Trump Media tells DJT shareholders how to block short sellers

Trump Media is making a point of telling its shareholders how to prevent their stock from being loaned to short sellers — who bet the price of the shares will drop.

The short-selling-prevention tips posted Wednesday on Trump Media’s website come as its DJT stock has fallen sharply in price since it began being public trading on March 26 — and as short sellers have taken a keen interest in the owner of the Truth Social app despite relatively high fees to finance such trades.

“It certainly shows concern” about short selling of Trump Media stock, said Kevin Murphy, a business professor at the University of Southern California who is an expert on executive compensation.

“I haven’t seen it before,” Murphy said when asked how common it is for companies to give shareholders instructions on how to thwart short sellers.

“Managers who … think the stock is undervalued aren’t going to be overly concerned about short sellers,” he said.

Trump Media’s share price rose sharply on Thursday by more than 21%, before giving back some of those gains in afternoon trading. But the share price was still more than 55% lower than what it opened at on March 26.

Trump Media disclosed on April 1 that it had booked a $58 million loss for 2023, with just $4.1 million in revenue for that year.

Former President Donald Trump is by far the biggest shareholder in Trump Media, owning nearly 60% of its stock. And his 78.75 million shares could soon grow by 36 million shares if DJT’s price stays above $17 per share in the coming days due to an earnout provision in the merger deal that took the company public.

But Trump, who is the presumptive Republican presidential nominee, and Trump Media since late March have seen billions of dollars in market value evaporate from share price declines.

On Wednesday, after two straight days of sharp price drops, the company included a supplement to its frequently asked questions list on its website, which it detailed in an 8-K filing on Thursday morning with the Securities and Exchange Commission.

The supplement adds a significant amount of instructions to what was originally posted on the FAQ on Wednesday, under the heading: “How do I prevent my shares from being loaned for a short interest position?”

Short selling is the practice of borrowing shares of a company’s stock, and then quickly selling those shares for a certain amount of money. The short seller then waits, hoping that the share price will drop over some period of time, so that they can then repurchase the same number of shares and give them back to the lender, pocketing the difference between what they first sold the shares for as profit after paying brokers’ fees.

“For long-term shareholders who believe in the Company’s future, the Company is highlighting the following actions you can take with your brokerage firm to prevent the lending of your shares for short selling,” Trump Media said in its supplement to its FAQ on Wednesday.

The tips include holding DJT shares in a cash account at a brokerage firm as opposed to a margin account, “opting out of any securities lending program,” moving Trump Media shares to the company’s designated transfer agent, and transferring shares to a bank and “holding them in your retirement account.”

The instructions include a helpful form letter that shareholders can send to their brokers.

The letter says, “Please accept this written instruction to make sure that the following securities are held in my cash account only and accordingly are not available for any stock loan activities.”

“I hereby expressly opt-out of any securities lending programs and instruct you to not loan out any of my shares,” the letter says, before a section that the sender can fill out with their number of shares.

The detailed instructions contrast with the much simpler instructions posted initially Wednesday in the FAQ, which just said, “To prevent shares from being loaned for a short interest position, contact your brokerage to place restrictions on the lending of your shares to short sellers.”

A Trump Media spokeswoman told CNBC that the company ”believes it has a responsibility to provide factual information in response to the questions its shareholders are asking.”

Short selling is particularly risky because it is markedly different than a “long position” in a stock — in which a person’s maximum loss is what they paid to buy the shares.

In contrast, a short position in a stock can in theory see its price rise without stopping, leaving the short seller responsible for paying exponentially more money to buy back the shares to return to the lender.

Trump Media in its updated FAQ nodded to that risk in noting that brokerage firms loan shares “to sophisticated and institutional investors” to do short sales. Brokers often insist that customers who do short sales with them are experienced investors, and have sufficient cash or collateral on hand that can insure that if the short trade goes bad they can cover their losses.

Trump Media also pointed out that lending shares to short sellers can earn brokerage firms “an alternative source of revenue.”

“If the price of the stock in fact decreases, then the brokerage firm and the sophisticated and institutional investors will have made a profit, while the ultimate retail investor has not,” Trump Media told its shareholders.

Only about 5 million shares of DJT have been available to short out of more than 136 million company shares. And much of the 5 million shares were already locked up in short positions earlier this month.

But Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, told CNBC in early April, “What I’m hearing on the Street is that if [an amount] of stock becomes available, shorts are taking it down.”

Clarification: This story has been updated to clarify the explanation of a long position.