PENNYBUSTER'S PENNY BUSTIN PLAYS!!

[Mr. Ed]

PENNY SHOCK:
Almost 100 penny stock companies claim that they are the victims of naked short selling being facilitated by the big brokerage firms. The taking of a short position without first borrowing the stock is at issue.
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May 18, 2003 -- Gary Valinoti had a crazy idea in the late 1990s - create a broadcast channel to compete with CNBC.
It turned into his worst nightmare. Valinoti, CEO of Jag Media Holdings, which runs stock-market Web site JagNotes.com, now may be creating a nightmare for the Street's largest brokerages and settlement firms.

Almost 100 penny stock companies - Jag Media included - have claimed that in the past that they are the victims of naked short selling, which is being facilitated by the big brokerage firms: the taking of a short position without first borrowing the stock.

Owners of the penny stocks claim brokerages are lending shares that don't exist to short sellers, who in turn are driving down the companies' stock prices.


Many have ordered trading in their stocks to be done through "certificate only" trading, meaning that to trade or short the stock, the brokerages must obtain the actual stock certificate.

Valinoti' going a step further: Jag Media filed a lawsuit last summer in District Court in Harris County, Texas, that accused more than 150 of Wall Street's biggest brokerages of improperly closing short trades and failing to identify borrowed shares.

The defending brokerAges - including Merrill Lynch, and units of J.P Morgan and Goldman Sachs - have sought dismissal of the Texas lawsuit, and the judge is expected to make a decision shortly.

To press the issue, Jag Media announced a special dividend in mid-March, but available only to those shareholders who could produce their stock certificates.

"We just wanted the brokerage firms to open their books and show us who owns our stock," Valinoti said.

The announcement sent shareholders to their brokers, who in turn went to the depository trust companies, both here and in Canada, that house all companies' stock certificates in this age of computer transfer.

Jag Media tried this ploy before, sending shareholders scurrying for their certificates. And like before, the result confirmed suspicions.

Many brokerages didn't have the certificates. Instead they just had IOUs for them, mostly from other brokerages and settlement firms.

A.G. Edwards, UBS PaineWebber, Spear Leeds (the settlement unit of Goldman Sachs) and several others came up short in the number of stock certificates shareholders were asking for, according to several e-mails between Jag Media and a number of brokerages, which were made available to The Post.

In an April 17 e-mail to Jag Media, A.G. Edwards reported a 520,000 share shortfall in the number of Jag Media certificates it had on hand. The firm blamed the depository trusts and other brokerages for not being able to locate the certificates.

"I have spoken to other firms and they are having the same problems that we have due to other firms also owing the shares," the e-mail stated. A.G. Edwards refused to comment on the situation.

Several e-mails also indicated Spear Leeds was facing a similar shortfall. A Goldman Sachs spokesman said the firm resubmitted its certificate requests to the depository trusts on Thursday and is awaiting delivery.

Given these shortfalls and the short interest in Jag Media stock, which Valinoti estimates is five times its 37 million outstanding shares, it appeared firms were trading shares without eventually establishing ownership via the stock certificates - a violation of regulatory requirements.

"Naked short sellers are destroying [us], and I caught them," Valinoti said, adding that if the big brokerages are allowing naked short selling to happen, they are leaving themselves on the hook for shares they can't produce.

"If that happens, the entire settlement system is going to collapse."

His suggestion? Force the brokerages to buy the missing shares - a solution that could inflate the stock prices of many penny stocks, including Jag Media.

Now that sounds like a dream.


http://www.nypost.com/business/75908.htm