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Practice Management > Building Your Business

Circle Group Zeroes In on Naked Shorts

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MUNDELEIN, Ill. (–”Any wrongdoers will be taken to the mat,” said the chairman and chief executive of Circle Group Holdings Inc., Gregory J. Halpern, in a salvo issued in a statement Monday (April 17). “We’ve come to fight and we believe that by joining forces with John O’Quinn, his team of lawyers and A-list experts, we will prevail.”

The answer to the question, “prevail against whom?” isn’t clear. Circle Group makes Z-Trim, a zero-calorie fat replacement. It has retained Attorney O’Quinn, of O’Quinn, Laminack & Pirtle, a Houston firm, to perform due diligence to determine if its stock has been manipulated by naked short selling or other means. Mr. Halpern seems, then, to have joined the circle of corporate executives ascribing a disappointing stock price to naked shorts and fails-to-deliver.

What seems unusual about this claim is that the stock price hasn’t been falling. In March, Circle Group (AMEX: CXN) completed a private placement of unregistered common stock, resulting in gross proceeds of more than $5 million. Since that time, its stock price has risen, from approximately $1.25 to $1.62. But in the bigger picture, Mr. Halpern may still be feeling the sting of the first three quarters of 2004, when the stock price fell steadily from a high of $10 to a low of below $1.

At the bottom of that long slide, in October 2004, Mr. Halpern put out a statement saying that there had been “a coordinated business assassination campaign by bloggers and chat room posters using the power of the Internet to harass and damage the Company.”

A year later, an article in Forbes about the alleged dangers of the blogosphere invoked that stock price slide, as the typical result of what Forbes’ writer Daniel Lyons called “an online lynch mob spouting liberty but spewing lies, libel and invective.” Mr. Lyons attributed the loss of 90 percent of stock value to anonymous posts in Yahoo! chat rooms that questioned the Circle Group’s relationship with a crucial business partner, Nestl?.

Three Texas Law Firms

Although Mr. O’Quinn is best known for his participation in the successful anti-tobacco litigation of the 1990s, he has become prominent more recently as part of the movement to expose what he and others regard as a massive labyrinthine conspiracy to privilege short sellers at the expense of entrepreneurs and their investors.

Houston has become a center for the relatively new anti-naked-shorting subspecialty of the plaintiffs’ bar. James Wes Christian, of another Houston law firm, Christian, Smith & Jewell, is another of the attorneys heavily involved in this cause. Christian Smith also will be part of the legal consortium looking into the Circle Group stock activity, according to the statement Monday.

“We are initiating a period of inquiry…. We will not rest until we have made a clear and solid determination as to whether or not CXN’s stock was manipulated down,” said Mr. Christian.

A third Houston firm, Heard, Robins, Cloud, Lubel & Greenwood LLP, is also active in the field. These three firms are all representing in its litigation against Gradient Analytics Inc. and Rocker Partners LP. Although in that lawsuit there is no reference to the alleged nakedness of the short selling, the activists involved seem to believe that the purchase of false research reports and biased analyses alleged in that lawsuit, and the failure-to-deliver problem to which Mr. Halpern is alluding, are but differently colored threads within the same tapestry.

The Circle Group’s release wasn’t very specific about Mr. Halpern’s suspicions. But if he is still smarting from the 2004 price slide and its apparent connection with the rumors about a soured relationship with Nestl?, then this would fit much the same pattern as the Overstock case. But for the moment, no one can contest the allegations of Circle Group Holdings because it hasn’t made any. It has merely indicated that it suspects there is some rustling about, and compiled a Texas posse to pursue whatever rustlers it may find.

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Contact Bob Keane with questions or comments at [email protected].


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