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UPDATE: Penson Director Resigns; Shares Dive On Collateral Disclosure
BY Dow Jones & Company, Inc.

— 4:03 PM ET 05/12/2011

(Updates with resignation of board member and CEO statement, beginning in first paragraph.)

By Jacob Bunge
Of DOW JONES NEWSWIRES

A board member of Penson Worldwide Inc. (PNSN) resigned Thursday after the company's disclosure of his relationship to a large, illiquid bond position held by the company, which sent shares in the clearing and settlement firm to an all- time low.

Penson (PNSN) reported this week that it held as trading collateral $42.6 million in bonds issued by a horse-racing track operator that maintains ties with director Thomas R. Johnson, which the company said in a filing this week could bring a " material" write-down.

"Penson Worldwide (PNSN) remains strongly financed, with ample excess regulatory capital and a solid business, and none of this affects or involves any correspondents or their customers," Philip Pendergraft, chief executive of Penson (PNSN), said in a statement.

The company said that Johnson's ties to the Texas horse track that issued the bonds made it "appropriate for him to resign his position at this time." Both Penson (PNSN) and Johnson agreed on the decision, according to the statement.

Penson (PNSN) expects to "resolve" the collateral matter without a loss, the company said, but even if a loss were realized, it wouldn't affect the company's financial condition or the amount of money it needs to have on hand to satisfy regulations.
Shares in Penson (PNSN) recently were down 21.9% at $3.07 after trading to a historic low of $2.73 earlier Thursday. Shares fell 23.8% Wednesday and have lost nearly 40% of their value year-to-date.

The Dallas-based company's core business lies in clearing trades in securities and derivatives contracts for broker-dealers serving retail investors, as well as high-frequency trading firms that need access to exchanges. The company also operates a Chicago-based futures brokerage.

"We believe that a significant risk to Penson (PNSN) is that the new disclosures affect its correspondent clearing customers," Rich Repetto, an analyst with Sandler O'Neill, wrote in a research note Thursday that warned of competitors poaching Penson's (PNSN) existing customers and potential clients taking their business elsewhere.

At the end of the first quarter, Penson (PNSN) held $97.4 million in nonaccruing receivables, which analysts said reflect nonliquid assets held as collateral against trades gone bad. Nearly half that figure represented bonds issued by Retama Development Corp., owner of Retama Park, a racetrack located in Selma, Texas.

Those bonds are collateralized by the value of Retama Park's real estate, and although they were regularly traded at the time Penson (PNSN) took them as collateral, "there is no longer any active market," according to a note from Raymond James analyst Patrick O'Shaughnessy.

Raising further questions was the relationship of Penson (PNSN) board member Johnson, chief executive of Call Now Inc., which manages the racetrack and owns $15 million of the Retama Development Corp. bonds, according to Sandler O'Neill's Repetto; Call Now was an early investor in Penson (PNSN).

"While we believe that Call Now's use of RDC bonds as collateral for margin loans could have reasonable explanations, Penson's (PNSN) exposure to $27.8 million of other Retama bonds raises questions about how the concentration of risk developed," Repetto wrote.

For Penson (PNSN), which has seen its valuation nearly halved to $87.5 million this week, nearly $100 million in nonaccrual receivables is "a troubling level," Repetto wrote.
Penson (PNSN) Chief Executive Philip Pendergraft is expected to attend a stock- options industry event Thursday in Savannah, Ga., where some clients are expected to discuss the matter with him.

"I'm reserving judgment until I look him in the eye and see what he has to say about it," said one client, who requested anonymity due to the sensitivity of the issue. "Right now, I don't think it impacts the business they do for us."
In his Thursday statement, Pendergraft called the selloff in Penson (PNSN) shares " unwarranted." The company estimated that the Retama bonds represented just 0.5% of Penson's (PNSN) $8.7 billion in average daily customer balances during the first quarter.

"We continue to move ahead with our 2011 plan, which calls for reducing quarterly losses and generating a small profit (excluding first quarter non- operating items) for the year," Pendergraft said.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; [e-mail]

(END) Dow Jones Newswires
05-12-11 1603ET
Copyright (c) 2011 Dow Jones & Company, Inc.