WERE THE SHORT SELLERS RIPPED OFF?
A California brokerage is accused of manipulating prices
For short sellers of micro-cap stocks, the riches can be substantial--and the risks can be downright scary. These little known market players face a potent weapon: the dread "buy-in," in which brokerages replace shares sold by the shorts, often forcing them to incur painful losses. The long-short warfare is usually waged in secret, and that is what makes the recent tussle between shorts and a California brokerage, Waldron & Co., so remarkable. This time the shorts have gone public--and the result is a rare picture of how even savvy traders can be slaughtered in micro-cap stocks.
For regulators, who halted trading in the stock at issue, Shopping.com, on Mar. 24, the Battle of Waldron poses a fundamental question. Are short sellers positive forces in the fraud-prone micro-cap market, bringing those stocks down to their true value? Or, as claimed by Waldron, do they hurt investors and brokers by driving down share prices?
The battle began not long after Shopping.com was taken public by Waldron last November, at $9 a share. The company operates an Internet Web site that is a kind of online warehouse retailer. The shares, trading in the OTC Bulletin Board, climbed instantly to a premium. By early March, the stock was $32--a market capitalization of more than $120 million for a company that sustained a $2.4 million loss on sales of $377,000 in the nine months that ended last Oct. 31. The company says sales are soaring, but short sellers are unconvinced. "That stock is way overvalued," says New York short seller John Fiero.
Once the shorts piled on, the buy-ins began. As told by Waldron's president, Cery B. Perle, what happened was simple: The short sellers failed to deliver the stock they had sold short. He first gave them notice to deliver--insufficient notice, the shorts say. Then, Perle says, Waldron's clearing firm, Wedbush Morgan Securities, went "to the Street" to replace the stock. They didn't have to look far--there was plenty at Waldron & Co. Perle delivered the stock to Wedbush at prices that he concedes were far higher than they had been selling for only minutes earlier. In one instance, the buy-in price charged Fiero was $39 a share on Mar. 19, when the shares never traded much higher than $26. The price for the shorts was $36 on Mar. 11, when everyone else paid $29 (chart).
Why so high? Well, Perle likens Shopping.com stock to "a 1952 Corvette, pink and white and in perfect condition.... You believe in the next year that Corvette's going to appreciate more." But he denies Waldron made a killing on the "Corvette." He says the shares came not from Waldron's inventory but from "customer accounts." Asked if he knew the customers, Perle became agitated, saying: "I'm not going in that direction. I'm going to be very stern with you there."
But Fiero and other shorts say Shopping.com stock was manipulated upward. Fiero asserts that he lost $977,000 as a result of the buy-ins, and he feels Wedbush bears much of the blame. "They let Waldron run rampant and rip off other brokerage firms and its customers," says Fiero. However, Wedbush's head of clearing, Wendy Rea, asserts that the firm merely acted on Waldron's instructions and committed no wrongdoing. Fiero makes one particularly grave accusation. He maintains that Perle, through an intermediary, recently threatened to buy him in at $50--double the market price--if he didn't close out his short position. That is denied by Perle."BRAZEN SCHEME." Another group of shorts raises serious allegations in a suit filed in U.S. District Court in Manhattan. Florida short sellers Richard and Lauri Gladstone charge that Waldron, Wedbush, and Shopping.com engaged in a "brazen criminal scheme" to manipulate Shopping.com prices by such time-tested methods as failing to execute customer sell orders. The defendants deny wrongdoing.
All the heat has brought forth swift regulatory attention. The National Association of Securities Dealers has launched an investigation of trading in Shopping.com stock, according to sources familiar with the inquiry. And on Mar. 24, the Securities & Exchange Commission halted trading until Apr. 6, citing "recent market activity in the stock that may have been the result of manipulative conduct." In a statement, Shopping.com said it is cooperating with the SEC's inquiry.
The NASD and SEC won't comment on the trading halt. But as far as those high-price buy-ins are concerned, Waldron may have some explaining to do. NASD Regulation's general counsel, Alden Adkins, says there are no hard and fast rules dictating the prices at which buy-ins can take place. But he says the prices must be "fair"--and that the person who sets the price must be prepared to defend it. This is one battle, it seems, that the shorts are likely to win. But whoever prevails, there will still be sure losers--the small investors who get caught in the middle.By Gary Weiss in New YorkReturn to top