Very rarely have I done a piece and had a virtually unanimous push for it to be rewritten. This one is it. And for good reason. This piece touches on some of the more arcane aspects of the brokerage business and also gives you a glimpse into some of the schemes used to hype performance and cheat the marketplace. In light of the shocking stuff that Martin Frankel is alleged to have masterminded, the regulators are going to have to adopt a much more skeptical eye toward trading that on the surface doesn't make sense. I was gratified to see Nasdaq shut down trading in this stock Friday, and I would like to think that this article had something to do with it because I know NASD Surveillance reads my columns. I will go into a great deal of detail about what I think occurred, more to an idea of how you can protect yourself from ever being embroiled in a situation like this. As always, the original column is reproduced in regular text, with my new comments in boldface.


ABR Information Services


situation stinks to high heaven. All day I heard a ton of innocent explanations of why a stock that's worth no more than 25 1/2 closed on Wednesday at 90. Someone said it was a

Russell 2000

rebalancing gone awry. Another guy said someone may have gotten wrong advice about how much ABR had to be bought at the close. I suggested that perhaps someone bought the wrong company and got the symbol mixed up. I have seen all of these happen before.

(My contribution to this morass came from someone who does nothing but rebalancing work. We have seen so many keypunch errors, and my source speculated on a mix-up. The other theories about a mistaken buy of ABR to fit into the Russell may have played a role, but when I discovered the intense buying ahead of Wednesday, those explanations ceased to wash with me.)

But I now think all these innocent theories are wrong. I think there may have been some chicanery here. I think that not because of the way the stock went out on the last day of the quarter but because of the way the stock was trading all of this week and some of last week. For weeks, this stock had been trading at its intrinsic value of 25 1/2, the amount


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intended to pay you if you owned one of the 400,000-odd shares that weren't already tendered, for a couple of weeks. It was a foregone conclusion that it should never trade higher.

(I can't believe I spelled Ceridian wrong in the first draft, especially because at one time it was my largest holding. All you needed to know about Ceridian was that it agreed to buy this company for $25.50 a share in cash. The tender was completed last month. (But not everybody gets the paperwork done and some people don't respond or are on a desert island or a Skylab or something. For these people, Ceridian was kind enough to extend its $25.50 offering after this date, so the stock was still trading for weeks around this price. (In the future, perhaps the NASD should suspend trading in stocks that are functionally dead after the tender's over. Anybody who discovered their certificates after the fact could then go directly to Ceridian, via the Web, and file. In fact, the Web should be the way all of these stubs are handled. NASD might want to call a meeting to discuss this stuff if it wants to avoid the shenanigans that happened here.)

It then began to rally suspiciously June 23, when it traded at 25 9/16 on 1,000 shares. That's a teenie more than the company intended to pay.

(Just so there is no confusion, there's always the chance that the tender won't be completed. There is always a chance that something will go wrong -- or, in some cases, more right. In other words, Ceridian could have backed out or someone else could have paid up. But once the tender was completed, as was the case here June 7, there is simply no way that you would ever get more than $25.50 from anyone. It is simply a done deal. The moment this stock traded as much as a penny north of $25.50 should have been an immediate red flag.)

Now, get this: The stock went out at 26 on June 24 on 3,400 shares, and then spiked to 26 3/4 on June 25 on 20,200 shares. None of that buying makes sense. (Again, anything north of 25 1/2 is a waste.)

It is entirely possible, right then, that someone saw this stock trading unnaturally and realized that you might be able to sell the stock short at that price, expecting to cover at 25 1/2. This would have been an illegal short, in that you could not borrow this stock. You could not get a locate, something that has to be done before you short a stock if you don't want to violate the law. (You could not borrow it to short it because all of the stock that was in the vaults around the Street had already been tendered and the rest was not in a margin account and could not be let out.)

(Here is an extremely complicated point and I am going to take it very slowly for you. Let's say you knew that a stock was trading too high, because the fundamentals did not support such a valuation. (Let's use National Gift Wrap, my dad's company, to avoid any confusion. You know that National Gift Wrap is having a just so-so year, but because it added AskNational Gift, a Web site to order gift wrap, the stock tripled from 20 to 60 in two days. As AskNational will not be up and running for several years, you think the stock will go back down to 20. You want to make a profit from that decline. You could sell 1,000 shares of National Gift at the last sale, 60, even though you didn't own it. The next day, when it is revealed that AskNational won't be up and running until 2002, the stock drops back to 20. If you sold the 1,000 shares you didn't own at 60 and bought back the 1,000 shares you didn't own at 20, you pocket the difference, 40 times 1,000 shares, or $40,000. That's how you profit from a stock's decline. It is the flip side of riding the stock from 20 to 60 and selling out there. (But there is a difference. So let's change the facts a bit. When you sell a stock, you have to deliver the stock that you sold to the buyer. Let's say you sold 1,000 shares of National Gift stock with Cramer Brothers, and a client from Remarc Brothers bought the stock. In three days, the Remarc client is going to want his shares. If you own the shares, it is not a problem, as Cramer Brothers takes them out of your account and ships them, by wire, to Remarc, which places them in the account of the buyer. (Now, let's say you sell a stock short. You don't have the shares in your account for Cramer Brothers to send to Remarc. That means you would fail to deliver them after three days. But if you sell a stock short, and you have to tell Cramer Brothers ahead of the sale that it is short, Cramer Brothers has a whole team of people ready to find those shares, or borrow them, so you can have stock to send to the buyer at Remarc. (The Remarc buyer doesn't care if the shares he buys are borrowed or not. For him, once they are in his account, he does not know the difference. The trade is completed.) (That team is called "stock loan." Before you sell National Gift short, you have to tell your broker to check with his stock loan department to see if National Gift can be borrowed and whether you can get what is known as a locate. That puts this whole borrowing process in motion. (Most of the time, there are shares hanging around in the vault of Cramer for you to lend out to Remarc. The reason, by the way, is that when you opened up your brokerage account with Cramer, you probably signed a hypothecation agreement as part of the opening. That means you gave Cramer the specific right to put your stock in the vault, so it could be lent out for precisely this reason. Periodically you will see or hear of companies that want you to take your shares out of the vault, also known as Street name, and put them in your own name and take delivery of the shares. This tactic is meant to stymie the short-sellers who may be targeting a specific company. (Some companies fret so much about short-sellers that they spread the word that if everyone took their stock out of Street name, they could force the short-sellers to cover, or be bought in, or risk a short squeeze. I think these are silly games and if the fundamentals are any good, there would be no problems to begin with. But it happens. (Anyway, if you decided to sell short National Gift at 60, or short National, as you would say, you might find that there aren't any shares around to borrow to meet the buyer's demand of having the stock in three days. You will have failed to locate. When you have not gotten a locate, it is ILLEGAL to sell the stock short. (If you disregard this, and sell it anyway, you could run afoul of the law. I always check before I short. If I can't get a locate, I stop right then. Period. No ifs, ands or buts. (Remember the


(WAVO) controversy, in which everybody thought I was shorting the stock while I was discussing it on CNBC? All I had done was this: Before the show began, I called

Goldman Sachs'

stock loan department to see if "one could get a locate on Wavephore." They told me in no uncertain terms that the stock could not be shorted because there were no shares in the vault and a locate was impossible. They said that the stock was being squeezed up because of that fact, as other short-sellers were scrambling to find stock to deliver to the Wavephore buyers. They told my firm this was a well-known short-squeeze. For repeating that precise fact on air, I was pilloried. Go figure. Back to our ABR story.)

Then on June 28, the stock explodes to 27 1/2 on 52,200 shares. Now, there can be no innocent explanation for that action. Who would possibly pay that much for something unless he deliberately wanted the stock higher for some purpose? Everyone who bought that day at that price could expect to lose $2, as you were guaranteed no more than $25.50.

(OK, the innocent analysis here is that someone shorted ABR in the days before, as they knew that the stock was overvalued. That short-seller failed to call stock loan. If he had, he would have discovered there were no shares to lend out. All shares that had been available to lend out were already tendered. The only stock left was stock that was taken out of Street name and not in the vault. Had you called stock loan as you should have, Mr. Short-seller, you would have been told "no go" and you would not have done it. So now you had to cover or go into the open market and buy it back -- because you would have failed to deliver the stock to the crazy or crooked or stupid buyer -- we still don't know which.)

It gets worse. On June 29, the day before the ridiculous close, this stock trades to 29 11/16, on 28,300. That's ludicrous. As Nasdaq stocks are double-counted, that's really only 14,150 shares that were bought, but every share was bought stupidly, unless, again, you wanted to take this stock higher purposefully.

(Some people dispute this double-counting, but the Nasdaq volume numbers can be confusing because sometimes a buy and a sell are counted as two trades, instead of one as it would be on the New York Stock Exchange. All of the trading this day is deeply suspicious because these buys, unless they were made to cover, are the work of a very clever crook or a total idiot who should be fired immediately.)

Of course, we all know now that the stock went out at 90, on huge volume, 273,500 shares, but the commentators made it out to sound like this was a last-minute splurge. This stock had been going up all day. People had been nibbling on the stock in the 30s all morning, which, again, is just as preposterous as 90 when you think about it.


Thirty thousand shares gapped it to 60 with 10 minutes left. Another 10,000 shares in different little pieces then took it to 90 at the bell, where the notorious 87,000 shares traded in two lots after the close as well as several thousand other shares at that price. None of these buys made any economic sense, either.

(All of this was attributed repeatedly to the Russell rebalance. That now seems like hogwash. If you knew this stock was going to be pegged at 90, this selling made a ton of sense, too much sense.)

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This simply could not have been an error. That's a pattern of persistent absurd buying.

Now, let's craft some sinister scenarios. Let's say you are a performance fund and you aren't doing so well. You choose not to tender your stock for 25 1/2, and then, for a minimal amount of buying pressure, you walk this stock up systematically for days before the end of your quarter.

You then blitz the stock up in the last half-hour. Your position rises in value immensely because of a small amount of buying and you get credit for a giant gain. That's a huge hit that could mask some other big losses.

(If you own 50,000 shares of ABR and for another 25,000 shares you can get a double, you might go for it. That's a $2.5 million gain! Not to mention all of the other stock you might have bought leading up to 90. That's money in the virtual bank, because your investors don't know how you made your money and the 90 mark is as good as gold.)

You have the whole next quarter to make up for the loss that you may have generated.

(Remember, hedge funds report on a quarterly basis, not a daily basis, so this trade may have made up for some losses away from this. Losses do happen and people can be pretty frantic about them. Never underestimate the resources of someone who has lost people a lot of money and wants to make it up fast.)

You may have been able to work with a friend, someone complicit, who knew to short it to you all the way up in the last half-hour, so he could make a killing the next day when you walked away and the stock plummeted back to its natural level. You could work out some sort of illegal sharing arrangement with that short-seller to recoup some of that gain.

(Again, you may have had a situation where a market order was given, and the market makers had no supply so they made up some price, $90, and then booked it. But it is more likely that the $90 was an agreed-upon price between two parties, with both profiting from the decline the next day. The buyers on Thursday should all be examined to see if they sold at 90 the day before.)

Here's another explanation, less sinister, but still with a culprit. Someone might have seen the action leading up to the 90 trade and said, "Hey, this is ridiculous, I am going to go short this overrated stock."

Each day the stock goes higher, perhaps because someone wants it higher (first example) or perhaps because someone, wrongly, thinks something is going on. The short-seller can't find any stock to deliver (you have to provide that stock, which usually comes from stock loan) and he gets a buy-in notice. He frantically tries to buy back the stock, paying absurd amounts, as the stock loan department that needs to deliver the stock to the buyers keeps threatening to buy the short-seller in.

(That means go into the open market and buy the stock.)

The stock doesn't come down and he fails to cover.

(This would be the National Gift Wrap instance, in which the stock doesn't come down right away and Remarc comes after you and says, Where is your stock? and you have to go into the open market to buy stock. You may not be able to get it all and you chase it up frantically. That is a short squeeze. It is entirely likely that someone from Remarc may have been taking the stock ahead of you, knowing your desperate situation.)

The short-seller stalls and stalls until this Wednesday when, finally, after the close, the firm that is supposed to deliver the stock just goes in and buys it at any price, which in this case is 90. The short is forcibly covered for a brutal loss. The short-seller has no choice. That's how buy-ins work.

(That's Remarc screwing the Cramer buyer by going into the open market at the bell and buying in all the shares, maybe under the cover of a Russell imbalance.)

The culprit here is the firm that did the buy-in. It is possible that the buy-in firm told one of his buddies, or his own desk, to get the stock in at all costs. That desk then ripped the short-seller's eyes out with that 90 trade and covered Thursday morning much lower. What a huge profit. (Remember, 90 minus where you bought the stock back -- somewhere in the 20s -- equals your gain.)

(If Remarc knew that Cramer's client was scrambling, someone at Remarc might buy the stock ahead of Cramer and then force Cramer to come in and pay through the nose, generating a fabulous, fabulous trade for Remarc and an incredible amount of pain for the short-selling client of Cramer's.)

Does stuff like this happen? Heck, I had it happen to me. I was part of a brutal buy-in once for the old

National Community Bankshares

in Rutherford, N.J. I was short it at the time of the S&L crisis. I thought it would go bankrupt and I wouldn't have to cover. One day I got a call from my firm's stock loan department saying that they could not find any more National Community shares to lend me, and that the firm that I had sold the stock to was threatening to do a buy-in to be able to deliver the shares I had sold. I stalled for days and days, hoping the stock would come down so I could buy it in myself. But it started running up, as it is usually widely known when a short squeeze gets going. (People talk; stock loan departments talk.)

(You are at the market's mercy when this stuff happens. It is amazing. Check the archives under Noxell and see how this stuff works. It is amazing.)

I watched in horror as the stock I was short about 35,000 shares jumped from 14 to 17 in a matter of two days. On the third day, a big piece of stock, 35,000 shares, traded at 19 long after the market had closed. I had been bought in, unbeknownst to me. I saw the report that I had bought 35,000 shares on my run the next day.

(You don't even get told about a buy-in until after it is done sometimes.)

I was livid. I still won't talk to the guy who did it to me, and this was 10 years ago.

They had paid 19 for me and I took a huge loss. The stock immediately dropped to 15 the next day. The seller of the shares was the desk that did the buy-in. They made 4 points on their short overnight.

(Brutal, but I could not find the stock. Had I, I could have kept this from happening. But I could not get a locate. Which means anything is fair, including what the squeezer did to the hapless ABR buyer. Let's face it, if the ABR buyer simply made a mistake -- why doesn't he just admit it, and blame it on "style purity" or "long-term" investing or some other canard that hapless managers use to cover their behinds? Unless it wasn't innocent, as I am suspecting.)

I suspect that something like that may have happened here. Either the seller made out like a bandit (scenario two) or the buyer was a premeditated bandit (scenario one).

This situation demands an investigation. There was nothing innocent here. The Nasdaq and the SEC should be getting all of the trading records of people who traded this stock and be raising some questions.

Right now.

(And they did. Good for them.)

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at