Replies to post #461 on NO QUARTER FOR CORRUPTION (Focussing on The Fed./F

[abh3vt]

Telephonics, I have several shorting related questions for you. Do you know the rules surrounding convertible debentures and hedging? Can a hedge fund involved in a deal immediately short up to the amount of shares they plan to convert?

I'm thinking of a particular case involving CXTI.ob. This Chinese tech company filed an 8k on Oct 27 announcing a "toxic" $6MM convertible debenture:
http://www.sec.gov/Archives/edgar/data/1039726/000113705005000314/platinumcontract8k.htm

Within days, the stock fell sharply from the 1.60 range down to 0.80. It stayed down just long enough for the hedge funds involved in the deal to convert $1.6MM of the $6MM into 2.3MM shares of stock:
http://www.sec.gov/Archives/edgar/data/1039726/000113705005000359/platconver8k.htm

Here's my question. CXTI never showed up on the Reg SHO list during the past month, so clearly the hedge funds were able to short up to 2.3MM shares with no problem. Now what? Can they sell these newly received 2.3MM shares if they have not been registered? Or can they sell some of them as long as they use a Form 144?

Also, what happens to those short positions if and when the hedgers sell the underlying stock? Are they forced to close them out?

Thanks!

[abh3vt]

Re: Form 144 selling. I found the answer to one question. I believe that the Form 144 seller must wait at least one year before selling any unregistered shares:

http://www.insiderinsights.com/form144.php

"Exemption from registering the shares doesn't necessarily mean holders have carte blanche to trade as they please, however. If there are less than 500 unregistered shares to be sold, and the total value of the shares is less than $10,000, they can be sold at will. But if both of these minimums are not met, the SEC's Rule 144 holds up numerous hoops for sellers of unregistered shares to jump through. These requirements aren't nearly as onerous as registering the shares, but they are enough to make sure that a company doesn't undertake a "stealth" offering of its shares by issuing them in dribs and drabs.

The conditions Rule 144 lays out are as follows.
1) The unregistered shares have to have been held by the selling party for at least one year. It was originally two years, but the SEC lessened the holding period with a 1990 rule change.
2) The sale must be made through a brokerage firm.
3) There must be information freely available to the public about the issuer of the securities.
4) The number of shares being sold cannot represent more than 1% of the issuer's shares outstanding, and also must be less than the average weekly trading volume of the shares over the preceding four calendar weeks.
If these criteria are met, a person may file a Form 144 with the SEC giving notice of their intent to sell a specified number of unregistered shares within the next three months.