Most chief executive officers celebrate when their shares get listed on a stock exchange. Robert Rudman, CEO of SmarTire Systems Inc., called his lawyer.Last month, he discovered that SmarTire's stock, which normally trades on the U.S. Over the Counter Bulletin Board, had mysteriously shown up on a tiny regional exchange in Germany.
"It's as weird as it sounds, believe me," said Mr. Rudman, whose Richmond, B.C., company makes tire-monitoring systems for the transportation industry.
"It came out of nowhere for us."
It turns out SmarTire has plenty of company. Hundreds of Canadian, U.S. and other companies -- mostly small firms trading in the lightly regulated over-the-counter market -- have suddenly found their shares listed on the Berlin-Bremen Stock Exchange (BBSE) without their knowledge or consent.
Worse, many say the unauthorized listing coincided with a sharp drop in the value of their shares.
This has sparked suspicions -- so far unsubstantiated -- that traders are using the German exchange to skirt new U.S. securities laws designed to clamp down on naked short selling, a shady practice that can sink the price of a stock. The BBSE says such practices are not possible under German rules.
"We suspect that the constant selling pressure on our market may well be related to the listing on the BBSE," said Peter Ticktin, CEO of PonyExpress USA Inc., a courier company in Boca Raton, Fla.
Lifestream Technologies Inc. of Post Falls, Idaho, which markets cholesterol monitors, also said its shares plunged after it was listed on the BBSE, even though the company recently signed a major distribution deal with Walgreen Co., the largest U.S. drugstore chain.
"The recent share price decline cannot be simply tied to any recent change in the company's day-to-day operations," it said in a letter to shareholders this week.
In Canada, companies caught in BBSE's net have included BIMS Renewable Energy Inc. of Montreal, Dragon Pharmaceutical Inc. of Vancouver and Altachem Pharma Ltd. of Edmonton.
In a short sale, an investor borrows shares and sells them on the open market, hoping to buy them back after the price falls and replace them for a profit. In a naked short sale -- a tool that organized groups of traders use to manipulate the market -- a large amount of shares that do not exist are sold to a market maker in the stock on the exchange in the hopes that the sale will create downward pressure on the price before the regulated time span for actual delivery of the stock (usually three business days). Then, after the share price declines, real shares are purchased and transferred to the market maker.
"It wouldn't surprise me in the least that, as the United States tightens up [on naked short selling], the wrongdoers go elsewhere," said Warren Funt, vice-president of member regulation for Western Canada at the Investment Dealers Association of Canada.
While naked shorting per se falls under a regulatory grey area, using it to manipulate a company's stock is clearly illegal, he said. While he has no evidence that the German market has become a haven for naked short sellers, "it's a perfectly logical hypothesis to me," he said.
But the BBSE says it's an unfortunate misunderstanding. Exchange spokeswoman Eva Klose said in a statement that the BBSE has allowed trading of foreign over-the-counter shares for years with no complaints, and that the practice of listing such shares without the companies' approval complies with German securities laws.
She dismissed the allegations of naked short selling, saying the procedure for settling trades and the "strict regulatory framework in Germany" makes it impossible.
She added that the BBSE, which met with the U.S. Securities and Exchange Commission and the National Association of Securities Dealers last month to discuss the matter, reviewed trading records of companies that had complained about illegal short selling and "came to the conclusion that in none of these cases there was an indication that short selling actually took place."
In some instances, the stocks in question had not yet begun trading on the BBSE, while in others there was no buying or selling during the period when the price fell on the U.S. market, she said.
In an interview, BBSE spokesman Andreas Weihmuller said about 300 companies have asked to be delisted, and the exchange has complied in about half of those cases. He said German brokerage Berliner Freiverkehr was responsible for listing most of the companies because it wanted a market for the securities.
Only companies that have no trading volume on the BBSE qualify for delisting, he said. If a company that trades actively were to be delisted, German investors who own the stock would not be able to sell their positions, he said.
The BBSE has been unfairly tarred, he added.
"I understand the shareholders' and the companies' requests for delisting because their stocks are falling down in price, but I think the problem is not really in our stock exchange but in the rules in the U.S.," he said. The real issue, he said, is a loophole that allows a sophisticated form of arbitrage between the U.S. over-the-counter market and Internet-based platforms that handle trading volumes far greater than the BBSE, he said.
Mr. Rudman of SmarTire said his stock hasn't been shorted yet, but it's not a risk he wants to take. SmarTire lawyers in Canada and the United States have demanded the shares be delisted, but the exchange has so far refused.
"As a business person, you have to sit back and say 'How did this happen?' " he said.