April 12, 2005
Subject: Fw: Form 15-12g/ 265-273
Carr Securities Corporation
14 Vanderventer Avenue
Port Washington, New York
11 April 2005
Jonathan Katz, Secretary
Securities and Exchange Commission
Washington, DC 20549
Dear Mr. Katz,
Investors should not have to compete with the management of a company to realize the value that it has created. Companies are eager to accept the investors money when they start out but once it appears that future financings are unlikely, growth is flattening or some other competitive event occurs, the current managements will look for ways of going dark or delisting. Over the last several years as a market maker, Carr Securities Corporation has seen a wave of delistings read: form 15 filings by companies widely recognized as value stocks.
Often the signs of a future delisting appear months before when companies take large write-downs and prepaid expenses balloon. Sometimes management generously gives lists of concerns and negatives about the future of the company, but in almost every case the company cites the Sarbanes-Oxley requirements as the reason for delisting.
This is total fabrication; it is a mere excuse to seize the company. We have seen companies present one face to investors and an entirely different face to their customers. The web sites of many of the recent delisting companies contain glowing descriptions of how they are world leaders at this and that, while barely giving any financial reporting.
Carr Securities is the world leader in cleaning out the attic and we do it for the largest institutional customers in the small cap and micro cap world. Carr lists some 125 investment funds as clients and has nearly a fifty-year operating history. We have dealt with non-filing companies more than any single person on your committee and we are scared that we may not have a business at all if this trend is allowed to continue.
Carr can usually generate a bid a price a portfolio manager is willing to pay for just about any stock if there are current financials for the company. When a company stops filing and then waits, as much as 6 months after year-end, to release results, the numbers are worthless. But wait there is more. We have encountered companies that require a NDA signed before viewing the annual report; we have been required to make a handwritten copy of the annual since a copy machine would not be made available; we have seen annual meeting on Christmas Eve It is not funny.
Since 1964 the SEC and the exchanges have moved to a three day settlement of trades and encouraging securities to be held in street name, meanwhile we see a company sending out 6,000 proxies in the spring and claiming less than 300 registered shareholders shortly thereafter. See the filing for SEEC or OART for example It is remarkable but happens nearly weekly. The counting goes something like this: Merrill Lynch counts as one registered holder, in spite of maybe thousands of beneficial holders; Goldman Sachs counts as two, so on and so forth. In the event shareholders try to thwart managements going dark plans and register their stock in their own names in order to cause the number to rise above 300 registered share holders the shareholders management simply does a reverse stock spilt of say 100 or 200 or 300 to one and pays out the odd lot holders, in order to get down to the magic 300 number. It is near impossible to fight a reverse stock split.
Oh But it gets worst, two recent academic studies by noted business schools show after 40 pages of research that in 98+ of the time the share price of delisting companies goes down. These were forwarded to the committee earlier. Meanwhile, after the company is in the dark and see the dropping stock price we often see blocks of stock offered for sale, as holders grow frustrated by the lack of information. Many times Carr will call the companys management to see if they are buyers. And many times they are buyers. Imagine that This it is better than inside information. The management buys but fails to provide the market with the same info they are trading on.
Squeeze outs are another hazard in this arena. Often we see these dark companies freely use shareholders money to buy back share into the treasury. This increases the percentage holding of the remaining shareholders. Once insiders have worked their way into a majority position, the remaining shareholders have the expense of the company finding fairness opinion. The fairness opinion which is often flimsy at best will set the price the last public shareholders are paid.
In one example of a fairness opinion a CFO explained to me that the price that which they were willing to offer was a 31 premium over the last 6 months average trading price. The price offered was one US dollar. This was a ridiculously fair price since the company had 1.60 in cash, a stated book value of 2.20. What a value for me as a shareholder This offer to me was made by management, which held a minority stake in the company. As far as I am concerned this is theft.
Here is what we propose:
1. Form 15-12g or delisting should go to a shareholder vote with insider holders over 25 excluded from the vote.
2. Reverse stock splits should go to a shareholder vote.
3. Shareholders should have the option to put the company up for sale or auction in lieu of going dark.
4. Quarterly reports are to be posted on the web as well as items that would be listed in a Form 8-k if a company is allowed to de-list.
5. Annual reports as well as the minutes and comments of the annual meeting are to posted on the web by non-filing companies.
6. Shareholders must approve stock buy backs by management with shareholders funds. This is step one to a freeze out.
7. Prices paid for odd lot shares must be greater of book value, cash or to the current stock price.
8. All options and warrants held by management should be cancelled in the event of late filings.
9. All beneficial owners need to be counted rather than registered holders.
In closing, compliance and regulatory authorities aim to protect investors from hedge funds, mutual funds and other schemes while allowing companies to de-list. How can these abuses be allowed to continue? The increased regulatory burdens imposed on hedge funds will be born by investors in spite of the fact they are not forced to invest in these funds. Meanwhile, a management in a small cap company can stop filing, force a reverse splits, and walk into the dark while the investors regulatory world refuses to step forward. It may be that one day IBM may have only 300 registered holders.
Is it that the SEC has a reverse motivation here; the more companies that de-list the less work it has to do? Do not allow it to be lost on you that thousands of investors in small cap mutual funds, broad based index funds and specialty funds holding small caps have a hole in their pocket as companies race into the dark.
Our talks with institutions in regards to this reveal that the cost to fight any single company will exceed the cost of the investment. We know this; the company knows this, therefore, the solution rests with the SEC.
When Carr and a small number of our customers started this action with a petition to the SEC regarding rule 4-483, we contacted the press with our issue. Remarkably the response from a number of noted columnists went like this, surely the SEC will see this abuse and stop it, it is so obvious it cannot be allowed to go on That was two and a half years and 400 companies ago.
James A. Brodie
800 221 2243