The stock of clearing and settlements firms Penson tumbled and was halted today after it was disclosed that the firm had $42.6 million in receivables collateralized by bonds issued by Retama Development Authority - a Texas racetrack. The problem is that the receivable had moved to a non-accrual category, in other words the collateral is most likely now worthless. What is odd is that the first mention of this appeared three days ago in the risk factors of the company's 10-Q: "With respect to the Nonaccrual Receivables, at March 31, 2011, approximately $42.6 million were collateralized by bonds issued by the Retama Development Corporation (“RDC”) and certain other interests in the horse racing track and real estate project “(Project”) financed by the RDC’s bonds. In each case these are owned by customers and pledged to the Company and/or its affiliates. Certain related parties to the Company own approximately $14.7 million of RDC bonds that are pledged to the Company and/or its affiliates." Since this goes directly to the company's liquidity, it is no surprise that investors decided to shoot first, and not even ask questions.
Subsequently the company was forced to issue press release with which it hoped to put the situation behind it, by which point however the stock was down almost 30% and was subsequently halted: "We believe the activity of the Company's stock related to the Retama related collateral is unwarranted. We hope this news release will aid in putting this issue to rest,” said Philip A. Pendergraft, Chief Executive Officer. "Penson Worldwide remains strongly financed, with ample excess regulatory capital and a solid business, and none of this affects or involves any correspondents or their customers. We continue to move ahead with our 2011 plan, which calls for reducing quarterly losses and generating a small profit (excluding first quarter non-operating items) for the year." One wonders how many of the company's clients will agree with this explanation and continue to clear with the firm. Especially since shortly thereafter in an 8-K the company announced the resignation of the related party Thomas Johnson "based on Mr. Johnson’s position as chief executive officer of Call Now, Inc, a holder of a portion of the Retama related collateral, both Mr. Johnson and the Company felt it appropriate for him to resign his position at this time." It only remains to be seen if there is fire in addition to smoke... And the next question: if Penson falls, what happens to the billions in funds held in client clearing accounts at the small firm.
From the resignation 8-K:
On May 12, 2011, Mr. Thomas R. Johnson delivered notice of his immediate resignation as a member of the Board of Directors of Penson Worldwide, Inc. (the "Company"). Mr. Johnson's resignation was not due to any disagreement with the Company on any matter related to the Company's operations, policies or practices.
Item 7.01 Regulation FD Disclosure.
On May 12, 2011, the Company issued a press release related to disclosure contained in its Form 10-Q, filed with the Securities and Exchange Commission on May 9, 2011. Pursuant to General Instruction B.2 of Form 8-K, all of the information contained in this Item 7.01 shall be deemed to be "furnished" and not "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and, therefore, shall not be incorporated by reference in any filing under the Securities Act of 1933, as amended. Item 9.01. Financial Statements and Exhibits.
Hopefully, unlike Lehman, in a worst case scenario, and downstream consequences can be "contained."