CMKM Diamonds Inc. (fka CMKX)

[dia duit]

It happened again! A second court has ruled in favor of PIPE deals. This should officially put to rest the argument that PIPE deals are technically NOT naked shorting. Never were! So stay away from stocks that make PIPE deals, imo.

http://www.hedgeworld.com/news/read_newsletter_aa.cgi?section=legl&story=legl2171.html

Pa. Court Deals SEC Another Setback on PIPEs

By Christopher Faille, Senior Financial Correspondent | Monday, January 28, 2008

PHILADELPHIA (HedgeWorld.com)—Despite a last-minute effort by the Securities and Exchange Commission to explain why he shouldn't, a federal district court judge in Pennsylvania followed precedents set recently by colleagues in New York and North Carolina, ruling against an SEC position about the registration requirements for private investments in public equity, or PIPEs.

The underlying dispute in this case, in U.S. District Court for the Eastern District of Pennsylvania, is as it was in the other two forums. According to the law, if an issuance meets certain requirements, PIPE securities are exempt from the registration mandate of the Securities Act of 1933. But the SEC has long contended that when a company short sells the securities it intends to buy through a PIPE transaction, it falls outside the scope of this exemption, and so illegally sells non-exempt unregistered securities. This is known as a Section 5 violation.

The Pennsylvania district court judge, Eduardo Robreno, granted a defendant's motion to dismiss the Section 5 aspect of a lawsuit filed by the SEC against Robert A. Berlacher and the hedge funds Mr. Berlacher controlled Previous HedgeWorld Story. Mr. Robreno denied the motion to dismiss as to another aspect of the lawsuit, which amounts in essence to an insider trading theory, and he ordered that the complaint be amended so that the phrase "PIPE information" will be explicitly defined.

In its complaint, filed in September 2007 Previous HedgeWorld Story, the SEC listed 10 distinct PIPEs transactions in which it alleged that the defendants had employed an illegal trading scheme, realizing more than $1.7 million in illegal gains.

On Jan. 18, the eve of a three-day weekend and only five days before oral arguments on the motion to dismiss, the SEC filed a "surreply," presenting new arguments as to why this court shouldn't follow the examples of those of North Carolina—where a judge threw out part of an SEC lawsuit accusing hedge fund manager John Mangan of insider trading and selling unregistered securities Previous Reuters Story— and New York, where a judge did essentially the same thing in a case against Gryphon Partners, a family of Dallas-based hedge funds, and associated entities, and against Gryphon's Chief Investment Officer, Edwin Buchanan Lyon IV Previous HedgeWorld Story.

Those courts had concluded, for example, that because the short sales undertaken by PIPEs purchasers involved securities the sellers didn't own, they weren't truly "sales" in the sense that requires registration.

In its Jan. 18 brief, the SEC said the other courts had erred because the statute defines "sale" quite broadly, including "every attempt or offer to dispose of … a security or interest in a security, for value."

In response, defendants in the Pennsylvania case contended that the issue isn't whether a statutory sale takes place, but when. The sale doesn't take place when the contract to make a sale is entered into. It takes place later, when the PIPE sales are used to cover the short position. Accordingly, no purchaser of securities from the defendants received any PIPE shares that were restricted at the time they were received.

In a statement after the court's ruling, attorneys for the defendants said that they were pleased, "because the SEC raised new and different arguments in support of its Section 5 and related claims that were not raised in the earlier Mangan [North Carolina] and Lyon [New York] cases, yet the Court saw through those arguments and reached the right conclusion, fully in line with how the Third Circuit views a transaction of this sort and how both the Mangan and Lyon courts view this type of PIPE transaction, including the shorting and covering of the trades with registered PIPE shares."

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