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Monday, August 14, 2006

The Delisting Dead Pool

One of the most critical decisions that investors will have to make is whether companies being caught up in the options scandal are likely to receive delisting notices from the NASDAQ. NASDAQ is required to send a notice if a company traded there is late in filing its 10Q or 10K. Apple disclosed recently that it had received such a notice.

Of course, public companies on the NASDAQ can request that their delisting be reviewed by a panel at the exchange. This often takes several months. If any of the companies that have received a notice can comply by filing their 10Ks or 10Qs in time, usually the NASDAQ drops the review.

The largest problem created is that most institutions, especially mutual funds, cannot own companies if their shares are not traded on one of the large exchanges. In other words, a mutual fund will usually have to sell all of its holdings in a company that has been delisted.

Most large public companies have more than half their shares held by institutions. For these companies, a delisting could create a disastrous sell-off. As companies receive notices, it is almost more likely that short-sellers move in as the anticipate institutions moving out. This creates a double pressure on the shares.

With in excess of 80 companies involved in the stock option scandal, Wall St. is going to have to start handicapping which companies are likely to get filings in on time and which are not. Usually, the more serious the stock options issue and the more senior managers that are fired, the more likely it is that an investigation that would affect 10Q and 10K filings are present.

All of this is leading to a new style of trading on Wall St., a dead pool of stocks that may be delisting.

Douglas A. McIntyre can be reached at

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