CMKM Diamonds Inc. (fka CMKX)

[trade15]

pantherj

here's a little tidbit about naked short selling and how it can be done. call it what you want, but it's short selling without the lends.

trade


http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C:*SEC-1633463&symbol=*SEC&news_region=C


U.S. Securities and Exchange Commission
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Recent Sedar Documents



SEC settles with "Bucky" Lyon


2009-08-14 14:16 ET - Street Wire

Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission


by Mike Caswell

The U.S. Securities and Exchange Commission has reached a $778,016 settlement with Edwin "Bucky" Lyon, a Texas hedge fund manager who allegedly used inside information to execute short sales ahead of PIPE offerings. (All figures are in U.S. dollars.) Mr. Lyon did not admit to any wrongdoing in settling the case. In a consent judgment dated Aug. 7, 2009, he and his Gryphon funds have agreed to pay a combined $310,288 in civil penalties, plus $467,728 in disgorgement and interest.

The SEC claimed that Mr. Lyon, through his Gryphon funds, shorted four companies between 2001 and 2004 after receiving materials for PIPE offerings from those companies. In PIPE offerings, the company typically issues discounted shares to a large investor, usually a hedge fund or an institution. When news of the offering is made public, the stock falls in price, allowing a shorter to profit. Those receiving offering materials ahead of time agree to keep the information confidential, and not to trade based on it.

The settlement came one month before the trial in the case, which was scheduled to begin on Sept. 8, 2009. The deal represents a partial victory for the SEC, after the judge dismissed a substantial part of the allegations. The SEC had claimed that Mr. Lyon illegally distributed the PIPE shares by using them to cover short sales he made through an unidentified Canadian brokerage. The judge dismissed that part of the case on Jan. 2, 2008, stating that there was no evidence that the Gryphon funds planned to distribute the shares before the resale restrictions on them were lifted.

SEC's complaint

The SEC filed a complaint against Mr. Lyon and his hedge funds on Dec. 12, 2006, in the Southern District of New York. The regulator identified his funds as the Gryphon Master Fund LP, Gryphon Partners LP, Gryphon Partners (QP) LP, Gryphon Offshore Fund Ltd., Gryphon Management Partners LP, Gryphon Management Partners III LP and Gryphon Advisors LLC.

Much of the complaint dealt with the unsuccessful allegation that the Gryphon funds engaged in an illegal distribution by covering shorts with PIPE shares. According to the complaint, the Gryphon entities realized more than $6.5-million in ill-gotten gains from this part of the scheme, which included 35 companies.

Typically, after agreeing to invest in a PIPE offering, Mr. Lyon would have the Gryphon funds short a company, usually a naked short sale done in Canada, the SEC said. This allowed him to take advantage of the fact that naked shorting was still allowed in Canada at the time. Later, once the SEC declared the resale registration for the offering effective, the fund allegedly used the PIPE shares to cover the short. Using this method, the fund was essentially selling its PIPE shares before they could legally be sold, the SEC said.

An example cited by the SEC was Medis Technologies Ltd., which closed a PIPE offering on Jan. 13, 2004. Gryphon allegedly invested $1.5-million in the offering, receiving 150,000 shares at $10, which was a discount from the $14.48 the company traded at. Gryphon then allegedly sold short 149,887 shares for proceeds of $1,939,000. Once the SEC declared the registration statement for the PIPE shares effective, Gryphon, through a series of wash sales and matched orders, allegedly moved the PIPE shares to the Canadian account and used them to cover the short. "Gryphon Partners' profit was therefore locked in at the moment its short sales were executed," the complaint reads.

Most of the 35 companies in this part of the scheme were U.S. listings. The list did contain one Canadian company though, Richard Coglon's Heartland Oil & Gas Corp. Gryphon invested in a $12-million financing that Heartland completed in August, 2003.

The remaining allegation in the complaint was the insider trading that formed the basis for the settlement. With four companies, Mr. Lyon allegedly had Gryphon complete short sales before news of the PIPE offering was public. The SEC identified these four companies as Gentner Communications Corp., Manufacturers' Services Ltd. and PhotoMedex Inc. "Although Defendants received legal advice advising them not to trade prior to the public announcement of PIPE offerings, Defendants disregarded this advice and continued to trade prior to the public announcement of certain PIPE offerings," the complaint reads.

With Gentner, Gryphon allegedly accumulated a short position of 87,500 shares on Nov. 15, 2001, one day prior to the public announcement of the PIPE offering. The next day, Nov. 16, the stock closed down $1.02, a drop of about 5 per cent, the complaint stated.

The SEC sought appropriate civil penalties and disgorgement of profits