Wave Systems Corp. (fka WAVXQ)

[helpfulbacteria]

Unclevername: Stonestreet and Whalehaven...

Bingo. Well, almost, that is.

Unclevername, you put me onto the trail of Whalehaven (for those who don't know, Whalehaven was a heavy Wave investor.) Do a Google search for Whalehaven Capital Fund Ltd. or Whalehaven Fund Ltd. and you will be led (in several filings) to Mr. Michael Finkelstein.]

By the way, put the words: Stonestreet Whalehaven into Google and you end up with SEVERAL filings that list INVESTORS that very much match up (almost spookily so) with some rounds that Wave has done.

Things start getting interesting here. But, don't jump to any conclusions:

U.S., Canadian Regulators Charge trio of Hedge Fund Managers The Globe and Mail

By Michael Flaherty
February 5, 2005

U.S. and Canadian regulators have charged three hedge fund managers with insider stock trading violations as part of an investigation launched last spring into a string of alleged short-selling abuses.

Maryland-based CompuDyne Corp. said this week it recently learned that former investor Hilary Shane faces National Association of Securities Dealers charges of violating securities laws in a financing deal the security company did in October of 2001.

Ms. Shane, a former hedge fund manager at First New York Securities LLC, made $1.1-million (U.S.) from inside information of the deal, according to an NASD complaint filed in late December.

Michael Finkelstein and Elizabeth Leonard of Toronto-based Stonestreet LP face similar charges by the Investment Dealers Association, a Canadian self-regulatory group.
The charges come less than a year after the U.S. Securities and Exchange Commission and brokerages watchdog NASD pursued allegations of hedge funds profiting from inside knowledge of private investments in public equity, a transaction known as a PIPE.

PIPEs help cash-strapped companies raise money quickly by selling discount-priced shares to a group of investors. The stock of a company conducting a PIPE usually falls in the short-term because the transaction floods the market with additional shares.

Regulators are investigating whether individuals who helped finance a PIPE profited from selling short the company's shares before the deal closed, knowing its stock was about to fall.

Ms. Shane, who left First New York in 2002, is accused of doing exactly that.

Short sellers borrow shares of a company and then sell them in anticipation of a decline. They profit when the stock falls since they can buy back the shares at a lower price and pocket the difference.

In September, 2001, a representative at investment bank Friedman Billings Ramsey Group Inc. contacted Ms. Shane about doing a PIPE with CompuDyne, according to the NASD complaint.

The complaint says Ms. Shane made false representations about her investment intent, obtained the right to acquire 475,000 shares of CompuDyne and then engaged in unlawful insider trading by selling the company's stock short while in possession of material, non-public information.

First New York has not been charged in relation to the case. Ms. Shane could not be reached for comment.

The complaint does not list charges against FBR Group and a FBR Group spokesman declined to comment further.

Mr. Finkelstein and Ms. Leonard face similar charges stemming from a PIPE involving Novatel Wireless Inc. in 2001, and another with Trikon Technologies Inc. a year later.
Stonestreet LP's website lists Mr. Finkelstein and Ms. Leonard as officers of the investment firm. The IDA complaint says Stonestreet maintains a non-client account at Canaccord Capital Corp.'s Toronto office that operates as a hedge fund, which Mr. Finkelstein and Ms. Leonard co-manage.

The fund would hedge against its anticipated investment in a PIPE by “shorting the issuer's underlying stock,” according to the complaint that was filed on Jan. 7.

Reached by telephone at Stonestreet, Mr. Finkelstein said he would not comment. Ms. Leonard could not be reached.

(Like I said, don't jump to any conclusions. The Canadian Investment Dealers Association disciplinary panel DISMISSED all charges against Mr. Finkelstein and Elizabeth Leonard. But, PLEASE READ THE DISMISSAL. It could not be any less convincing or forceful.)

http://www.ida.ca/Files/Media/MediaRelease/Hearings/MRH200509290_en.pdf

NEWS RELEASE
For immediate release
For further information, please contact:
Alex Popovic Jeff Kehoe
Vice-President, Enforcement Director, Enforcement Litigation
[phone] or [e-mail] [phone] or [e-mail]

Disciplinary panel dismisses all charges against
Michael Finkelstein and Elizabeth Leonard

September 29, 2005 (Toronto, Ontario) – A Hearing Panel of the Investment Dealers Association of Canada (IDA), appointed pursuant to By-law 20, heard a disciplinary matter involving allegations against Michael Finkelstein and Elizabeth Leonard, at all material times registered with the Toronto office of Canaccord Capital Corporation, an IDA Member firm.

By written decision dated September 16, 2005, the Hearing Panel dismissed two charges against Mr. Finkelstein and one against Ms. Leonard. The panel dismissed a third charge against Mr. Finkelstein, with one panel member dissenting.

Association staff brought three charges against Mr. Finkelstein and one charge against Ms. Leonard. Staff alleged that between December 2001 and November 2002, both respondents had breached By-law 29.1 and engaged in conduct unbecoming in that, through a hedge fund over which they exercised control, they traded in securities of U.S. issuers while in possession of material non-public information, in violation of Section 10(b) of the U.S. Securities and Exchange Act of 1934 and Rule 10b-5 prescribed thereunder. In addition, staff alleged that Mr. Finkelstein breached By-law 29.1 in that he failed in his gatekeeper duties by permitting certain clients to trade in securities of U.S. issuers while in possession of material non-public information, in violation of Section 10(b) of the U.S. Securities and Exchange Act of 1934 and Rule 10b-5 prescribed thereunder. Further, staff alleged that Mr. Finkelstein violated By-law 29.1 in that he, on behalf of Stonestreet Limited Partnership (Stonestreet), engaged in short selling and hedging transactions in breach of certain covenants contained in two separate subscription agreements to not short sell securities of the issuer.

The Hearing Panel found that, at times relevant to the case, Mr. Finkelstein was registered with the IDA as a Registered Representative Options and controlled and managed Stonestreet, through Stonestreet Corporation. Stonestreet operated as a hedge fund and maintained a nonclient account at Canaccord. At all times relevant to the case, Ms. Leonard was registered with the IDA as a Registered Representative Options and as a Portfolio Manager Options. She was employed at Canaccord and was the portfolio manager of Stonestreet. Together, Mr. Finkelstein and Ms. Leonard ran Stonestreet.

As part of its business operations, Stonestreet participated in private financing by issuers of securities which traded on the NASDAQ Stock Market Inc. or on the Over-the-Counter Bulletin Board. Four financings were specified in the particulars of the charges, three of which were private investment in public equity sales. The fourth transaction was a shelf registration sale. In private financing of these types, restricted-trading shares of the issuers are offered to investors at a discount to the market price.

While each of the four transactions had its own particular details, there was a general pattern to Stonestreet’s activities. Upon learning of an impending private financing, in which it decided to participate, it sold short the issuer’s shares in the market. It then subscribed to purchase shares at the discounted price set out in the offering. Once it received free trading shares, following the required filings by the issuer with the Securities Exchange Commission and the public announcement of the financing was made, Stonestreet used its free trading shares to, directly or indirectly, close out its short position. Profit was the spread between the discounted private placement price and the short sell price.

The Hearing Panel heard evidence from two expert witnesses, one called by the prosecution, one by the defence, regarding whether the respondents’ conduct involved illegal trading in violation of American law. The experts were starkly opposed in their opinions on issues which were crucial to the case. On Count 1, the Panel concluded that “while we are unable to say that, from a Canadian perspective, the conduct of the respondents was commendable, we are left in a state of real uncertainty about whether that conduct constituted a violation of Section 10(b) of the Act. Canadian law requires that the uncertainty be resolved in the respondents’ favour. Count 1 is, therefore, dismissed.” Count 2 against Mr. Finkelstein alleging failure to perform his gate
keeping role was dismissed because conviction required a Hearing Panel finding of violation of Section 10(b) on Count 1.

With respect to the third charge, Mr. Finkelstein executed the signature page of a subscription agreement which contained a covenant precluding the short sale of the issuer’s securities. He claimed he signed the agreement without reading it. Despite the covenant, Stonestreet engaged in short selling activity. A majority of the Hearing Panel found that in these circumstances, an isolated breach of a contractual provision which may well have been inadvertent did not amount to Conduct Unbecoming. A dissenting opinion found that the fact that the respondent did not read the contract cannot be used as a defense for the breach and, whether by design, deliberate omission or carelessness, the respondent did not live up to the obligation of any member of the IDA to act with the highest level of integrity whenever issues of security regulation are involved.