- 10% of float ineligible for dividend for not printing out a shareholder list
- 32 brokerage firms and banks forfeited right to dividend
- Weyland creates legal quagmire for firms unwilling to correct fail to deliver problem
- Naked Short order flow is at epidemic levels.
- Short squeeze imminent.
Investors learned in a press release yesterday that 32 brokerage houses/banks have not complied with the corporate actions handed down by FINRA regarding the distribution of Weyland Technologies (WEYL) spinoff. This means that 700,000 shares (10% of the float) are not eligible to receive the special dividend of AtoZpay. The well telegraphed corporate action from WEYL specified that they needed a shareholder list as of October 12, 2018 delivered to the transfer agent by close of business on November 2, 2018. This was extended 3 weeks for reasons unknown, but many have been speculating it was at the requests of brokerages promising WEYL that they will sort the matter out and balance the books. Putting this in perspective, all the brokerage firms had to do is pull the report up on their screen and print out a position report and send the email. Had they completed that simple task then the shareholders on the list would have been mailed their spinoff shares without any legal repercussions. There is no plausible excuse for not complying unless the brokerages had something to hide. Those shareholder with WEYL stock from the non-compliant firms WILL NOT be getting a dividend, but they might have a cause of action against the firms that ranges from breach of their fiduciary responsibility up to securities fraud.
Top Reason to Spin Off = Squash a Known Naked Short
According to FINRA the top reasons for the company to execute a spin off are:
- Better Management
- Separating growth trajectories and strategies
- Better coverage from securities analysts.
- Unlocking shareholder value.
In the case of WEYL it seems like the best chance that they have of unlocking shareholder value is the spinoff of AtoZpay. In the private market the company can garner a 15 multiple for sales. If they hit their target of $100 million in sales by the end of 2019 that is a private market valuation of $1.5 billion. Since WEYL owns roughly half of AtoZpay it represents $750 million. Since 40% of the company is going to be spun out it represents $600 million in value or on a fully diluted basis that converts into $21.69/share. Before the spinoff, when the stock was trading at around $2 – $3 per share it was quite obvious that the stock was being heavily shorted by the market maker Vertex. In the past the company has address irregular trading activity and the insider buying response to it. For the informed shareholder this price was quite a value proposition allowing investors to acquiring over $20/share in value at about a 90% discount courtesy of the naked short. WEYL fully expected to unlock the shareholder value by forcing the short to unwind their position before the record date or face a forced buy-in from the brokerages that had a massive fail to deliver problem on their hands. This has not happened for reasons discussed later in the article.
Special Dividends Commonplace
When a special dividend is declared it is typically because the company has exceptionally strong earnings that it wants to share with its shareholders that is above and beyond the current dividend. These special dividends are also used to make changes in the financial structure of the company or in the case of WEYL spin off a subsidiary company to its shareholders. These dividends are commonplace. In the past couple months about 30 special dividends have been announced. One thing to notice is that 99% are for some sort of cash value. It is unheard of for a brokerage firm to voluntarily give up a cash dividend. WEYL’s special dividend won’t be paid in cash but rather in stock of a privately held company that will be mailed out in certificate form to the shareholders that were listed on the brokerages submission to the transfer agent on Friday November 2, 2018. On November 6th 2018, 32 brokerages did not comply with these instructions and have therefore forfeited their rights to the dividend shares. The loss to these shareholders was substantial and the brokerages are going to have a lot of explaining to do in front of a judge when legal action is taken against them because they neglected to provide a shareholder list by the deadline. The headline number is large, but of those 32 brokerages 13 had DTC positions less than 3 shares and were not entitled to it anyhow.
DTC # Bank/Broker
756 AMERICAN ENTERPRISE INVESTMENT SERVICES INC.
8072 ALPINE SECURITIES CORPORATION
901 BANK OF NEW YORK MELLON
10 BROWN BROTHERS HARRIMAN & CO.
5046 CANACORD GENUITY CORP-CDS
696 CANTOR FITZGERALD & CO.
5099 CDS CLEARING AND DEPOSITORY SERVICES INC.
701 CETERA INVESTMENT SERVICES LLC
5030 CIBC WORLD MARKETS INC-CDS
2170 COMMERCE BANK
5083 CREDENTIAL SECURITIES INC-CDS
873 ELECTRONIC TRANSACTION CLEARING, INC.
8396 HSBC BANK, USA, NA-CLEARING
824 INDUSTRIAL AND COMMERCIAL BANK OF CHINA FINANCIAL SERVICES, LLC
67 INSTINET, LLC
17 INTERACTIVE BROKERS LLC (Interactive Brokers DTC # 534 has been submitted)
750 INTERNATIONAL FCSTONE FINANCIAL INC.
57 EDWARD D. JONES & CO.
1970 JP MORGAN CHASE BANK-EUROCLEAR
512 LEK SECURITIES CORPORATION
2145 MUFG UNION BANK, NA
5008 NATIONAL BANK FINANCIAL INC-CDS
2669 NORTHERN TRUST COMPANY
5084 QUESTRADE INC-CDS
997 STATE STREET BANK AND TRUST COMPANY
2399 STATE STREET BANK AND TRUST COMPANY-DEUTSCHE BANK FRANKFURT
445 STOCKCROSS FINANCIAL SERVICES, INC.
271 TRADESTATION SECURITIES INC.
2622 TEXAS TREASURY SAFEKEEPING TRUST COMPANY
295 VIRTU AMERICAS LLC
595 VISION FINANCIAL MARKETS LLC
8199 WEDBUSH SECURITIES INC-P3
The corporate action the company required was a beneficial shareholder list as of October 12, 2018. If any readers scan through this list they find household names like JP Morgan, Edward Jones, Bank of New York, HSBC, and Brown Brothers Harriman. All these names gave up an estimated $14 million dollars in “free money” assuming a market valuation of $20/share of AtoZpay. All these firms missed the deadline and now need to make good on this to their clients and it will probably come down to a legal fight. The question investors need to ask is why didn’t they take the “free money” because all they needed to do was printout maybe 10-20 investors names on a sheet of paper with their address and number of shares and they get $14 million. What rational person wouldn’t do that for $14 million?
Perhaps counsel advised them that if they submitted a list that showed more shares than what they had at DTC they would be admitting gross violation of REG SHO by not buying in the stock and correcting the fail to delivers. If they did submit a list like ETrade and TD Ameritrade did and it matched DTC then they would get some of the dividend and would push part of the problem down the road into a legal action with the clients, but there would be no heat from the regulators. What none of the brokerages realized is that they were set up by WEYL and the only way out of this trap was a buyin of WEYL stock. The brutal reality is NOT one brokerage bought in the stock and no short squeeze ensued.
The Legal Trap
Option 1 – Buyin the stock so that DTC and Shareholder Records match before the record date.
Option 2 – Falsify records so that DTC and Shareholder list are in balance by the record date, but this tactic opens the brokerage house up to the risk that WEYL wouldn’t do a shareholder transmittal that received a big enough response to prove securities fraud. An informal poll suggests that a high percentage of shareholders responded. Should the shareholder transmittal numbers be higher than what is available for them at DTC the brokerage houses could be on the hook for securities fraud.
Option 3 – Do nothing and face lawsuits from clients for the dividend shares and hope they will settle but avoid sending in a list and committing securities fraud and face SEC sanctioning.
Brokerages Hoping to Kick the Can Down the Road
Brokerages were given ample opportunity to correct the problem, but did nothing. TD Ameritrade has the largest position in the stock. This tweet below demonstrates that they had knowledge of the issue and did nothing to protect the shareholder to ensure they get the dividend. Instead their attitude was that they were going to list only the shareholders with cleared stock. They voluntarily chose not to execute a buyin to correct the situation. Investors need to understand this is in direct violation of REG SHO. This is why some investors at TD Ameritrade will not be delivered the dividend spinout.
There is a greater force at work that is driving the behavior of the brokerage firms. Simply put that force is GREED. There is a tremendous amount of order flow that comes from naked shorting a low priced security under $5.00. Hedgefunds target these low priced companies during their fundraising periods when they use structured instruments like a convertible stock offering. Once the Hedge Fund gets wind of an offering it naked short sells the shares driving the price lower and in the process creates panic selling allowing the hedge funds to manufacture extraordinary profits. The thing is that once a company gets into this downward spiral it cannot get out of it because the naked short seller has no margin requirements and never buys the security back allowing the price to recover.
This abusive selling by the hedge funds is illegal because they never locate the shares before selling the stock which means that the buyer of their stock will have a fail to deliver. The brokerage houses rarely look at their fail to delivers and take corrective action because the order flow from the hedge funds is so great and there is no incentive to enforce the rules because of the minuscule amount of oversight from FINRA.
As the primary regulatory body, FINRA does have the power to force the brokerage to execute a buyin to square up their positions and become flat in their account. It is so hard to prove naked shorting that the SEC has spent little time and effort on enforcement the lack of enforcement has let to rampant abuse by the hedge funds. The brokerages are complicit because they are required to file a Suspicious Activity Report (SAR) on their client but fail to do so because they realize that if their client get investigated the gravy train of orders would grind to a halt. The sheer number of failed trades from a market maker such as Vertex is a telltale sign that something is suspicious. The real problem for the brokerage houses is that they are keenly aware of the issue but still take the hedge fund order flow.
Strategies Employed to Avoid an Inevitable Buy in
Weyland Tech is milestone case study in the war to combat illegal naked shorting by using the regulatory bodies as instruments to force the covering of the fail to delivers. Every dividend has a record date and on that date the ownership of the stock must reconcile to the DTC’s ledger so the dividend is apportioned properly to the shareholders. WEYL used the Liability Notification Procedures to force the regulatory agencies to deliver specific corporate instruction which they did as indicated in the September 24, 2018 press release to the brokerage houses. If the brokerage houses do not comply with these corporate actions they can be “held liable for any damages caused by the failure to deliver the securities in time for the owed part to participate in the voluntary corporate action.” This means if the brokerage houses don’t buy the stock in they are bearing the full responsibility for the short position. If the dividend shares were processed through DTCC credit memos could be generated to artificially balance the situation to create a snapshot of the shareholder ownership. That dividend distribution allow the short actors to slither away unscathed. When WEYL decided to do its own distribution to shareholders which is outside of DTCC it forces a reconciling of the books between the brokerage house and the shares held at DTCC.
Why no price appreciation.
The firms that complied with the corporate action seem to be acting as though they have no fail to deliver problem but the tweet from TD Ameritrade tells a different tale. For example, TD Ameritrade may have sent in a list for 500,000 shares and it may match the DTCC’s records so FINRA has no evidence to require a buyin. However WEYL did in fact reach out to shareholders and asked for a shareholder transmittal letter on October 19, 2018. If WEYL investigates and counts the number of shares and then finds that shareholders from TD Ameritrade have more shares than were reported at DTCC then the brokerage company has issues.
Timing the Short Squeeze
The buy in could be imminent, but that is just rampant speculation. Right now the shareholders don’t know if they are on the naughty or nice list and going to get the dividend. Media coverage about the dividend distribution on November 30 will be instrumental in determining whether or not a buy in will happen because the brokerages would want to keep this issue out of the press. All it takes is one brokerage firm to buy in the stock and many others would follow. After the dividend distribution date passes then this issue could be determined by the courts. If there is no buy in by then the brokerage firms decided it would be cheaper to litigate versus doing a buy in in a thinly traded stock.
WEYL has the stigma of being completely manipulated by the shorts. Unless FINRA does their job to force the buyin firms will resist covering until their hand is forced. The catalyst could be negative press, one of their own breaking ranks and covering, or a litigation. There is tremendous value in this company. At least 700,000 shares might be the subject of a class action lawsuit for not complying with the corporatize action. Rumors have been circulating that periodicals like the Economist, The Wall Street Journal and Investor’s Business Daily are interested in picking up the story. The stakes are very high because if a short squeeze ensues then this process could be used as a template to bust other shorts. It is for this reason we have seen such solidarity with over 32 brokerage houses not responding to a corporate action in the hopes that they can create despair among the long shareholder base and panic them into selling, allowing them to correct their position over time.
Disclosure: The staff at PSINVESTOR are LONG on WEYLAND, and reserve the right to buy or sell their position at any time. PSINVESTOR was NOT compensated for mentioning the above company. For more on our disclaimer, click her.