Found an interesting article posted on the IPRE board. Thought I'd share it with our board. Happy Trails
DJ IN THE MONEY: OTC Short Data Don't Back Abuse Claims
Tuesday , August 01, 2006 11:59 ET
"The distribution of unregistered securities via the secondary market, not abusive market-maker short selling is the problem," Cromwell Coulson, chief executive of Pink Sheets LLC, said in a telephone interview.
By Carol S. Remond
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--The NASD turned on the lights on the often nebulous world of the over-the-counter bulletin board last week when it started reporting short interest in those securities.
The data add transparency to shares of small capitalization companies traded on the OTCBB and Pink Sheets, but it has also led to a significant revelation; short selling is relatively limited for most companies.
Especially so for those companies which over the years have alleged a short selling conspiracy to keep their stock prices artificially depressed.
Insiders of small companies trading on the OTCBB and Pink Sheets have long complained that the shares of their companies unduly suffer from abusive short selling. Some of these companies have brought lawsuits and publicly challenged Wall Street firms and regulators, which they accuse of complicity with short sellers. These suits and the publicity surrounding them have sometimes attracted investors hoping that a short squeeze could push prices higher.
Turns out, those short squeezes are unlikely.
"The distribution of unregistered securities via the secondary market, not abusive market-maker short selling is the problem," Cromwell Coulson, chief executive of Pink Sheets LLC, said in a telephone interview.
Coulson petitioned the Securities and Exchange Commission in January 2005 to require short interest reporting of all OTCBB securities, similarly to the monthly data already reported by the NASDAQ and New York Stock Exchange.
Coulson highlighted in his letter to the SEC that although companies often blame naked short selling for a market decline, other activities are responsible for the price drop. Among those activities, Coulson said, is selling by people who purchased stock in private placements, sometimes ahead of the registration of this stock.
"The lack of short interest reporting in OTC equity securities causes confusion on the part of investors and issuers, and inhibits proper regulatory oversight," Coulson wrote in his letter.
Cameron Funkhouser, senior vice president for market regulation at the NASD, said that the new data will provide much needed transparency. "This is a positive event, particularly in the OTC arena where there is a history of disclosure vagueness," he said.
Short sellers typically borrow shares to sell them, hoping that they will be able to replace them with shares bought at a lower price later. Trading without a borrowing agreement is called naked short selling. It's illegal for most investors, but legal for firms that make markets in stocks by bringing liquidity to the market.
Big Gap Between Hype And Reality
While a number of companies have over the years alleged that their stocks have improperly been driven down by abusive short selling, the newly released data tell another story.
Take Jag Media Holdings Inc. (JAGH), a company that became a trailblazer when it unsuccessfully tried to exit the global clearing system managed by the Depository Trust and Clearing Corporation, or DTCC, and subsequently sued more than 100 brokerage firms in the U.S. District Court for the Southern District of Texas. It accused the financial institutions of market manipulation and securities fraud. That suit was dismissed in 2004 after a federal judge found that Jag Media didn't have a viable claim, but the company remains a poster child for those who believe that abusive short selling is a plague that needs to be eradicated.
Yet as of July 25, only 15,256 shares of Jag Media were sold short - less than 1% of its outstanding common stock. It would take less than a day to cover these positions. Jag Media didn't immediately respond to two telephone messages.
What about another, more recent "Get Shorty" candidate, Nexia Holdings Inc. (NEXH). The Salt Lake City real estate company informed investors on July 26, shortly before the NASD short selling data became public, that it believed that it had fallen victim to abusive short selling practices "like so many other micro cap companies."
But according to the data collected by NASD, there were a mere 37 shares of Nexia sold short as of July 25, which given the company's 3.9 billion shares outstanding, should hardly affect its stock price.
Nexia Chief Executive Richard Surber wasn't immediately available to comment.
And what about Universal Express Inc. (USXP), a Florida luggage delivery company which in 2004 sued the SEC in an attempt to prevent the commission from filing charges against it. The company claims that it was victimized by naked short selling. The SEC later filed charges against the company and some of its insiders, alleging that they issued more than 500 million shares illegally in a period of three years.
NASD's data show 1.9 million shares of Universal Express sold short as of July 25. Given Universal Express' 8 billion-plus shares outstanding and average daily volume of more than 30 million shares on most days, that also shouldn't present any unbearable weight on the company's stock price.
Universal Express' general counsel, Chris Gunderson, wasn't immediately available to comment.
Same goes for Global Links Corp. (GLLC), a development stage company that attracted much attention last year when it was used as an example of illegal short selling by U.S. Senator Robert Bennett. R-Utah, during a Senate hearing on a new SEC short selling rule dubbed REG SHO.
According to data collected by NASD, there were 6,851 shares of Global Links sold short as of July 25, less than 1% of Global Links' 15 million common shares outstanding. It would take less than one day to cover these short positions.
Nobody answered the telephone at the number listed on Global Links' last quarterly report filed with the SEC. An email inquiring about the short selling data released by NASD was not immediately answered by the Las Vegas company.
And when it comes to Vyta Corp. (VYTC), previously known as Nanopierce Technologies Inc., the finding is the same. Despite the company's repeated claims that its stock has been abused by short sellers, there were only 1,359 shares of Vyta sold short as of July 25, shares that could be covered in less than one day.
Like Jag Media, Nanopierce filed suit to make its claim of abusive short selling. Nanopierce is appealing a federal judge's decision to dismiss its complaint against DTCC. The judge in that case found that Nanopierce's claim that DTCC's stock-borrow program facilitated the naked short selling of the company's shares is preempted by federal law.
A person answering the telephone at Vyta's Colorado office said nobody would be available to talk about the short selling data for a week.
NASD's Funkhouser said that it will take some time to review the short selling data received from NASD member firms. "We believe the data is accurate, but it will take a few months to identify potential gaps," he said.
The first batch of short selling on the OTC contained data on almost 7,000 securities, but in reality there are tens of thousands of OTC symbols out there, some of which are dormant.
Although the data may not be complete, it may not be too early for investors to take notice: Before taking a company's claim of abusive short selling at face value, check the trading data before betting for that magical short squeeze.
(Carol S. Remond is an award-winning columnist who won a Gerald Loeb Award in 2005 for best news service content with "Exposing Small-Cap fraud," a series of articles that described how three small companies unscrupulously pumped up their stocks.)
- By Carol S. Remond; Dow Jones Newswires; 201-938- 2074; carol.remond@dowjones.com
