Wish we could focus the debate more on hedge fund manipulation, particularly with PIPE's and convertible debentures, than on penny stocks like NFI and CKKM.
Hedge funds are the real scammers killing us retail microcap investors.
Deephaven among funds in SEC investigation
Neal St. Anthony, Star Tribune
July 6, 2005 NEALST0706
Deephaven Capital Management, one of the country's largest hedge funds for affluent individuals and big institutions, has been dragged into a far-flung federal investigation into whether it profited -- to the disadvantage of small investors -- through large private investments in capital-hungry public firms.
Knight Capital Group, the New Jersey parent of Deephaven, has disclosed that Deephaven and "a former Deephaven employee" have been notified by regulators at the Securities and Exchange Commission that Deephaven may be sued for violating antifraud provisions of securities laws in connection with trading involving certain private investments in public equities (PIPEs) between June 1999 and March 2004.
In a letter to Deephaven investors, CEO Colin Smith said last week that the Minnetonka-based firm believes it's the target of an "industrywide review," that Deephaven is cooperating fully and that the investigation involves "an insignificant portion of the assets" held in one Deephaven fund.
"We discontinued all investments in PIPEs by August 2004," Smith's letter said.
Smith and a spokeswoman for Deephaven declined to comment Tuesday.
The investigation is believed to involve more than two dozen investment funds and already has resulted in some scalps. Regulators are looking into allegations of stock manipulation by hedge funds, which are big investors in PIPEs.
In May, Philadelphia hedge fund manager Hilary Shane agreed to pay fines and give up profits of more than $1 million as a result of a PIPE offering in a company called CompuDyne, according to the SEC case against Shane.
In a PIPE offering, investors commit to buy restricted shares in a company, often troubled, usually at a discount to the market price.
The company agrees, in turn, to file a "resale registration statement" that enables the PIPE investors to resell the shares to the public.
The PIPE investments often constitute a big block of shares, and the news of the investment often drives down the price of the company because of the dilution that occurs for existing shareholders. In Shane's case, the SEC said, she violated a confidentiality agreement and securities laws by short-selling shares of CompuDyne in her private account and her firm's account the day before the equity infusion was announced.
When investors short a stock, they are betting that the price will go down. Usually, they have to borrow the stock they are shorting. Shane covered all her short sales with the shares she obtained in the PIPE offering, making big profits for herself and her firm as CompuDyne shares plummeted.
And TheStreet.com reported last week that brokerage firm Friedman Billings Ramsey has "proposed paying a $7.5 million penalty to regulators to settle allegations arising from its role as the placement agent for a 2001 PIPE deal. The SEC and the National Association of Securities Dealers, which also investigated abuse in the $14-billion-a-year PIPEs market, have not yet decided whether to accept the Virginia-based investment firm's offer."
The investigation of Friedman Billings also led to the forced the retirement of Emanuel Friedman, the firm's founder and CEO, who is under SEC investigation.
Deephaven, with about $3.5 billion in assets under management, generated $77 million in asset-management fees, according to Knight's 2004 annual report.
Hedge funds typically solicit money from so-called "accredited investors" who have at least $1 million in net worth and who can invest a minimum of $250,000. Deephaven said last year that its minimum investment is $2 million and that it has posted after-fee average compound annual returns of 20 percent over 10 years through 2003, double that of the S&P 500.
Deephaven was in the news recently when it announced that it would mount a proxy campaign to oppose MCI Incorporated's buyout offer from Verizon Communications.
Hedge funds largely are unregulated by the SEC, which has moved in recent months to order the fast-growing segment of the investment industry to meet certain registration and compliance standards.
Neal St. Anthony can be reached at 612-673-7144 or nstanthony@startribune http://www.startribune.com/stories/1069/5492018.html