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VirnetX Anything but a Marginal Market Problem

Oftentimes, margin accounts are created so executives can use their stock for personal investments or loans without having to sell shares, which could be viewed negatively by investors and lead to capital gains tax.

Seemingly in response to the CNBC column, Larsen said 6,853,192 of his VirnetX shares are pledged to Deutsche Bank for a personal line of credit of $5 million, in a July 24 filing with the Securities and Exchange Commission. Previously, he had pledged nearly 8 million shares for a $3.5 million loan, the filing stated, signaling that a recent rise in VirnetX shares increased their value as collateral. Larsen also reported 1,783,068 in restricted stock units in VirnetX's shares and options that can't be sold, according to the filing, putting his total stake at 18.4% of the company's outstanding shares.

According to VirnetX's trading price of $24.24 as of Monday's close, Larsen's $5 million loan is secured by over $166 million in pledged stock, likely giving the CEO ample room to withstand a share drop. Some Wall Street analysts are comfy cozy with Larsen's use of pledging after the new disclosure.

Cowen & Co analyst Matthew Hoffman wrote in a research note that the filing confirmed Larson's past statement that he never sold company shares, in a disclosure that put controversy over margin accounts "to bed." Gilford Securities analyst Robert Tango added that since the shares are seemingly pledged to a personal loan and not an account for securities purchases, the prospect of margin calls may be overstated.

Still, VirnetX's share volatility, its recent disclosures regarding CEO Larson's share pledge and the enduring uncertainty over margin calls, taken with actual share firesales at Green Mountain Coffee Roasters and Chesapeake Energy stand as a clear indication that minimal disclosure surrounding collateralized share holdings can impact investors.

The risk of more market implosions triggering margin calls is significant, according to May 2012 data from Institutional Shareholder Services. Approximately 23% of S&P 500 companies have executives or company officers who have pledged company shares. Only 62.4% of S&P 500 companies have a policy in place prohibiting the hedging of shares by executives.

In May, Green Mountain Coffee Roasters ousted its chairman and founder Robert Stiller after he was forced to sell $125.5 million in stock to meet margin calls. Stiller may face Securities and Exchange Commission scrutiny over the sales, according to a Reuters report, because the sales came during a restricted period for insider selling.
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