"..Rule 204 provides an extended period of time to close out certain failures to deliver. Specifically, if a failure to deliver position results from the sale of a security that a person is deemed to own and that such person intends to deliver as soon as all restrictions on delivery have been removed, the firm has up to 35 calendar days following the trade date to close out the failure to deliver position by purchasing securities of like kind and quantity."
$LAHO 'Go to Zero' Isn't Great for Short Sellers It's hard to bet on disaster, because that's when bets tend not to get paid off.
.. If a stock "goes to zero" by going from $20 to 2 cents, or if it "goes to zero" through a formal bankruptcy process, then that is a pretty unequivocal win for the short seller. But some other paths to zero are ... actually ... bad?
Gates says he is stuck short China-Biotics, for instance, a stock that was halted in November 2013 when the Securities and Exchange Commission revoked its registration. The shares were delisted, and the company shut down. Gates showed us a January 2018 letter that he says he sent to the stock market record keepers at The Depository Trust Co., in which he laments that a TFS mutual fund has paid hundreds of thousands of dollars in stock-loan fees on China-Biotics and remained subject to the $2.50 a share margin required by Financial Industry Regulatory Authority rules. A handful of other short positions have him in the same predicament.
Gates is Rich Gates of TFS Capital, who "has joined an industry committee that the Securities Industry and Financial Markets Association calls the Worthless Securities Working Group." He shorted some stocks that he thought were frauds, and the SEC agreed that they were frauds and halted them, and then ... things got worse for him. The shares were worthless, but they didn't trade at zero or $0.01 or whatever: They didn't trade at all, so he couldn't buy them back to deliver to his stock lenders. Here is his letter to DTCC, which notes:
DTCC maintains securities in its records indefinitely that are worthless and illiquid; these securities have not been "taken down" by DTCC despite the fact that they have been deregistered by the SEC, delisted by the exchanges, have no existing business location, operations, management or employees and their registration is not in good standing in their state of incorporation.
Gates blames the brokers who loaned him the stock for this situation (and calls it "a glaring conflict of interest" for them), but that is not the whole story. "Gates’ prime brokers aren’t necessarily pocketing stock-loan fees—they may have to pass them on to other firms that supplied the borrowed shares," notes Bill Alpert at Barron's. The only way to (legally) short stock is to borrow it from someone who owns it, and your stock borrow fee makes its way back to that owner-lender (with brokers taking a cut). The actual conflict is that whoever was long China-Biotics stock is still making money from it in its limbo; if the stock borrow fees are high enough and the limbo goes on long enough, they might make more from the stock borrow fees than they would have if the company had been successful. The incentives in stock lending are always a little weird -- you are making a little extra money on the stock you own by helping someone bet against that stock -- but here they are downright perverse.
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