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Short sale halt for A123 Systems as stock price tumbles

Aggressive short selling of beleaguered A123 Systems' stock (AONE) have triggered a special SEC rule meant to prevent a stock from being short sold into oblivion.


Troubled lithium-ion battery maker A123 Systems is in serious trouble, AONE's stock price has fallen steeply for the last month, the NASDAQ has warned the company could be delisted, and now the SEC has put a halt on short sales of AONE due aggressive short selling.

A "short sale" is a kind of stock trade where the "investor" sells shares of stock he or she does not own, and the seller must eventually replace the shorted shares. Short sales are a bet by a short seller that the stock price will go down, and short sales tend to put a downward pressure on stock prices. In February 2010, the SEC adopted a new rule, the "alternate uptick rule", which is designed to restrict short selling from further driving down the stock price. The rule is triggered when the price of a stock falls by more than 10% from the previous days close. The restriction gives precedence to long sellers over short sellers to sell their shares.

AONE's stock price has declined steeply from $1.62 per share on June 27, 2012, to $0.22 today. The current phase of AONE's stock slump began on August 9 shortly before the rescue of A123 Systems by Wanxiang was announced. On Tuesday AONE closed at $0.24 and this morning the stock price immediately fell to $0.23 and in the middle of the day it had fallen as low as $0.215 but by the end of the day the price recovered to $0.22 per share. That rapid decline is what triggered the alternate uptick rule.

On June 2, the company warned it was at risk of continuing as a going concern. However on June 12 the company broke a long series of bad news announcements with news of a new battery chemistry (NanoPhosphate EXT) more accommodating of hot or cold weather. But that proved to be only a short term blip of positiveness, and not even the rescue by Wanxiang has been enough to reverse AONE's stock price slump.

The company's troubles began in December with a recall of battery packs made for Fisker Automotive and other vehicle manufacturers. A123's battery packs were also implicated in the shutdown of the Fisker Karma purchased by Consumers Union for testing. By March, A123 was being tugged between good news and bad news. In late March a "field campaign" was launched to replace battery packs that potentially had cells with manufacturing defects. These extra costs due to recalls and battery pack replacements blew a hole in the middle of A123's financial status.

On Aug 15, 2012, there were 24.5 million shares of AONE sold short, for 19.6% of AONE's floating shares. Presumably the short interest is even deeper today.