December 3, 2007
I find it absolutely unbelieveable that Knight would take an order to naked short 80% of a company's shares in a single transaction without at least a phone call to confirm.
If they did, then that tells much more than it actually says. Like: Is it such a normal business matter for a broker to naked short 80% of a penny stock issue, in a single transaction, that it doesn't even raise an eyebrow? If so, we are in a lot more trouble than we thought we were.
This from the ST. Louis Dispatch:
Scottrade sues penny-stock company, other brokers
By Jerri Stroud
ST. LOUIS POST-DISPATCH
12/01/2007
Scottrade Inc. won a temporary order Thursday to halt a purported stock split in a small energy company, alleging stock manipulation by the company and fraud by other brokers and organizations involved in trades of the stock.
Scottrade, a discount broker based in west St. Louis County, said in a lawsuit filed in U.S. District Court in St. Louis that the company, Modern Energy Corp., attempted to boost the price of its shares through a 1-for-1,000 reverse stock split but never filed the paperwork required to effect the split. Modern Energy is registered in Wyoming, but its website lists an office in Los Angeles.
Calls to numbers for Modern Energy weren't returned. Shares closed Friday at $1.10, up 2 cents, in the over-the-counter market.
The suit names several broker-dealers, including Merrill Lynch and ETrade, as defendants along with Modern Energy. Advertisement
In the suit, Scottrade says that on Sept. 27, a customer gave the brokerage an order to sell 1 million shares of Modern Energy's stock in his account for at least a penny a share, or $10,000. The shares were trading well below that in September. On Oct. 19, The Depository Trust Co. notified Scottrade electronically that the ticker symbol and identifying number of Modern Energy's shares were being changed.
Scottrade then notified its customer of the change and asked the customer whether he wanted to renew his sell order. He did, and Scottrade asked Knight Equity Markets LP, a market maker and dealer that Scottrade uses regularly, to sell the shares.
Knight Equity sold the shares, but the trades failed to settle in the usual three business days. On Nov. 2, Scottrade said it learned of Modern Energy's plan to do the reverse split and a related issue of preferred stock to its shareholders. The action supposedly had taken effect Oct. 16, three days before Scottrade sold the shares.
As a result, Scottrade's action was interpreted by Knight Equity and other parties, including Merrill Lynch and E-Trade, as a sale of 1 million shares of stock, rather than the 1,000 it should have been after the split.
To cover its sale, Scottrade would have had to purchase 999,000 additional shares of the stock, representing more than 80 percent of Modern Energy's stock. By early November, the new shares were trading at about 89 cents a share, meaning that Scottrade would have to pay nearly $1 million to settle a $10,000 trade.
Scottrade said Modern Energy, which calls itself an alternative energy developer, never completed any of the regulatory filings to back up the stock split or the new preferred shares.
A Modern Energy news release described the change as "a unique corporate action" aimed at reducing its float — which is the shares outstanding, minus the shares owned by company insiders. The release, which isn't dated, says the stock was trading in late October at a penny to 4 cents a share "due to (what we suspect to have been) short selling by market makers." The release says the float in the stock — after the reverse split — was 400,000 shares, or less than half of the amount Scottrade was short.
Scottrade says Merrill Lynch, ETrade and other brokers have tried to enforce the trades. Scottrade has not delivered the shares nor tried to cover its short position "due to the futility of attempting to do so and the harm to the market such action would cause."
Thursday's order bars the defendants from trying to carry out Modern Energy's exchange of shares or taking any action to force Scottrade to buy the new shares to cover its position. A new hearing on the suit is scheduled for 11 a.m. Friday.
jerristroud@post-dispatch.com
314-340-8384
http://www.stltoday.com/stltoday/business/stories.nsf/0/EF5F523C1D070B46862573A4001326A2?OpenDocument