Short Seller’s Winning Bet Means Permanent Payments to Jefferies

(Bloomberg) — A short seller that bet against a struggling retail chain claims it’s now paying the price: an endless stream of monthly payments to Jefferies LLC, which lent it the shares for the trade more than a decade ago.

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IsZo Capital can’t close out its short position in Gordmans, a Nebraska-based retailer that filed for bankruptcy in 2017, because Jefferies won’t let it, the hedge fund said in a lawsuit filed late Tuesday in New York state court.

For years Jefferies “has collected fees for an outstanding loan of shares of stock that have been canceled and thereby rendered forever valueless,” IsZo said in its complaint. “Even assuming its motives are benign — a questionable assumption — defendant’s continued refusal of plaintiff’s requests to close the short sale is unjustifiable and inconsistent with the principles of equity.”

Read More: Hedge Fund IsZo Says Jefferies ‘Hijacked’ Its Brokerage Account

It isn’t the first skirmish between the two. In 2021 IsZo filed an arbitration complaint against Jefferies claiming that the investment bank had “hijacked” its prime brokerage account when IsZo wanted to move its business to a different brokerage. The hedge fund published an open letter criticizing several Jefferies employees by name and even created a website devoted to the firm’s alleged misdeeds.

In February an arbitration panel of the Financial Industry Regulatory Authority ruled in Jefferies’ favor and ordered IsZo to pay $1 million toward the firm’s attorneys fees and take down the website.

In the current dispute, IsZo is asking the court to make Jefferies let it close the position.

A spokesperson for Jefferies declined to comment on the suit.

Short sellers identify companies they believe are overvalued and sell borrowed shares, planning to buy the stock back later for return to the lender, when they believe the price will be significantly lower. If the targeted company goes bankrupt, wiping out the stock, it can all backfire. That’s what happened to IsZo, which can’t buy back the stock because it no longer exists.

In addition to the Sisyphean stream of monthly fees, IsZo alleges it has been forced to keep $1.6 million at its prime broker, Pershing LLC, because it can’t close out its Gordmans position without Jefferies’ approval.

As a result, IsZo says, it “will remain stuck in a kind of perpetual purgatory.”

The case is IsZo Capital v. Jefferies LLC, New York State Supreme Court, New York County (Manhattan).

–With assistance from Katherine Doherty.

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