SEC Charges Hedge Fund Over Shorting
Tuesday December 12, 3:19 pm ET
By Judith Burns, Dow Jones Newswires
SEC Charges Hedge Fund With Naked Short-Selling
WASHINGTON (AP) -- Federal regulators sued a Dallas-based hedge-fund manager Tuesday, alleging he pulled in more than $6.5 million of gains through illegal trading involving "naked" short sales of dozens of companies.
Edwin Buchanan Lyon IV, the managing partner and chief investment officer of Gryphon Partners LP, was charged by the Securities and Exchange Commission on Tuesday, along with Gryphon and six other related firms based in Texas and Bermuda.
According to the SEC's complaint, filed in federal district court in Manhattan, from 2001 to 2004, Gryphon would engage in "naked" short sales, typically through Canada, after agreeing to invest in PIPE deals, or private investments in public equity.
The SEC also charged Gryphon with trading on inside information on at least four PIPE deals, involving Celsion Corp., Gentner Communications Corp., Manufacturers Service Ltd. and PhotoMedex Inc., by selling their shares short ahead of public announcement of the stock offerings. Lawyers advised Lyon not to engage in trading in advance of the deals, but he did it anyway, according to the SEC.
Short selling, which involves sales of borrowed shares in hopes of replacing them later at a lower price, is legal. So-called "naked" short selling occurs when the short seller doesn't borrow shares before selling them, a practice that was legal in Canada at the time.
The SEC claimed Lyon and Gryphon engaged in deceptive sales involving at least 35 companies that sought PIPE financing, after telling those firms that the hedge fund wouldn't sell or transfer the shares it acquired through the PIPE deals. The companies included Guilford Pharmaceuticals Inc., IntelliData Technologies Inc. and Heartland Oil & Gas Corp.
The SEC is seeking to have Lyon and Gryphon return their allegedly ill-gotten gains, with interest, and pay civil penalties.
"Insider trading and fraud by hedge funds continues to be a high priority for the commission," said Robert Kaplan, an assistant director in the SEC's enforcement division in Washington. He added that the agency will seek "substantial" penalties from the defendants.
The case isn't the SEC's first to target alleged manipulation involving PIPE deals and hedge funds, which are lightly regulated investment vehicles meant for the ultra-wealthy. Hedge fund manager Jeffrey Thorp and three hedge funds paid $15.8 million in March to settle SEC allegations of insider trading and illegal sales of shares involved in PIPE transactions.
Lyon isn't the first Gryphon manager to run afoul of the law, either. Former manager Jonathan Daws pleaded guilty in 2005 to charges of manipulating the price of penny stocks using information obtained from U.S. government sources. Daws was charged in a scheme that included former Federal Bureau of Investigation agent Jeffrey Royer; Royer's former girlfriend, Lynn Wingate; and former short-seller and Web site operator Anthony Elgindy.
Kaplan said the conduct alleged against Lyon and Gryphon was unrelated to the charges against Daws.
Ralph Ferrara, an attorney who represents Lyon and Gryphon, was traveling and couldn't be reached immediately for comment.