You have got to be kidding me...
By Carol S. Remond
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--A tool some small companies have used to make it
difficult for investors to short their stock has just been taken away.
The Depositary Trust & Clearing Corp. (DTCC) has decided companies that clear
and settle through it cannot exit DTC's global electronic system for the
purpose of moving to physical delivery of stock.
After allowing six development stage companies to exit its electronic clearing
and settlement system, the DTCC said that shareholders, not issuers, have the
right to determine how to hold securities, in electronic form or physical form.
Actually having to deliver stock certificates between buyers and sellers would
make short selling difficult, if not impossible.
The decision by DTCC is sure to anger a dozen or so small companies that have
said they want to exit the electronic clearing system, known as book entry.
These companies say they want to revert to using physical stock certificates in
order to fight what they call illegal short selling of their stocks.
But DTCC said that, after consulting with the Securities and Exchange
Commission, it will not allow any more companies to exit its stock clearing
system managed by one of its subsidiaries, DTC.
"If the shareholders of any company wish to have their shares withdrawn from
DTC and hold them in certificated form, they should submit that request to
their broker and when that request is forwarded to DTC, it will be handled in
the ordinary course of business in accordance with DTC's procedures," DTCC said
in a statement to Dow Jones Newswires.
"DTC does not have any procedures for acting upon withdrawal requests by
issuers," DTCC said in the statement, adding that the "Uniform Commercial Code
provides that it is the shareholder that has a right to determine how his or
her shares should be registered, not the issuer."
Following an "In the Money" column on the subject, several companies last week
insisted that they companies had a right to exit DTC.
"A group of (Over The Counter) Bulletin Board listed companies that have
exited the DTC system and have subsequently been the target of a media campaign
that questions the validity and legality of the procedure have jointly
confirmed the precedence for the use of this method and support by all
governing bodies concerned," Investor Communications International, or ICI,
said in a press release.
ICI represents at least six publicly traded companies that have either exited,
or said they would exit, DTC, including GeneMax Corp. (GMXX) of Blaine, Wash.
GeneMax has been the subject of three other "In the Money" columns. Those
columns questioned whether insiders would benefit most from limits on short
selling and GeneMax's connection to consultant ICI.
The move by some small companies to exit DTC contrasted sharply with global
efforts to streamline securities trades clearing and settlement and do away
with some of the costs associated with paper certificates.
A spokesman for Wall Street's main trade group, the Securities Industry
Association, said last week that the securities industry "is trying to move
away from certificates all together." In fact, the SIA is launching a publicity
blitz this year to do away with paper stock certificates. So far, one company,
AT&T Corp. (T) has dropped paper certificates all together.
A spokesman for the SEC declined to comment Friday on DTC's decision not to
allow companies to exit its electronic clearing system. But asked whether the
SEC was concerned about the recent moves out of DTC, SEC spokesman John Heine
said earlier this week that the SEC is "concerned with any trend that runs
counter to immobilization and dematerialization," two words used to describe
the move to electronic clearing of securities.
Companies looking to exit DTC all blame short sellers for their depressed
stocks.
Short sellers sell borrowed securities in the hope of replacing them later at
a lower price. Short selling is generally limited by the ability of borrowing a
stock at the time of the sale. That rule, known as affirmative determination,
limits the ability of investors to short the stock of companies with small
amount of free trading shares since their stock is often difficult to borrow.
Only shares held in margin accounts can be loaned out. Shares held in cash
accounts cannot be loaned out.
The DTCC insisted in a statement to Dow Jones that the companies' claim that
the move out of DTC helps fighting short selling is without merit.
"The rules governing short selling are the same in a physical environment as
they are in a book-entry environment. Moving to physical securities does not
inhibit short selling in any way," DTCC said in its statement.
Companies that have officially made the move out of the DTC system are:
GeneMax; Ten Stix Inc. (TNTI); BlueBook International Holding Co. (BBIC);
MidasTrade.com (MIDS); MSM Jewelry Corp. (MSMJ) and Make Your Move Inc. (MKMV).
In addition the following companies have said that they would exit, or that
they were considering exiting DTC: Reeds Holdings Corp. (RDHC); Nutra Pharma
Corp. (NPHC); Critical Home Care Inc. (CCLH); Hadro Resources Inc. (HDRS); Jag
Media Holdings Inc. (JGMHA); InternationalBioChemical Industries Inc. (IBCL);
SunComm Technologies Inc. (STEH); Bentley Communications Corp. (BTLY); Nutek
Inc. (NUTK); ITIS Holding (ITHH) ; FreeStar (FSTI) and Sionix (SINX).
