Last Thursday, in a move which we had expected [6]would happen, KaloBios new CEO Martin Shkreli [7]gave shorts in KBIO a "thanksgiving present" when he announced he would stop lending out his 70% block of KBIO shares, thus making shorting virtually impossible and forcing a short squeeze, one which sent the stock up over 100% the next day.
It appears the idea of withdrawing one's borrow has spread to other troubled companies, and moments ago in a very surprising statement, the Chairman of small-cap fashion company, Sequential Brands Group (SQBG), William Sweedler issued the following statement [8]today "with respect to the recent volatility in the Company’s stock price", by which we assume meant the 10% intraday slide in the company's price.
“Tengram Capital Partners, as the largest shareholder of the Company, has been closely monitoring the significant decline in the Company’s stock price and associated increase in trading volume. We believe this decline in stock price and related increase in volume is being driven primarily by short sellers. The Securities and Exchange Commission only permits this activity if the short sellers have access to shares that may be borrowed to cover their positions. What you may not know is that you, as a stockholder of the Company, may be facilitating the ability of these short sellers to create these positions by permitting your shares to be borrowed.
The problem, however, is that unlike KBIO, Tengram owns a modest 16% of the company and hardly enough to cause a panic short covering burst in the stock, which according to Bloomberg has 9% of its float shorted.
As a result the Chairman had no choice but to ask every other investor in the company to do the same, and force the kind of squeeze witnessed in KBIO (and of course Volkswagen):
"Tengram has instructed its broker that it will not permit borrowing of any of its shares by short sellers who are only interested in reducing the value of the Company’s stock price for their short-term gain. We urge each of you to contact your broker today and inform them that your shares may not be made available to be borrowed by short sellers.”
In other words, the war against shorts takes on a new form, one where executives and investors are pulling borrow, making naked shorting virtually impossible, and hoping to technically trap shorts and force a short squeeze.
It remains to be seen if they will succeed, although for now the SQBG price has returned back to opening levels...
[9]
... although we are confident that as more and more companies try the "Shrekli" angle, many more squeezes among some of the most troubled public companies will become the norm, leading to even more pain for those who are short them, just as we predicted a week ago [10]. At least until the SEC and Finra have something to say about this practice.
