Wolf Trap

For three weeks the governors of the Toronto Stock Exchange had been investigating the gyrations in the stock of a little steel company named Chatco Steel Products Ltd. Last week the exchange ordered trading in the stock stopped "to protect the interests of American investors"--supposedly the small, unknowing investors who had bought the shares through high-pressure salesmen in the U.S. But this was only part of the story.

The surprising fact was that the ban on trading had not been necessary to protect the unknowing American investors. Few, if any, of them had lost money on the stock. In fact, they could have made a lot. Those who had lost money--and stood to lose a great deal more--were the hardeyed professional speculators on Toronto's Bay Street who had committed one of the mortal sins of speculation: they had been "caught short" in Chatco stock. They had sold thousands of shares of the stock in hopes that it would fall and they could pick it up later at a cheaper price for delivery to the buyer.

Summed up a government securities expert : "It's the first time in years that anything like this has happened here. I've read in books about markets being cornered, but I've never seen it. This is the classic situation. This is a corner and the short sellers have been caught in it."

"$15 by Christmas." The short sellers' problems began last June, when Chatco's President Harold S. Shannon decided to shift Chatco from its unprofitable steel contract business into the production of air conditioners, truck bodies, etc. To get cash, Chatco sold 100,000 new shares, at $4.50 a share, to four New York and Montreal investors who took control of the company. Robert C. Leonhardt, president of Manhattan's McGrath Securities Corp., an over-the-counter brokerage firm, was elected chairman of the board.

Shortly after, U.S. over-the-counter firms began pushing Chatco stock, predicting that Chatco, then selling at about $9, "will hit $15 by Christmas." As Chatco rose to 15, the Toronto Stock Exchange was besieged by U.S. calls for quotes on the price, and began to investigate, suspecting the stock was being rigged.

Down & Up. As rumors spread on Bay Street that the Toronto Stock Exchange would probably suspend Chatco, the speculators sold thousands of shares short, figuring that the suspension would knock down the price of Chatco as it did Great Sweet Grass Oils only three weeks before (TIME, Nov. 5). But the short sellers made one big mistake: they failed to realize that Chatco has only 160,000 shares outstanding. Shannon owned about 36,000 shares, and the Leonhardt interests a big chunk of the rest, leaving few shares around for trading. When the suspension was announced, the stock dropped from 16 1/8 to 10, but only for a few hours. The Leonhardt interests began to buy, and it started up again, causing some shorts to panic and buy in order to cover their commitments, thus sending the stock up.

By week's end Chatco was up to a new high of 19 and still climbing. The Toronto Stock Exchange was besieged by the short sellers, pleading for it to arbitrate a fair price at which the stock might be traded and they could settle their short sales. But it gave no indication that it would. .It looked as if the wolves in Toronto had been sheared by the smarter wolves in Wall Street.

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