions, leaving Shkreli and others who are long the stock with all the pricing power.

The situation is similar to the famous 2008 Volkswagen AG (http://blogs.wsj.com/moneybeat/2015/09/25/hedge-funds-frustrated-by-volkswagen-again/)(VOW.XE) short squeeze, when Porsche AG increased its stake in the car maker to 43% from 31% plus another 31% in options, giving it a 74% stake in the company.

As the remaining 20% of the company was owned by the state of Lower Saxony, which was not willing to sell, short speculators were left with no ability to cover their positions. Volkswagen stock surged to more than 1,000 euros from about 200 euros in just a few days.

Porsche wanted to take over Volkswagen, and not to speculate. But the massive short squeeze hurt hedge funds and investment banks who lost tens of billions of euros on their bets.

Shkreli has made headlines in recent months, after his Turing Pharmaceuticals AG acquired a drug (http://www.marketwatch.com/story/impax-announces-sale-of-daraprim-to-turing-pharmaceuticals-ag-2015-08-10) used to treat a specific infection that can strike those with compromised immune systems, such as AIDS and cancer patients, and raising the price to $750 a pill from $13.50. The move led to a vocal backlash from Democratic presidential candidate Hillary Clinton and others and has led to a Senate investigation of drug pricing.

Read: Outrage over high drug costs unlikely to bring change any time soon (http://www.marketwatch.com/story/outrage-over-high-drug-costs-unlikely-to-bring-change-any-time-soon-2015-09-23)

-Ciara Linnane; 415-439-6400; [e-mail]


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11-27-15 1409ET


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