Tuesday, January 24, 2006

Millions of Stelco shares traded after judge strikes shares worthless

I wanted to do what I can to bring attention to this Stelco issue, so please read this post at Bill Cara's blog about 40 million shares of Stelco traded today after the judge struck the shares worthless earlier this week. Cara explains this seemingly idiotic behavior as short covering, and a tactic to evade the unwanted scrutiny that would come with filing special tax paperwork. I'm no accountant, but it is easy to see that short positions held all the way down to zero are special circumstances that need to be reported differently.

So why wouldn't the shorts just hire accountants to take care of the extra paperwork and let the shares become worthless to realize the full potential of their short positions? One likely explanation is that many of the parties with large short positions are masking illegitimate manipulations of the company and its stock, explains Cara.

It will be interesting to see how this situation resolves. If there is no accountability and different laws for corporate hijackers, the markets become an even more unfriendly game than they already are. I'm not a sympathetic or charitable person, but I do believe that shareholders shouldn't have to fear the rug getting pulled out from under their feet by lawyers and charading courts.

I don't practice value investing for the most part, but cases like this Stelco one dramatically increase the risk premium that value investors must demand in order to put their capital at risk. The financial markets are an echosystem, so damage to this foundational investor group is damage done indirectly to me. I advise traders and investors to look more deeply into what has transpired in Canada, and more specifically, at Stelco, and discuss the implications openly. It is in our best interest.


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