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Knickerbocker Boom Shrouded in Many Mysteries

August 25, 1995|TOM PETRUNO

Has the "short squeeze" in L.L. Knickerbocker stock come and gone?

On Thursday, the National Assn. of Securities Dealers issued its August report on short interest in Nasdaq stocks, and Knickerbocker's short-share total was 287,236 as of Aug. 15--a spectacular eightfold rise from mid-July's 31,440.

What those figures represent are the number of shares of the Rancho Santa Margarita-based collectibles distributor that had been borrowed and sold by bearish traders betting on the 6-month-old stock's collapse.

But tiny Knickerbocker, which had 1994 sales of just $8 million, has been anything but a collapsing stock this summer. Instead, the share price zoomed from $4 in June to a peak of $52 on Aug. 11, cheered on by controversial Southland-based stock promoter Rafi Khan.

On the surface, it looks like Knickerbocker has been a classic case of a short-squeeze in a highly speculative stock: Those traders who had sold shares they didn't own, expecting to buy them back cheaper later, instead faced an ever-rising stock price. At some point, many of the "shorts" should have thrown in the towel on their bad bet, bought the stock on the open market, and in the process helped drive the price even higher.


With 287,236 shares still short as of Aug. 15, the biggest squeeze would seem to be pending. Yet oddly enough, Knickerbocker's share price has been falling in recent days instead of rising, an incongruity if there's a short squeeze going on. The stock fell $3.25 on Wednesday and $2.25 on Thursday, ending at $36.75--its lowest since Aug. 2.

Trading volume, too, has shrunk, suggesting that there is no great rush by any remaining short-sellers to cover their bets--even though rumors abound among traders that one or more brokerages that had lent shares to shorts (a standard transaction, normally) now want them back.

The surprise, one trader suggested Thursday, could be that many shorts are already out of the stock. "I think the major short positions have already been cleaned up," he said, requesting anonymity. But like so much about this bitterly contested stock, he conceded, no one really knows who's doing what to whom. "It's a mysterious stock, it really is," he said. Which shouldn't be of comfort to any small investor caught in the shares, even if they've been lucky enough to ride it up from $4.

If there is any wonder that the NASD and the Securities and Exchange Commission are probing Knickerbocker's trading activity, consider this: Although fewer than 1 million of the total 2.4 million Knickerbocker shares are available to trade--because 1.4 million belong to founder Louis Knickerbocker--trading volume in the stock has totaled a stunning 7.4 million shares since July 17.

That's incredible turnover for a stock that the owners, such as Khan, claim to be holding tightly to, and that the short-sellers theoretically would have sold once and then waited on patiently.

If the owners and the shorts aren't trading, then the shares must be changing hands repeatedly among the broker-dealers who make a market in the stock. But many of those dealers have stopped trading in the shares because of the volatility.

Seven dealers remain, including Norcross Securities in Phoenix. Steve Fischer, a Norcross trader in Knickerbocker and a believer in the stock, says he is "as puzzled as anybody" about how so many shares can supposedly be changing hands. He thinks some short-sellers and dealers have been engaging in intraday "naked shorting," meaning that they are selling shares they not only haven't borrowed but couldn't even buy if they wanted to. In a sense, "virtual shares" may be trading.

Yet on July 24, the NASD issued a "UPC-71" advisory on Knickerbocker, which means a non-dealer can't short it without demonstrating an ability to deliver the physical stock. That should have stopped non-dealer shorting right about then.

Dealers themselves can engage in naked shorting, but only as part of their market-making function, which means they must have legitimate buy orders from customers to justify sales. But several traders in the stock concede that many small investors, in particular, have stopped buying in recent weeks, waiting for the shares to split 5-for-1 next Wednesday. And still, the stock churns away.

That so many mysteries should dog shares of a firm that markets Marie Osmond dolls and other collectibles over home-shopping networks is disturbing, at a minimum. The business itself, depending on which side (short or long) you believe, is either the Next Big Thing or a flash in the pan.

One thing we do know is that few stocks that enjoy such dramatic run-ups have sustained them, historically. If Knickerbocker's short-squeeze is over, or ending, a horde of new buyers had better be on the horizon--or look out below.


End of Frenzy?

Trading volume in L.L. Knickerbocker Co. shares has tumbled this week--and so has the stock price--despite rumors of "forced" buying of the shares by bearish traders. Weekly volume on Nasdaq, in thousands of shares:

Aug. 21: 623.3*

* Through Thursday

Source: National Assn. of Securities Dealers

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