SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Fallon, Zachary
From: McCormick, Tim
Sent: Friday, December 12, 2008 6:15 PM
To: Edwards, Amy K.
Cc: Caglio, Cecilia; Overdahl, James
Subject: NCC
Attachments: NATIONALCITYCOR424B2.rtf
Amy,
You were right about this April 2008 issuance that started all the problems for NCC shareholders (at least in
terms of dilution and potentially price pressure from short selling) being the Preferred Series G that later
converted into 1.3 billion common shares in Sept 2008. The bank needed money and the buyers got a deal
where they effectively bought stock for $5 per share with downside protection such that they would get back $5
in value regardless of the stock price (effectively a “unit” that included common stock + a put for $5 a share).
There were some death spiral characteristics of the preferred stock if not converted within 6 months (conversion
price declined by 50 cents every 6 months) but it wasn’t really a death spiral because the conversion price was
not dependent on future market price. Anyway, it seems like the company intended (& did) force conversion
within 6 months whereas a true death spiral manipulation would have had to prevent conversion within 6
months to potentially yield “control” gains.
The attached document says:
“Any sales in the public market of our common stock issuable upon the conversion of the Series G Preferred
Stock or the exercise of the Warrants could adversely affect prevailing market prices of the outstanding shares
of our common stock and the Series G Preferred Stock. In addition, the existence of our Series G Preferred
Stock and the Warrants may encourage short selling or arbitrage trading activity by market participants
because the conversion of our Series G Preferred Stock or the exercise of the Warrants could depress the price
of our equity securities.”
Also, the supplement at the end implies that the buyers were allowed to hedge their long positions via short
sales so now I am starting to get a clearer picture of why short selling and fails may have been high, particularly
leading up to the preferred stock conversion. Anyone who hedged their preferred stock position by shorting the
common stock knew that they’d get the common stock they needed to deliver upon conversion. There were
many, many buyers so it is likely that some, if not many, were short selling post-April issuance. It would be
very interesting to see how many of these institutional buyers reduced or eliminated their economic position
before conversion to see if the issuance was effective at placing shares in the hands of long term investors.
There is certainly the possibility that some institutional buyers did not intend to be long term holders (maybe
they just wanted to capture the issuance discount) so there could have been a failure in the placement of the
offering that contributed to the decline in stock price.
NATIONALCITYCOR
424B2.rtf (880 ...
By the way, what is a bit eye-opening is that I downloaded this document directly from the NCC investor web site but the
people bringing the accusations of short seller wrongdoing clearly did not read this document.
Tim McCormick
Office of Economic Analysis
U.S. Securities and Exchange Commission
100 F Street NE
1