Just offering some reading on Naked Short Selling...
Shares of local companies take hit on German exchange
By THE JOURNAL NEWS
(Original publication: June 5, 2004)
Two companies in the northern suburbs are among an estimated several hundred U.S. companies whose stock was traded on the Berlin Stock Exchange without their knowledge, in what is said to be an effort to circumvent U.S. regulations on a form of short selling.
One of those companies is New City-based PowerChannel Inc., a consumer electronics marketing company that sells electronic appliances and services to consumers. The other is Wellstone Filters Inc., which is based in Tarrytown and has developed and patented a cigarette filter that it says effectively removes carcinogens.
The stock of both corporations trades on the over-the-counter market, where trades are done by telephone and computers as opposed to on a physical trading floor.
Short selling occurs when individuals borrow securities — perhaps from their brokers — sell the shares and then hope their price will go down so they can make money by buying them back later for less.
When such trades occur, the United States has stringent regulations that a brokerage firm, for example, must have the stock in its inventory, said Matthew Clawson, the executive vice president with Allen & Caron Inc. in Irvine, Calif., an investor relations firm specializing in small and midcap companies. But Clawson said there is no such requirement in Germany.
So such trades on the German exchange are known as "naked short-selling," he said. "They're using it as a means to short the stock that they could not do over here."
Clawson also said companies do not have to request its stock be listed on a German exchange. Rather, you just need a German broker to sponsor it.
Clawson said his firm noticed the naked short-selling of U.S. firms a few months ago and since that time it has become very frequent.
"It's something that has caught on," he said. "They're circumventing tougher U.S. laws on naked short-selling. ... Smallcap stocks are more susceptible to this because of their relative illiquidity and volatility."
Thomas Holloman, an NASD spokesman, said the U.S. Securities and Exchange Commission regulates the companies which issue stock through the over-the-counter market, Nasdaq operates the quote service and NASD regulates the people making the sales.
"NASD is aware of the stories in the press about the Berlin Stock Exchange, and we are looking into it," Holloman said yesterday. "We have no further comment until our observations are complete."
Steve Lampert, chairman and chief executive of PowerChannel, said at his request his company's stock was delisted from the Berlin exchange this week but it went down about 25 percent because of naked short-selling.
Wellstone Filters said in a prepared statement this week that it had requested its stock be delisted but it could not be immediately learned how much Wellstone Filters shares were affected. The company did not return a phone call seeking comment.
MCI, the company formerly known as WorldCom Inc., handed out pink slips to 25 workers in Rye Brook yesterday. Brittany Hoff, a company spokesperson in Ashburn, Va., said the cuts were part of the plan MCI announced May 10 to eliminate 7,500 jobs across the nation. The company lost $388 million during the first quarter of this year. The company had about 350 employees in Rye Brook at the time of the announcement. The employee count was as high as 900 in the mid-1990s before WorldCom's accounting scandal and bankruptcy filing in 2002. Full-time employees laid off yesterday will receive a minimum of six weeks severance, depending on how long they worked for the company, Hoff said.
Bart Catalane of Stony Point has been promoted to president of Ziff Davis Media Inc., the special interest media company announced this week. Catalane will retain the title of chief operating officer. Ziff Davis publishes PC Magazine and eWEEK among others.
