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Short Sellers Could Be Dead Wrong About This Stock

 May 13, 2012 07:39 PM

(By Street Authority) Every two weeks, we get a chance to look at fresh data on how heavily stocks are being shorted. It helps to see what short-sellers are focusing on -- especially if you own one of the stocks being targeted.

You'll often see short positions in a particular stock slowly rise as an increasing number of short sellers start to sniff trouble at a company. But it's highly unusual to see a short position rise from 60 million shares to 139 million shares in just two weeks, as I did. It's as if the entire short-selling community has raced to get on the bus and watch this stock tumble.

[Related -Verizon Communications Inc. (VZ): How Verizon Addresses Competition From T-Mobile US Inc]

Normally, these short-sellers spot red flags in a quarterly report and want to bet against a stock before even worse numbers appear in subsequent quarters. But that's not why they are targeting wireless services provider Sprint Nextel (NYSE: S). The company actually delivered pretty decent results during that interim period between short seller release dates (April 15-30).

[Related -T-Mobile US Inc (NYSE:TMUS): AT&T Inc.(NYSE:T) Could Suffer In Wireless War]

Instead, short sellers are focusing on a news item that hit the wires on April 19, a full week before quarterly earnings came out. That's when New York State Attorney General Eric Schneiderman slapped the company with a $100 million lawsuit alleging under-collection of sales taxes. The scary part: New York could win triple damages if successful. The really scary part: other states may follow New York's lead, opening Sprint up to a liability in excess of $1 billion.

Since I am not a legal expert, I'll lay out the facts for others to digest. Sprint claims it didn't owe taxes on sales associated with out-of-state phone calls. So the company decided to put a reduced amount of taxes on each customer's bill as a way of cementing its reputation as a low-cost industry provider. In my cursory review of the resulting fallout, this is indeed a gray area. Other communications firms have reportedly adopted similar tactics regarding interstate commerce without any pushback.

Sprint further believes that even if there is a liability for unpaid taxes, it's the responsibility of consumers to make good on their unpaid taxes, not the company. Sprint would obviously like to avoid that route, knowing it would make its customers irate to receive a one-time $100 bill for past unpaid taxes

A settlement in the works?

One thing is for sure. This is an unwanted distraction for Sprint as it belatedly embarks on a massive technology upgrade known as Network Vision.

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