Case Study # 8:  NASDAQ Trading Halt Due to Lack of DTC Eligibility

The Client:  A publicly traded company whose shares were listed on the Toronto Stock Exchange (TSX), had recently received approval for the trading of its shares on the NASDAQ stock exchange. Due to an error in the paperwork submitted to the NASDAQ, everyone was under the impression the Company’s shares were DTC Eligible, when in fact they were not.  The Company’s shares traded for about two (2) weeks on the NASDAQ stock exchange before the Company learned that its shares were not DTC Eligible.  Upon discovering that its shares were not DTC Eligible, the Company contacted the NASDAQ stock market to inform them of the news.  Upon learning of the lack of DTC Eligibility, NASDAQ immediately halted the trading in the Company’s shares.  This trading halt occurred on Friday March 1st. By the time that NASDAQ halted trading there were significant failures to deliver throughout the settlements system.

Coral Capital Partners was contacted after business hours on the Friday that trading was halted.

The Task:  To have the Company become DTC Eligible, and have NASDAQ lift the trading halt and thus allow trading to resume in the Company’s shares.

Issues:  NASDAQ’s representatives stated that during the history of the NASDAQ stock exchange, there had never before been a situation such as this; where a company had initiated trading without being DTC Eligible, and then further complicating the issue, halted with so many significant failures to deliver.  NASDAQ’s  representative stated that because they had never encountered this problem before, as a result they were unsure of what documentation would provide them with a comfort level that the failures to deliver would clear, and there would be no further settlement issues.  NASDAQ’s representatives made it very clear that they had no idea how long it would be before the trading halt could be lifted.

Secondary Issues: The Company, and its consultants were all worried that the longer the trading halt lasted, the greater the possibility of a litigation concerning the trading halt.  This had the potential to become very messy, and entangling everyone along the way.

Plan of Action:  On Monday March 4th, Coral Capital immediately gathered the necessary documentation and information for the DTC Eligibility application.  The application for DTC Eligibility was submitted to DTC on Tuesday March 5th; and by 5:00pm Thursday March 7th, DTC had approved the Company’s application for DTC Eligibility.  The Company’s shares were now DTC Eligible.   During this period of time, we began working with the Company, its representatives, and representatives from the NASDAQ stock exchange to address the trading halt.  We assisted the Company with the drafting of a press release following the DTC Eligibility application submission.  This press release was designed to provide the appropriate industry participants with the information necessary to let them know the initial problem was being corrected, and the failures to deliver would be able to clear the system upon the granting of DTC Eligibility.

It was during a call late in the week, that the representative from NASDAQ stated that this problem had never happened before, and they were not quite sure how to verify everything to a degree that would allow them to be comfortable with a resumption of trading. It was implied that it could be weeks before trading was allowed to resume.  This was extremely significant.  As a stock exchange, NASDAQ is focused on the trading that occurs on its electronic exchange.  It is not focused on the back end settlement of securities trades; that is the purview of clearing firms and DTCC.  As a result, it was not an issue they normally had to deal with, or had a great deal of experience with.

On Friday March 8th, we focused our efforts on addressing the failure to deliver issues for trades executed prior to the trading halt; and very importantly the demonstration to NASDAQ that stock was properly flowing through the system.  We worked with the Company’s transfer agent to obtained the necessary documentation from DTC, and to provide the documents to NASDAQ to demonstrate the delivery of shares for trades where there were failures to deliver.  We took the lead in explaining to NASDAQ’s representatives how the documents provided supplied the information they were looking for, and would give them the comfort level they were seeking.  Additionally, we again assisted in the drafting of a press release specifically designed to let the appropriate industry participants know that their trades that had failed to settle, could now be cleared.

We continued to work with the Company and its representatives over the weekend.  On a Sunday evening conference call,  representatives of NASDAQ informed us that they would allow the resumption of trading in the Company’s shares at approximately noon on Monday March 11th.

Results:  Coral Capital Partners was able to submit an application for DTC Eligibility, have it approved, and have an unique trading halt lifted within seven (7) days of being engaged to assist.  Approximately five (5) week later, the Company completed a Twenty Million dollar ($20,000,000) capital raise.  It should be noted that this capital raise was at a per share price significantly higher than the share price at the time of the trading halt.  It should also be noted that as of the date of this Case Study, over sixty (60) days since trading was resumed, we can find no evidence of any litigation concerning the trading halt.

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