GENEVA, Dec. 7, 2017 /PRNewswire/ -- Memento S.A.
("Memento"), the family office of an investor in Sears Holdings
Corporation ("Sears" or, the "Company") (NASDAQ: SHLD), delivered a
letter to Sears' board of directors (the "Board") today to express
concerns regarding historical patterns of alarming short-selling
activity in the Company's shares and to ensure the Board is taking
whatever actions may be required to curb any similar short-selling
issues that may arise in the future.
The full text of the letter follows:
December 7, 2017
Sears Holdings Corporation Board of Directors
c/o Corporate Secretary
Sears Holdings Corporation
Law Department
3333 Beverly Road
Hoffman Estates, Illinois
60179
Dear Board Members:
The Elarof Trust ("Elarof") is a shareholder of Sears Holding
Corporation ("Sears" or, the "Company") with nearly 2 million
shares of ownership in the Company. Memento is the investment
manager of the Elarof Trust and acts as family office of the
Swiss-based Spadone family, the beneficiary owner of the Elarof
Trust.
We are a long-term oriented value investor seeking to identify
deeply undervalued opportunities in which boards of directors can
take immediate and decisive action to significantly increase
shareholder value.
Sears represents a significant investment for Elarof, and we
have invested in Sears because of our belief in the long-term value
of its vast national network of over 1,100 Sears and Kmart retail
stores across the United States,
the strength of its well-established proprietary brands, its
position as the nation's leading provider of appliance and product
repair services, and its insurance subsidiary. Our investment in
Sears has taken in to consideration many factors, including its
significant stakeholders who are closely aligned with its success,
such as its vendors, customers, and over 140,000 employees. We
believe Sears has the potential for strong financial performance
once it addresses a few critical concerns including, among others,
the high volume of short-selling activity in its shares.
We are writing at this time to highlight certain issues that
have been plaguing the Company's shares on-and-off over the past
two years that require your immediate attention to prevent further
deterioration in shareholder value. We have been closely monitoring
these recent developments at Sears and, while we remain optimistic
about the Company's potential for long-term growth and shareholder
value creation, we seek to engage in constructive discussions with
the Company's Board of Directors (the "Board") and management to
address our deep concerns surrounding the integrity of the
Company's securities ("SHLD shares" or, the "Common
Stock").
There have been several occasions over the past two years in
which the market has indicated that more short positions exist in
the market than SHLD shares available to borrow, as shown by the
unusually high volume of short-selling activity relative to the
Company's real available float of outstanding shares. For the
reasons set forth below, we believe that this shortage of available
shares in the marketplace heightens volatility and places downward
pressure on the share price. We believe the Board must promptly
investigate and address this activity to prevent further decline in
shareholder value, including (i) the formation of an independent
Board committee to look after the equity ownership interests of all
shareholders, (ii) seeking an SEC investigation in to the potential
violations of Regulation SHO and a temporary suspension of
short-selling in SHLD shares, and (iii) the evaluation of strategic
alternatives such as going private.
Our interests are aligned with all Sears shareholders in seeking
stable and sustainable growth in the value of SHLD shares. As such,
we respectfully request the Company provide its investors with
adequate assurances that it is taking the steps necessary to
effectively address the urgent problem of naked short selling in
its shares by establishing sophisticated internal controls and
seeking appropriate regulatory action.
Excessive Short Interest
Naked shorting involves selling a stock short without first
locating the shares for delivery at settlement. Such a practice is
in violation of Regulation SHO, a 2005 SEC rule. Regulation SHO
provides that brokerage firms may not accept orders for short sales
without having borrowed the stock or having "reasonable grounds" to
believe that it can be secured. This is known as the "locate"
requirement. The SEC further noted that the practice of naked short
selling can be abusive and drive down share prices.
We have observed on several occasions that the number of shares
of Common Stock outstanding have fallen below short interest
activity as measured by real available float. As shown below, short
interest in SHLD shares has fluctuated between 12 to 19 million
shares in the past two years. In early 2017 we identified that, not
taking derivatives into account, there were more stocks lent than
the real float, causing a deficit of 3.6 million shares.
We observed similar behavior in options activity for SHLD
shares. Based on our analysis, it would not be possible for market
makers to appropriately hedge their investments and, consequently,
deliver the shares of options when exercised. If all of the open
put or call contracts were exercised, it would be impossible for
market makers to locate and deliver shares for settlement within
the legally required time period of three business days.
Sears' put open interest as a percentage of shares outstanding
has fluctuated between 30% to 40% of the Company's market
capitalization, indicating that between 30 to 40 million shares are
waiting to be delivered for these contracts. This is despite the
fact that the Company's real available float remains between 12 to
20 million shares.
The call open interest is also rising but remains well below the
put open interest.
We have learned through our own experience in lending SHLD
shares that several institutions/brokers were unable to timely
locate shares when we recalled them. It took ten or more days for
us to receive our lent shares back. We recalled about 1 million
shares twice this year with various institutions/brokers in order
to transfer the shares to another counterparty. In both cases our
brokers failed to deliver, and the SHLD share price soared between
30 to 100% after our recall.
When asked to explain their delay, these institutions/brokers
indicated that the shares may have been borrowed by market makers
who are subject to less stringent locate requirements and who have
the ability to return shares later in certain circumstances as a
result. We observed that the SHLD inventories for borrowing stocks
were massively below what was reported to the SEC, and Markit
informed us that the double-counting of some stocks could cause
them to be lent over several times. This is alarming and
demonstrates that the same shares may be sold short more than
once.
We also note that the lending rate of Sears in 2017 has often
reached levels close to 100%, indicating a high borrow cost that
creates further incentives for naked short selling. This high
interest rate raises the specter that market makers are engaged in
naked short selling to avoid the high borrow cost associated with
covered short sales.
Such behavior would violate the requirements of Regulation SHO.
As their only recourse to prevent such an outcome,
institutions/brokers would be forced to buy SHLD shares in the open
market, which risks causing a spike in the price of SHLD shares, a
pattern that would artificially distort the Company's value and
increase its volatility in the marketplace.
The shares of SHLD stock owned by restricted shareholders cannot
be borrowed against in the marketplace to cover short sales. Taking
this in to account, the real float of Common Stock has fallen below
the short interest on several occasions in the past two years.
Sears has reason to know this occurs based on the volume of
short-selling activity in the marketplace compared to the
percentage of outstanding shares restricted from securities
lending. It is clear to us based on our own experience in
securities lending of SHLD shares and monitoring the Company's real
float that there have been repeated instances of widespread naked
short-selling in the Company's shares, with the short interest
exceeding total Common Stock outstanding when excluding restricted
shares.
Naked short selling has the effect of placing immense downward
pressure on share price over time, since an unlimited supply of any
commodity, including SHLD shares, places downward pressure on its
price. At a time when Sears' employees, vendors and customers worry
about the Company's long-term viability, we believe that the Board
must treat this particularly delicate matter with the highest
priority. Immediate action is necessary from the Company to prevent
further destabilization and depression in the price of SHLD
shares.
We request that the Board establish an Equity Ownership
Committee comprised of independent Board members for the
purpose of protecting the interests of all shareholders by
monitoring real float versus short interest and seeking stable and
sustainable growth in the price of SHLD shares.
We further recommend that the Board seek a temporary restriction
on short-selling in the SHLD shares to allow the Company to instead
focus on more urgent operational priorities. In addition, we
believe that these facts warrant an SEC investigation in to the
repeated instances of naked short-selling of SHLD shares in
violation of Regulation SHO.
Lastly, we recommend that the Board consider strategic
alternatives such as going private to allow the Company to focus on
enhancing long-term shareholder value instead of monitoring
short-selling activity in the marketplace.
We look forward to continuing our discussions and engaging with
the Company to address these troubling concerns on behalf of all
shareholders.
Sincerely,
Alessandro Mauceri
memento S.A.
16 Cours des Bastions
1205 Geneva
Switzerland
About Memento:
Memento is a Geneva-based long-term oriented value investor
seeking to identify deeply undervalued opportunities in which
boards of directors can take immediate and decisive action to
significantly increase shareholder value. Memento is the investment
manager of the Elarof Trust, a shareholder with nearly 2 million
shares of ownership in the Company, and acts as family office of
the Swiss-based Spadone family, the beneficiary owner of the Elarof
Trust.
Memento seeks to engage in constructive dialogue with Sears'
Board and management. Memento has retained Olshan Frome Wolosky,
LLP as legal counsel to advise on its engagement and discussions
with the Company.
Investor Contact:
Alessandro
Mauceri
memento S.A.
16 Cours des Bastions
1205 Geneva
Switzerland
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SOURCE Memento