September 1, 2006
Pegasus Wireless Property Dividend
Pegasus Wireless company has issued a "property dividend" of stock warrants (options to by stock from the company). There is a catch: The company will pay only those shareholders whose names are listed individually on the the stock roles or as beneficial owners on the roles of a trustee who is on the stock roles. The later shareholders are the equitable owners of stock held in legal title by someone else (held in "street name"), usually a brokerage house or a clearing corporation. So far so good; here is the catch. If a brokerage house shows up to claim the warrants so as to pass them on to the beneficial owners, the company will not pay unless the number of dividends claimed matches the brokerage house accounts (or client accounts) on file with the Depository Trust Clearing Corporation, which holds about 85 percent of the stock. The discrepancy is caused by brokerage house loans of the stock to others, usually short sellers. On a loan, beneficial title passes, but the right to collect dividends stays with the lessee; as the result of a short sale the brokerage house attempts to collect dividends on stock that is no longer listed under its name with the clearing house. Normally such requests are honored by the company. Not so with Pegasus. If the number of dividends requested by a brokerage house is larger than the brokerage house account at the DTCC, the company will not pay. To collect the Pegasus dividends, the brokerage house has to go get the stock back so as to even its accounts. The company is attempting to get a firm count on its outstanding shares, neutral of short sales, and to stop the trading of what it calls "fake stock", stock that was never issued that is trading as issued stock. Short sales on Pegasus stock can still happen, but the purchaser from a short seller collects the dividend and the short sell must remit a substitute value of the property dividen to the lessee when it re-delivers the stock, adding to the risk of the short sale. Nevada and the SEC are trying to figure out whether the dividend is legal. Ingenious. Looks perfectly legal to me.
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Much of the hysteria around Pegasus and the dividend rises out of a massive misunderstanding of the mechanics of short-selling and dividend payments in general.
Pegasus is trying to create two classes of shareholders out of the same class of common stock. One which has entitlement to the warrant, and one which does not. This is likely to be problematic. A single class of common stock must be treated as a single class.
Furthermore. both stock and derivative instruments such as options and warrants (which are options by another name) are fungible. As such, it does not (and should not) matter exactly which particular share of stock one owns, nor from whom one purchased it, whether a long seller or a short seller.
If one is short a share of stock, you are responsible to pay any and all dividends (including spin outs, etc) to the purchaser. This is true regardless of the type of dividend.
For all types of dividends and corporate actions it is the short-seller who is responsible for paying the dividend (or the cash or shares of an acquiring company, etc) to the purchaser. It is not the responsibility of the company.
This is the reason why the buyer of stock may see on his end of year tax statements the entry "Payment in lieu of dividends." That line indicates that the payment he recieved came from the short-seller and not from the company itself.
Pegasus' dividend is no different. The noise and general ruckus they are throwing up around it, however, is quite unusual. It is likely an attempt to obfuscate the company's many, serious, and recently publicized, fundamental problems.
Posted by: SellToWhom | Sep 3, 2006 11:18:44 AM