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When someone "shorts" a stock, they are selling the
stock without actually owning it. The big problem
comes in when the shares are held in street name and may
not even exist. For example,
one company said that according to its transfer agent
records, "we have 5,504,680 shares held by DTCC
(Depository Trust and Clearing Corp.), but an ADP broker
search indicates 6,217,458 shares being reported by
broker/dealers as being held on behalf of their
customers, indicating a short position of more than
700,000 shares.
How can more shares be on the market than were actually
issued? That's the topic of an often-delayed
Dateline NBC story that has yet to see the light of day.
It is believed that almost $1 billion annually is
received by the Depository Trust and Clearing Corp. for
its "Stock Borrow Program," in which some lawsuits claim
is just a fancy name for counterfeiting, as the DTCC
purportedly lends out many multiples of the actual
certificates in the float.
According to one attorney, Austin Burrell, who is
providing litigation support and research for the law
firms, said that Stockgate is more massive than anyone
may have imagined. "Illegal Naked Short Selling has
stripped hundreds of billions, if not TRILLIONS, of
dollars from American investors," and have resulted in
over 7,000 public companies having been "shorted out of
existence over the past six years." Burrell said some
experts believe as much as $1 trillion to $3 trillion
has been lost to this practice.
Recently the NASD and U.S. Securities and Exchange
Commission approved an interim naked short-selling
band-aid, requiring U.S. brokers to make an "affirmative
determination" that short-sellers, even foreign
short-sellers, mostly Canadian, can find certificates to
cover before processing the order.
Another problem that has come up recently is the listing
of small public companies on the Berlin-Bremen Stock
Exchange - mainly for the sole purpose of shorting the
stock. The companies are listed without their
knowledge and don't even know about it until that market
affects their U.S. listings. Companies are
requesting to be delisted from the exchange to protect
their stock values.
What kind of companies are most susceptible to this type
of attack?
Small cap companies that have been driven up by
momentum investors, especially companies that are
difficult to value.
Companies whose P/E ratios are much higher than can
be justified by their growth rates.
Companies with bad or useless products and services.
Companies riding the latest fad.
Companies that have new competition coming.
Companies with weak financials (bad balance sheet,
negative cash flows, etc.).
Companies that depend too heavily on one product.
How can a company protect itself from this kind of
abuse? At CMI Capital, we have developed some
strategies to keep short sellers at bay. Contact
us if you would like us to share these strategies with
you.
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