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Regulation and Compliance > Federal Regulation > SEC

Hedgers' Lawyer Asks SEC to Hamper Deregistration

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WHITE PLAINS, N.Y. (–Stephen J. Nelson, a lawyer acting on behalf of several hedge fund managers and a broker-dealer, has filed a petition with the Securities and Exchange Commission, asking it to change its interpretation of the 300-shareholder threshold for the public disclosure of financial data, to make it more difficult for issuers to avoid disclosure by deregistering.

“I think you always see a rash of going-private strategies whenever there’s been a bear market. Companies come to look at their shareholders more as a nuisance than as a source of capital,” Mr. Nelson said.

In 1964, Congress amended the Securities Exchange Act of 1934 to bring over-the-counter trading within the scope of the regulatory system that it had created 30 years before with the New York Stock Exchange in mind.

The 1964 law said that issuers that trade over-the-counter would be required to register and to comply with the proxy rules and the insider trading and reporting requirements of the Exchange Act if they exceeded certain minimums of total assets and the number of shareholders of record. The statute, section 12(g), also gave the SEC discretion in defining how to count holders of record.

The following year, accordingly, the SEC adopted rule 12g5-1, which did not require issuers to count all the beneficial owners of stock, only the so-called “street names.” This meant that as the practice spread of holding stock through a broker, the disparity between the number of beneficial holders and the number of holders of record widened.

The petition contended the 1965 rule is obsolete now and ought to be changed. It said that since the start of 2003, 24 issuers have deregistered their securities “under circumstances suggesting manipulation of the capital markets and circumvention of the Exchange Act.”

The petition examined three recent cases of deregistration in some detail. Each instance was facilitated by the fact that the deregistering companies only had to get their number of street names below 300 in order to qualify. One of the three issuers unflatteringly profiled is United Road Services Inc., Albany, N.Y., a national provider of motor vehicle and equipment towing and related services. United Road Services filed a deregistration statement on May 14.

Mr. Nelson’s petition said that United Road Services is an example of a company that uses its equity as “acquisition currency” and then wants to jettison its obligations when the currency has become devalued by the failure of its acquisition-based market strategy. United Road Services’ initial public offering in May 1998 raised US$85.8 million, at US$13 a share. It used that capital immediately to purchase seven towing companies. Over the last year, it has made 49 additional acquisitions. The petition says that there are 294 holders of record for its stock, just under the magic number of 300 that allows it to leave Nasdaq for the pink sheets, regardless of the amount of assets it has on the books.

This would not be possible if the rule counted every beneficial shareholder, since United Road Services has more than 6,000 of those. This transaction established, Mr. Nelson and his clients contend, why the SEC should change the rules to count beneficial shareholders in order to prevent such injustices. The shareholders have taken a beating (the stock price is now US$0.05), and this deregistration deprives them of their “last remaining good opportunity to influence the management of their hard-earned investment dollars,” said the petition, filed July 3.

On July 29, though, Mr. Nelson said that United Road Services and the other two issuers discussed in detail in his petition are no worse than many others that might have been cited, that these three cases happened to be useful as illustrations. He could not say whether any of his hedge fund clients had an investment in United Road Services, “I haven’t asked them.” His clients are interested in the broad principle, not the specific illustrations.

The chief executive of United Road Services, Michael Wysocki, said Tuesday only that the time was not convenient for comment.

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