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Criminal Charges Brought In Sedona Short-Sale Case
By JUDITH BURNS
Of DOW JONES NEWSWIRES
WASHINGTON -- Federal prosecutors charged two brothers with manipulative short-selling of Sedona Corp. (SDNA) stock, bringing criminal proceedings in a matter that securities regulators settled earlier this year.
Andreas Badian , an employee of Rhino Advisors, Inc., a New York money management firm, was arrested Tuesday and released on $2 million bail after pleading not guilty to securities fraud, officials said.
An arrest warrant was issued for Thomas Badian , president of Rhino Advisors, and Andreas Badian's older brother, but he did not appear in court and his attorney, Victor Rocco, declined to comment on his whereabouts. Prosecutors wouldn't comment on reports Thomas Badian had left the country.
Rhino and its president paid $1 million in February to settle Securities and Exchange Commission allegations they manipulated Sedona stock to benefit an offshore client who held $2.5 million of convertible debt in the company. They didn't admit to or deny the SEC's claims. The SEC didn't charge the client, Amro International, a Panama corporation based in Switzerland, or Andreas Badian .
Sedona, a King of Prussia, Pa., technology firm, was delisted from the Nasdaq Small Cap Stock Market early this year and now is quoted on the OTC bulletin board.
The criminal complaint filed in federal court in Manhattan charges the Badians ordered aggressive short sales of Sedona stock through a New York broker.
Andreas Badian told the broker to sell Sedona shares short with "unbridled levels of aggression," and be "merciless" with it, prosecutors charge. He later congratulated the broker on a "good job" because the stock price had "collapsed," according to tape recordings of telephone calls to the broker, prosecutors said.
Short selling is legal, but in this case it violated Amro's financing agreement with Sedona. Prosecutors described the financing as a "toxic" convertible deal that guaranteed Amro more Sedona shares if the stock price fell. The deal specifically barred Amro from short sales of Sedona stock. Short sellers profit by selling borrowed shares and replacing them later when the stock price has fallen.
Prosecutors claim Andreas Badian directed short selling in Sedona shares in March, 2001, just before the conversion date. According to the complaint, "it appears that these short sales were designed to drive down the price of Sedona common stock," giving Amro a bigger block of stock upon conversion.
Moreover, prosecutors raised the prospect of "naked" short selling abuses in the matter, noting Amro never tendered shares to the broker within three days after the short sale, as required. As a result, the broker "failed to delivery approximately 700,000 shares of Sedona common stock that it had sold on behalf" of Amro, according to the complaint.
"Naked" short selling occurs when short sellers fail to borrow stock before engaging in short sales. The SEC proposed changes this fall to curb manipulative, naked short sales, but it has yet to act on the measure, to the dismay of companies and investors that claim to have been victimized by the practice.
Sedona, for its part, balked at the conversion and filed a counterclaim after Amro filed a civil lawsuit. Andreas Badian was less upbeat in an e-mail to his brother in Oct., 2001, saying "we set up all these elaborate structures with seperatye (sic) entities, etc., for protection, now it seems like it was all for nothing," and affords no protection.
"There is no way we can have this go into court," the e-mail continued. "Not with the records and the endless trader testimony."
Adam Hoffinger, a Washington, D.C., attorney who represents Andreas Badian , said "the criminal complaint contains virtually identical allegations to what was covered by a civil settlement with the SEC." He declined further comment.
SEC officials declined to comment.
-By Judith Burns; Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com
Updated December 10, 2003 9:23 p.m.
AI
