Rocker NFI Connection - A Conspiracy of Greed
A Little Bit of History
In July, 2002, NovaStar Financial, Inc. became the target of a massive, concerted short attack. Their short interest went to 60% of the float in a period of 2 months, and the share price plunged as conservative, risk-adverse investors ran for the door from the newly engineered volatility. There was no way of knowing who was behind the short attack, as short positions are not disclosed by hedge funds.
On the Q3, 2002 conference call with the company, a new voice was introduced, one David A. Rocker, President of Rocker Partners, LLC. He participated in the conference call, asking a number of off-base questions relating to the accounting treatment of certain items (he seemed unfamiliar with REIT accounting procedures), and generally being hostile. Rocker is the principal in Rocker Partners, LLC, Compass Holdings, an offshore hedge fund, and Helmsman Holdings, another offshore hedge fund. His ownership thereof is documented in the SEC-sponsored Hedge Fund Roundtable presentation for Panel #6 on Hedge Fund Enforcement and Fraud Concerns, dated May 14-15, 2003. On page 40 you'll find Mr. Rocker as the sole control of Rocker Partners, Compass Holdings and Helmsman Holdings:
http://www.sec.gov/spotlight/hedgefunds/hedge-mccarty.pdf
The Power Of The Press, and Freedom Of Speech
Of interest at this stage is the involvement of Rocker in Thestreet.com (TSCM), an influential and supposedly un-biased on-line financial publication that features investment advice and commentary. One of the leading commentators is Jim Cramer, who also has a syndicated radio show and a television show (“Kudlow & Cramer”) on CNBC. Mr. Cramer holds 3.495 million shares of TSCM as of 4/3/03 when he filed pursuant to SEC regulations that he had sold 81,666 shares. That gave him a 14.64% stake. Other owners include David A Rocker, with a stake of 2.224 million shares, or 9.32% (held personally), and an additional 1.284 million shares (6.87%), held in Compass Holdings1. This combines to a total of 16.19%, making David Rocker the sole controller of the largest block of shares in TSCM. It is also interesting to note that Elliot Spitzer (NY DA) was an investor in Cramer, Berkowitz (hedge fund Cramer ran before TSCM) prior to Spitzer becoming NY DA. It's a small world, apparently.
On December 20, 2002, after the Q3 conference call and the unexpected and unprecedented dividend increases, Herb Greenberg of TSCM began a series of inflammatory and bashing pieces about NFI. Jim Cramer had also started issuing “sell” recommendations on his radio show, the latest occurring on August 5, 2003, wherein he echoed the language and innuendo used on the July 31, 2003 NFI conference call by the Compass Holdings representative J.C. Kittinger and Helsman Holdings representative Russell Lynn, and additionally made the provably false statement that NFI, “couldn’t afford to pay its dividend”. The broadcast is available in the archives at TSCM. In addition, two articles were published in May 2003 in Forbes by Elizabeth MacDonald, a Senior Editor, using many of Rocker’s phrases, and advising readers to short the company and cover at $20.2
By June 2003, 94% of NFI’s float was sold short. It is as of today still 70+% sold short.
Closing price manipulations and dumping
NFI’s shares have experienced a remarkable phenomenon unlike any other issues on the NYSE. The majority of trading days, the closing price is substantially lower that the last trades at the bell. This is achieved by shares trading hands 2-15 minutes after the bell, usually $0.15 to $0.50 less than the trades occurring at 16:00. Apparently, a seller or sellers are systematically selling shares for less than they would bring in the open market minutes before. The motivation is clearly to lower the apparent closing price. Why is a matter of conjecture, however it is not lost that this directly benefits any shorts who need to adjust their capital requirements overnight based on the closing price. It is also obvious that any reduction in the share price at the close can have an impact on traders that rely upon technical analysis for their investment decisions, as well as create an impression of a stock in decline (there are numerous trading days where a $2 or more gain has been erased in the last few minutes of trading.) It is of particular interest to note that Rocker Partners, LLC holds 244,000 shares of NFI in a long account (per the June 30, 2003 SEC 13F filings, and of which 185,000 have no voting rights) – which could clearly be used to manipulate the close in exactly the systematic manner we have noted. Because shorts are restricted from selling short shares on a downtick, one handy way to circumvent that restriction is to hold one day’s trading volume in a long account where there is no dumping restriction. As Compass Holdings and Helmsman Holdings are offshore funds, we have been unable to determine their holdings in NFI, including any long accounts they may have. A subpoena of the trading records from the broker dealers putting through the trades and from the NYSE for the suspicious trades would no doubt go a long way into clearing up on whose behalf they were performed.
Additionally, one other benefit to the short cause would be the ability to place a series of trades wherein an uptick is created out of the long account, is hit by a related long account, and then a large short sale is made. Repeating it over and over you can see where on a thinly traded issue, you could take $3 or $4 out of the price in moments, effectively triggering stop losses and enabling you to cover at a tidy profit. Not to mention the “shock and awe” of 100K shares dumped at the open a couple of dollars below the bid on any bad news in the market. We’ve seen that a few times as well, most recently on August 14, 2003 and August 18, 2003, where large sell orders at the opening bell started large declines.
Footnotes:
1 If any further requirement exists to further document David A. Rocker’s control over Rocker Partners, Compass Holdings and Helmsman Holdings, we can go to the SEC form 13G filed for Powerwave, a publicly traded company: Schedule 13G dated February 13, 2003, filed with the Securities and Exchange Commission by David A. Rocker. The Schedule 13G states that the number of shares beneficially owned includes: (i) 3,409,600 shares owned by Rocker Partners, L.P., a New York limited partnership; (ii) 2,609,365 shares owned by Compass Holdings, Ltd., a company organized under the International Business Companies Ordinance of the British Virgin Islands; and (iii) 365,088 shares owned by Helmsman Holdings, Ltd., a company organized under the International Business Companies Ordinance of the British Virgin Islands. The Schedule 13G states that David A. Rocker has sole voting power and sole dispositive power as to 6,384,053 shares by virtue of his positions as (i) the sole managing partner of Rocker Partners, L.P.; and (ii) the president of Rocker Offshore Management Company, Inc., the investment advisor to Compass Holdings, Ltd. and Helmsman Holdings, Ltd.
2 “SuperNovas Don’t Last”, May 26, 2003. “Novastar May be Due for a Fall”, May 15, 2003.
Letter to Elected Representatives
Send E-Mail to:
Copyright © 2003 . All Rights Reserved