NEW YORK (Reuters) – A botched share swap last month in which 10 times more US Bancorp (USB.N) shares were issued than planned, angering and confusing investors, led the NYSE on Tuesday to cancel three days of trades in the stock.
The New York Stock Exchange also said it will delay from Wednesday to Friday the reopening of trading in the shares, which are expected to sell at about 10 times the price they had on June 18, when they were abruptly halted.
A series of missteps surrounding the swap of trust preferred securities into Series A Preferred shares (USB_pa.N) has raised questions about safeguards on Wall Street involving the agents responsible for the deal, the share allocator, stockexchanges, regulators and ultimately traders.
This all comes months after stock exchanges and the U.S. Securities and Exchange Commission faced sharp criticism for busting thousands of trades following the May "flash crash," which exposed deep flaws in the marketplace and rattled investor confidence.
The NYSE, where the shares are listed, long wanted to bust the Bancorp stock trades that were made on June 16-18 but the SEC resisted, a source familiar with the situation said.
But the NYSE took the step anyway, which could ease concerns among investors who faced steep losses if the trades were allowed to stand.
The confusion started when US Bancorp, one of the biggest U.S. banks, wanted to convert 1.25 million outstanding fixed-to-floating rate bonds into 1.25 million depositary shares, according to a May 10 regulatory filing.
The depositary shares would then convert to preferred shares worth 100 times more, projected to yield a market price of about $790 to $800 per share.
A mistake was made in the conversion, however, resulting in the allotment of 10 times the intended amount of shares, according to people familiar with the situation. This drove the share price down to between $75 and $86 as it went to market on June 16, an appropriate level given the elevated share count.
But on June 18, the number of shares were adjusted, back to the original 100-times ratio. This time the price did not react because investors were not properly informed of the share count adjustment, and because the NYSE halted trading shortly after, sources said.
BLAME GAME
It is still unclear who was to blame.
The Depository Trust Clearing Corp, the organization responsible for allocating and adjusting the share count, said it did not misallocate shares. "We executed the instructions received from the exchange agent and the transfer agent," a DTCC spokesman told Reuters.
According to a regulatory filing, the exchange agent was proxy firm DF King & Co, while US Bancorp itself served as the transfer agent.
"We understand that this occurred due to potential confusion regarding the price of the securities, which may have been caused by issues with the allocation of the book entries," said US Bancorp spokesman Steve Dale. He did not comment specifically on the unusual June 18 share readjustment.
The SEC had no comment. DF King said it does not comment on client matters.
NYSE Euronext's (NYX.N) Big Board, the preferred shares' primary market, referred to notes it sent to traders, including the one late on Tuesday.
The NYSE halted the shares because the prices "were not reasonably related to the market value ... and following information that the allocation of shares associated with an exchange offer for USB PRA (the Preferreds) had been adjusted," it said on June 30.
Last week, it said: "After extensive consultation with the related regulatory authorities, the trades executed on June 16, June 17, and June 18 will stand," adding that trading will reopen Wednesday.
Exchanges do not have the authority to break trades in this case because the problem was not reported within a half hour. The SEC had decided not to allow an exception, a source briefed on the discussions said.
But on Tuesday, the NYSE said it filed an "immediately effective" SEC rule interpretation that allows it to break the trades.
Angry investors have over the last month called regulators and exchanges to discuss the problem, said sources who requested anonymity because the situation was delicate.
Without cancellations, one firm faced a loss of about 10 times the value of shares traded during the 3-day window last month, said a person familiar with the position of that firm.
The Friday reopening is likely to be a rocky one for investors, whether buyers or sellers in those three days in June.
"The glaring facts are, it's sloppy, there is a lack of policing, a lack of compliance, a lack of professionalism," said Andre Bakhos, director of market analytics at Lek Securities in New York.
"It draws into question what type of company am I investing in and what type of company is underwriting this? Where are the checks and balances?" he said.
(Reporting by Jonathan Spicer and Chuck Mikolajczak; Additional reporting by Megan Davies; Editing by Gary Hill)