Shock of Epic Short Squeeze in KaloBios Pharma (KBIO) Reverberates Across Wall Street

The stock being talked about the most on trading desks today is KaloBios Pharma (NASDAQ: KBIO). After closing at around $2 per share, shares surged to as high as $21.05 (+953%) following a disclosure after the close from Turing Pharmaceuticals' Martin Shkreli, a man demonized for jacking up drug prices, that he accumulated 1.2 million shares.

$2... $4... $6... $10... $12... shares keep climbing as short sellers were left stunned.

You see, just last week KaloBios Pharma announced that it would wind down its operations. It seemed like a "no brainer" to be short.

What Mr. Shkreli seized on was that, even if fully liquidated, there was a good chance there will be ample cash left over for common shareholders. While the company hasn't released its third quarter financials, at June 30, 2015, KaloBios had cash, cash equivalents and investments totaling $23.2 million. Our back-of-the-envelope calculation suggests a value of about $2.60 (assuming a similar cash burn in Q3).

Shkreli had nothing to lose. He could buy up the float and worst case scenario make a nice profit on the wind-down.

Taking it a step further, Shkreli formed a group that now controls more than 50% of the outstanding shares with a proposal to continue the company's operations.

With the possibility of a reverse merger with the most-hated-man-in-pharma, a short squeeze of epic proportion ensued.

Shorts were caught in the headlights, totally powerless. Brokers were forcing buy-ins to limit their exposure. Buying beget buying, beget buying. Even Shkreli, shit eating grin and all, could not have predicated what happened.

This morning, shares traded as high as $21.05. Now nearly $10 off the high they are still up 455% to $11.50. The damage has been done.

Multiple traders are saying they blew up their account on the KBIO trade. One post at profit.ly describes a trader blowing up an account he has steadily grown over time being short KBIO overnight. The trader was hit with a final margin call of $50,809.72. "I am with out words," he said.

Another trader started a gofundme account claiming losses of $106,000 on a KBIO short gone bad.

Speculation even suggested brokerage firms like E*TRADE (NASDAQ: ETFC) may be holding the bag on millions in losses. An e-mail to E*TRADE about its exposure has not been returned as of the time of this article.

Some are asking if what Mr. Shkreli did was legal. As far as we know we don't see illegal activity but that is a question for the SEC. As per protocol, the SEC would not comment on if they are investigating the trading in the stock.

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