"A

lie around it."

worst thing you could possibly do. If
you're going to do that, be a private com-
pany."

The best antidote to short-selling is,
of course, a good, ongoing IR program
that is in place long before the crisis devel-
ops. An honest dialogue between the com-
pany and the investment community
usually precludes the kind of hype and
overpricing that attract short-sellers in the
first place. Moreover, maintaining healthy
relations with analysts and influential
portfolio managers can be extremely help-
ful in instances when short-sellers get real-
ly nasty and start calling up the company's
major shareholders to spread damaging
gossip.

It also helps to maintain rapport with the financial media. Thorough, accurate press coverage can greatly aid a company in keeping its credibility during a mean rumor campaign. In fact, that kind of crisis can even become a boon to financial relations because, as Cameron Associates' Borchert cheerfully points out, "You build better credibility with the media with ncgative news than with positive news."

Borchert suggests that companies routinely plan for a short-selling crisis as part of their investor relations program. "All companies should have a crisis-management program. You've got to know what you're going to do when a crisis hits, like Tylenol scares or Bhopal," he says. "And you've got to add a bear raid to that list" The plan should provide for involvement by top management, company attor neys, investment bankers and investor and public relations specialists. It should also designate one official crisis spokesperson. Otherwise, cautions Borchert, shortsellers will make hay out of even the most innocent discrepancies between what dif ferent company representatives are saying

Friday phone calls

Another part of being prepared is knowing what to do about a negative mention in Alan Abelson's "Up & Down Wall Street" column in Barron's. At last May's shon-selling conference, dispirited CEOS told story after story about receiving lateFriday-afternoon phone calls from Barron's Invariably, the executives had felt a rush of excitement about the sudden media interest in their companies, only to discover the next day that they had been publicly eviscerated by Abelson.

"If you get a call after 5:00 in the afternoon on Friday," consultant Towcy cautions, "it's got 'bear raid' written all over it. And if you know it's a bear raid, you put your tape recorder on." Having helped two different clients survive mention in Abelson's column, Towey has some additional advice. "Don't subscribe

to Barron's," he tells IR officials. "Buy it on Saturday morning. You need to be prepared. The worst thing that can happen is to be blindsided on Monday morning."

Towey also suggests taking the simple precautionary step of keeping a list of all important phone numbers at home, so that the company's reaction can be thoroughly planned before the market opens on Monday. That might well entail a Sunday afternoon meeting with top management. More than once, Towey says, he's made the Sunday afternoon trek into Manhattan from the Hamptons.

Despite the negative connotations of a late-Friday-afternoon phone call from Barron's, Towey and other IR practitioners still recommend that companies cooperate with the publication — if only so they can later ask for a chance to reply. Joseph Feldschuh, the CEO of Daxor Corp., a New York-based company that runs blood and sperm banks, did that last year and wound up satisfied. "I basically had an okay experience with Barron's because they printed our rebuttal in full," Feldschuh says.

The best defense

Obviously, the best defense against short-sellers is to prove them wrong. Reebok International is often cited by shortsellers as a textbook example of a company that responds adeptly to an attack. Murphy conceded in his newsletter after a bear raid last year, "The stock has been a disaster from a short point of view, and the only question is when to cover."

Reebok chief financial officer Paul Duncan reviewed his investor relations strategy in an interview with Institutional Investor last fall. The key to the program, he said, was expanding communications without making any direct reference to any short attack. "You absolutely lose once you start fighting head-to-head," Duncan counseled. "You don't want to give them any additional publicity."

Duncan also said he had spurned re-. quests from other companies that he complain about short-sellers to members of Congress. "I just feel that we're in the business of selling shoes," Duncan said. "The shorts will take care of themselves over time." Besides, Duncan professes to have such confidence in his company that he can look forward to the day when the shorts will have to run for cover. "If what they're saying about you is not true," he says, smiling, "they will create a tremendous growth in your stock in the future."

Another athletic-shoe company, L.A. Gear, was taking a similarly blasé ap proach to a spate of short-selling last summer. "We're just going about business as usual here," maintained Elliot Horowitz, the chief financial officer. "What it's really

going to come down to is performance."

There are times, of course, when companies may be forced to become more aggressive, especially if they become convinced that short-sellers are manipulating their stock illegally. Occupational-Urgent Care Health, a Sacramento processor of workers' compensation claims, filed a $90 million lawsuit carly this year against San Francisco's Sutro & Co. because of what it considered a vicious rumor campaign by a Sutro broker. President James Cameron told the short-selling conference last May how his company endured months of increasingly damaging rumors, including claims that management had criminal records. Then, he got his first "real break," a call from a former New York broker with a big position in OUCH who had recently taken a job at Sutro. "He called to let me know that something was really wrong and that he felt illegal activities were being encouraged... in an effort to hammer down the stock," Cameron related. Shortly after OUCH filed suit, said the president, the rumors "came to a screeching halt." The lawsuit is pending in federal

court.

In 1985 Daxor's Feldschuh became convinced that his company was the victim of naked shorting (in which shorts don't borrow actual shares of stock, as required by law). He promptly spread word that he was planning to write all of Daxor's shareholders a letter advising them to ask for their stock certificates. Because stocks cannot legally be shorted without first being borrowed, which requires a temporary transfer of the stock certificate, such a move would have created a shortage of Daxor stock and caused a major short squeeze.

"If we had put it through completely, we could have wiped a few brokerage firms out," Feldschuh claims. "We put out the word that we were not to be trifled with." He warns, however, that the strategy wouldn't work with "garbage stock" that is, a stock without a consistent shareholder base. "If you've developed a loyal shareholder following, then you control your company."

When circumstances require it, there's nothing wrong with fighting aggressive short-selling aggressively unless,

that is, the short-sellers are right about your stock. Kynikos Associates' Chanos advises companies to let truth be their guide. "Find out exactly what's being said in the marketplace," he says. "If it's a false or misleading statement or rumor, go after it. Prosecute, sue, whatever. On the other hand, if— as is the case 95 percent of the time it's a fact, then you'd better address it squarely. It's going to be found

out. There are too many bright people out there." i

the-counter, hoping to cover their ican Continental's problems become stock drops.

short positions at a profit when Amer

widely known and the price of the

Keating's solution to his woes:

Shoot the vultures. His ammunition:

lending money to holders so they can convert from margin accounts to cash accounts, drying up the shorts' pool of borrowable stock. He's also considering paying institutions so they will stop lending out their stock.

It's amazing. A company running a cash deficit on its operations lends money against its own stock. And, unlike brokers, American Continental isn't required to issue a margin call if the stock price drops. The company says it will demand more collateral if that happens. But can you imagine American Continental selling out the stock of borrowers who don't comply? At the same time it's trying to squeeze the shorts?

If Keating's tactics become wideblow to short-sellers. Few tears for that, but it would also enable companies to artificially prop up their share prices.

Though American Continental is clearly vulnerable, shorting its stock isn't without risk. According to the company, insiders and their families own 8.34 million of the company's 16 million shares, and an employee

35

American Continental's Charles Keuting Jr.
Hunting vultures is easier than fixing a company.

surprisingly, Shearson has been un-
able to deliver some of the stock.
Which brings to mind that old saw:
He who sells what isn't his'n/Pays it
back or goes to prison.

Welcome to Squeeze City. Recent ly, American Continental stock has bounced between 6 and 10, on unusually heavy volume, depending on whether the company or the shorts have the upper hand.

Whatever you think of American Continental, you have to admire Keating's ingenuity at nuking the shorts. The strategy works like this:

Short-sellers typically borrow stock from brokerage houses, which for a fee lend out shares that customers keep in street name accounts or in margin accounts. Margined stock can be lent without the customer's consent. It's all perfectly legal and accounts for a good part of the profit brokers make on margin accounts.

Keating, who has hired a proxy soliciting firm to help, has been contact

36

An American Continental subsidiary, Medema Homes, has replaced margin financing on some 287,000 shares, according to the company.

American Continental says it is thinking of paying institutional investors for refusing to let their American Continental stock be borrowed. "Institutions typically lend their stock out for a fee on a day-to-day basis, and we would guarantee them the same income, for a longer period, if they agreed not to lend the stock out,' a company spokesman said, adding that no institutions have yet been approached.

Is American Continental trying to squeeze the shorts? Heaven forfend. "Our goal isn't to squeeze anyone, but to make sure there's an orderly market in the stock," argues the spokesman. "We want to let you know, Mr. Short, that it's not a liquid market, and you should find someone else's stock to play with."

Yet it's not hard to see why the

shorts are after American Continental, which uses clever bookkeeping to obscure the fact that its operations run at a cash deficit. FORBES estimates that cash deficit at around $11 million in 1986, $19 million in 1987-and a staggering $100 million for the first nine months of 1988. The company vehemently-but not convincingly disagrees.

How do we come up with our loss figures while American Continental reported profits totaling $90 million in 1986-87, and a loss of just $36 million in the first nine months of 1988? Easy. We use the cash flow statement instead of the income statement.

We don't count as cash flow "interest credited," which is interest paid to depositors of the company's S&L but not withdrawn, that money, after all, belongs to the depositors, not to the company. Neither do we count as cash flow the provision for loan losses. These losses are real and have to be covered.

Reality, in the form of the Securities & Exchange Commission, may now be catching up to Charlie Keating. He tried to show a break-even third quarter by booking a $56 million gain on his paper swapping with one of Sir James Goldsmith's companies. Keating was so eager to book that gain that he parted ways with Arthur Young & Co., his accountants, who refused to approve it, and replaced them with a more accommodating Touche Ross & Co. Touche's approv al notwithstanding, the SEC refused to let Keating book the profit.

This is eerily reminiscent of Finan cial Corp. of America's Charles Knapp (FORBES, July 30, 1984), who used to cover cash operating losses by taking in savings and loan deposits, and used creative bookkeeping to show profits, until the commission forced him to restate his figures and show losses. Knapp got away with it for quite some time, but not forever.

Keating is determined not to lose his company, as Knapp did. Keating is fighting hard, threatening to sue everyone in sight, bullying regulators into moving the supervision of his S&L out of the Federal Home Loan Bank of San Francisco to the presumably more congenial confines of Washington, D.C. Instead of caving in, he hits the shorts right back.

It is hard to cry for the shorts, some of whom play a pretty good game of dirty pool themselves. The whole thing is kind of like mud wrestling, in which both sides are so obnoxious that it is hard for the spectators to root for either. You just sit and enjoy the grunts and groans.

FORBES, DECEMBER 26, 1988

Market Place Floyd Norris

Broker's Big Role
In Chase Medical

WHAT happens when more than 100 percent

However, the Moore & Schley customers, none of
whom have been named, seem to have run out of
money and are now unable to pay for many of the
shares they bought. The brokerage firm's an-
nouncement said that its customers had defaulted
on margin requirements for as many as 300,000
shares, and that as a result Moore & Schley was
acquiring them. That would give the broker a
stake of more than 11 percent.

The announcement did not say whether the
brokerage house would make them available for
lending, but did say the firm had no intention of
seeking control of
the company.

The American Stock Exchange disclosed on Dec.
27 that customers of one firm had accumulated a
very large position in the stock, and Wall Street
sources then identified the firm as Moore & Schley.
But the size of the stake was not known until Fri-
day.

The Amex announcement in December sent the
shares down $2, to $11.625, but they soon recovered
and last traded on Thursday at $13. The Amex did
not allow trading to open on Friday, pending the
announcement that came late in the day.

S.E.C. rules require that groups owning more
than 5 percent of a company's stock disclose that
fact within 10 days of going over the limit. Mr.
Garodnick said such a report would now be made
by Moore & Schley. If all the customers were act-
ing independently, and none held more than 5 per-
cent, no previous report would have been required,
but Wall Street sources indicated that an investi-
gation was going on to see if that was the case. Mr.
Garodnick said he would not discuss any investiga-
tions.

The Amex said it expected to allow trading to re-
open today, notwithstanding evidence that the en-
tire ownership of the company was concentrated
in the founder of the company and in a group of
customers of one brokerage firm. The exchange
sent a reminder to member firms that it would be
illegal to sell shares short unless arrangements
had been made to borrow them.

At what price the shares will trade, if they do re-
open, is anyone's guess. If the shorts are effec-
tively squeezed, the price could soar. If Moore &
Schley, or some of its customers, try to sell, the
price could plummet.

In the meantime, the incident is a reminder that
such factors as a company's growth, of which
Chase has had a lot, and profits, of which it has had
little, are not always the controlling factors in
determining a stock's price.

By PAUL DUKE JR.

Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON-The Securities and Exchange Commission proposed a rule that would restrain techniques used by professional traders to sell what some consider unfairly large portions of the shares purchased in tender offers.

The rule, if accepted, would prevent shareholders from tendering shares held in a so-called short position.

In tender offers for only part of a company's stock, shareholders sometimes tender more shares than the bidder asks for. In those cases, the bidder buys only a portion of each shareholder's tendered shares. The size of that portion is determined by the number of shares tendered.

Traders can increase the size of their portions by tendering shares that they have borrowed and promised to replace later-known as holding a short position. Because of the complexities of going short on stock and guaranteeing replacement, these practices have in effect been available only. to professional brokers and traders. The SEC has contended that such "short tendering" is illegal, but a 1986 U.S. appeals court decision in a related case clouded the issue.

The appeals court in New York ruled in favor of a shareholder who tendered both his own shares and a short position, in a Phillips Petroleum Co. stock buy-back offer, holding that the shareholder's two tenders were separate. The court also said SEC regulations governing such transactions weren't clear.

The proposed SEC ruling would clarify that a shareholder couldn't tender more shares than his "net long" position-the number of shares owned outright minus the number of borrowed shares, or shares held in a short position.

The SEC also said, however, that it would consider rescinding a 1984 ban on selling shares to another party after they

have been tendered, a practice known as "hedged tendering."

Hedged tendering enables traders to lessen some of the risk that a tender offer won't be completed. Thus, proponents ar gue, traders can offer slightly higher prices for stock involved in tender offers; that lifts the price for small buyers as well.

"With hedged tendering, everyone who tender's has some stake in what they're doing, even if they sell later," said M. Blair Corkran, an SEC attorney. "The problem with short tendering is that anyone can tender any number of shares, whether they own them or not. That can create chaos."

A spokesman for the Securities Industry Association said he was "very pleased" the SEC had proposed to clarify the rules. The spokesman also repeated the group's desire that the SEC reinstate hedged tendering.

The SEC will accept public comments on the short-tendering proposal for about two months, and could take several more months before issuing final regulations,