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The Case of the Disappearing Shares

Another example of the wonders of pooled nominee accounts has come to my attention. When you buy shares through a stockbroker, you expect to receive them. Indeed settlement should now take place in 2 days if traded electronically as most now are. So if you are using a stockbroker’s nominee account they should appear in that account in that period. You will see them on your account so they will be there will they not? The answer is not necessarily!

Take the case of New World Oil & Gas (NEW) that developed earlier this year. It is an AIM traded company where there was a large placement of shares anticipated to refinance the business in April. But is seems that there was a lot of naked short selling taking place (i.e. selling shares the seller did not own), perhaps on the basis that the sellers could acquire shares to settle the trades from the placing. As much as 3 times the issued share capital might have been short sold. Readers might remember the case of Room Service back in 2004 where likewise many more shares were sold short than the company actually had in issue, which meant the deals could never be settled. It resulted in heavy censure by the FSA. What happened at NEW seems very similar.

A significant number of holders of NEW wanted to requisition an EGM to change the board, but found they could not get their shares re-materialised into paper certificates because market makers had not delivered stock they were supposed to. Given the settlement issues that there were in NEW’s stock, as acknowledged by the London Stock Exchange in three separate market notices, this problem was well known.

What was less well known were the problems some long-term holders of NEW faced in getting their shares re-materialised. There were at least four instances of clients of Barclays Stockbrokers and Share Centre, who had bought and held their NEW stock long before the forward selling controversy began. Holding a combined 3,000,000 shares, these people requested re-materialisation of their stock only to be told by Barclays Stockbrokers and Share Centre that they could not because neither broker held the shares anymore!

Why? Because other purchases into the “pool” had not been settled as expected (presumably ones that were trades with the short sellers). Other clients had sold holdings from the pool, thus leaving a totally inadequate number to meet the request for re-materialisation.

In other words, the brokers had sold the clients shares without their knowledge, and allowed sales by those who had purchased shares and not received settlement of them, because they were all mixed up in a pool.

These problems effectively defeated the initiative of the New World Shareholder Action Group (see ) who could not get past the 10% holding requirement to requisition an EGM even though they believed they had 60% of shareholders supporting them. Thanks to Ben Turney who is promoting the Action Group for some of the information herein.

So the moral is: if you hold shares via a brokers nominee account, as most investors do, the broker may not in reality actually own the shares. And they won’t necessarily tell you that the delays in settlement are affecting your position. At least if you are dealing via a Personal Crest Account or in Certificated form you might know about the problem so this is another good reason why ShareSoc would like to see nominee accounts, particularly pooled ones as are most of them, discouraged. Go here to read about our campaign on this issue:

In addition it surely suggests that naked short selling should be banned as it is very likely to lead to settlement problems as happened in this case. The LSE (who regulate AIM) and the FCA seem to be very little concerned about these issues which is surely symptomatic of their attitude that “anything goes” on AIM.

Roger Lawson

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