U.S. Companies Worry Naked Shorts Are Rampant
Fri Jul 16, 2004 03:16 PM ET By Michael Flaherty
NEW YORK (Reuters) - Dozens of U.S. companies are demanding to have their stocks taken off a stock exchange in Germany, saying the shares were listed without their consent.
Even worse, several executives claim that their stock's presence on the Berlin-Bremen Stock Exchange has exposed them to a form of market manipulation called naked short-selling that can potentially drive a company into the ground.
Since April, more than 200 U.S. companies have been added to the Berlin-Bremen, a small German exchange that is a fraction of the size of the Frankfurt bourse.
The surge in new additions appears to be triggered by a crackdown this spring by U.S. regulators on the stock trading tactic known as naked short-selling.
Short-sellers make their money by borrowing shares and then selling them, hoping the stock price falls. If it does, they buy them back at the lower price, return them to the lender, and pocket the difference.
In a naked short-sale, the trader sells shares without actually borrowing them. The tactic, practiced for years by crooked traders and brokers across the world, can be highly profitable for those involved, and can devastate a company's share price.
The controversy over the Berlin listings and the naked shorting allegations, dubbed <b>"Stockgate,"</b> has snowballed since it surfaced this spring.
John Heine, a spokesman for the U.S. Securities and Exchange Commission, would not say whether the agency was investigating the matter or not. The SEC passed a series of rules beginning in April that effectively bans naked short selling in the United States.
And while no regulators have proven that naked shorting is occurring in Germany, some companies aren't so sure.
Beverage holding company Hansen Natural Corp. said on Friday it saw no reason for the recent decline in its stock price and is investigating the unauthorized listing of its stock on the Berlin-Bremen exchange. The company said its common stock is listed there without its consent, and is seeking a delisting.
Isonics Corp. and Miravant Medical Technologies were among the more than 20 companies in recent weeks to offer similar statements.
Most of the U.S. companies recently added to the Berlin-Bremen are listed on the American Stock Exchange or are over-the-counter stocks with small market capitalization. These are the kind of stocks that are easier to roil, and where a small amount of trading can lead to large fluctuations in share prices.
Some financial experts believe the U.S. ban on naked shorting has pushed the practice to places beyond the SEC's reach.
"Every time a government has tried to crack down on this type of thing in one location, it tends to migrate offshore where it's obviously much harder to regulate," said Lynn Stout, a professor of securities regulation at the University of California, Los Angeles.
FOREIGN EXCHANGE
Joerg Walter, Berlin-Bremen's Chief Executive, said that in his 10 years with the exchange he has not seen a single case of naked short-selling.
"Naked short-selling, as it happens sometimes, is not possible in Germany," Walter said, adding that the country has strict rules against the practice.
Listing a company without its consent is legal in Germany.
In the case of the Berlin-Bremen exchange, a broker will call and ask to trade a company. The exchange verifies that the stock is listed on another exchange and is in compliance with the rules there before it can begin trading, said Berlin-Bremen spokesperson, Petra Greif.
Greif said the exchange does not inform the company that they are trading, and instead leaves that up to the brokers that added them.
But Dave Gentry, an investor relations representative for several U.S. companies, said nobody told his clients that they were trading on the Berlin-Bremen.
"That was a surprise to us," Gentry said, echoing sentiments from dozens of executives and financial experts wondering how companies were not told of their listing there.
Gentry, president of the Aurelius Consultant Group, said four companies that he represents are listed on the exchange, and so far, getting the trades to stop has been difficult.
One client, a small biomedical company named Genesis Bioventures Inc., has seen its stock price cut in half since it was added to the Berlin exchange in April.
"Whether GBI's stock fall was related to the Berlin Stock Exchange, we can't be sure," Gentry said. "But it looks like there has been some manipulative activity."
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