OTCDD

[xxrayeyes]

SPECIAL FIRSTALERT:

The shares of Sedona Corp. (OTCBB: SDNA) are flying today after the SEC busted their short-sellers (see below). Also see the warning that the SEC has posted regarding toxic convertibles.
Finally, remember to inform your shareholders of the two hour national syndicated radio program via BusinessTalk Radio (http://www.businesstalkradio.net) and also accessible via Investrend Broadcast (http://www.investrendbroacast.com) this Sunday between 8 p.m. and 10 p.m. on "Corporate Strategies with Tim Connolly." The special call-in number is 1-877-266-7469 -- or contact Karen Breeckner below if you'd like to suggest a guest for the show. The program is co-sponsored by the CEO Council (http://www.ceocouncil.net).

Karyn Breeckner
[e-mail]
Corporate Strategies, Inc.
713-621-2737

SEC Settles with Rhino Advisors, Thomas Badian
FOR IMMEDIATE RELEASE
2003-26

http://www.sec.gov/news/press/2003-26.htm
http://www.sec.gov/answers/convertibles.htm
http://www.sec.gov/answers/shortsale.htm
http://www.sec.gov/answers/shortbox.htm
http://www.sec.gov/answers/shortrestrict.htm

Commission Cautions Companies, Investors about Dangers of Certain Convertible Securities
Washington, D.C., Feb. 27, 2003 — The Securities and Exchange Commission today filed a settled civil action against Rhino Advisors Inc. and its president, Thomas Badian, for directing a series of manipulative short sales of Sedona Corp. stock that contributed to the decline in price of Sedona's stock. Rhino, based in New York, manages money for two overseas clients. The Commission's complaint was filed in U.S. District Court for the Southern District of New York.

The Commission alleges that Rhino and Badian manipulated Sedona's stock price to enhance a client's economic interests in a $3 million convertible debenture that Sedona issued to Rhino's client. The purchase agreement for the debenture expressly prohibited Rhino's client from selling short shares of Sedona's stock while the debenture remained "issued and outstanding." According to the Commission, despite this contractual provision, Rhino engaged in extensive short selling on behalf of its client prior to exercising the conversion rights under the debenture and this short selling depressed Sedona's stock price.

Without admitting or denying the allegations in the SEC's complaint, Rhino and Badian have consented to the entry of an injunction for violations of the anti-fraud provisions of the federal securities laws and to pay, on a joint and several basis, a $1 million civil penalty. In addition, Rhino has consented to a court order requiring it to respond to an order directed to it by the Commission pursuant to Section 21(a) of the Securities Exchange Act of 1934 and to hire an independent consultant, acceptable to the Commission, to review its compliance policies and procedures and to implement the Independent Consultant's recommendation. The settlement terms are subject to court approval.

"Certain convertible securities, particularly those referred to as 'toxic' or 'death spiral' convertibles, present the temptation for persons holding the convertible securities to engage in manipulative short selling of the issuer's stock in order to receive more shares at the time of conversion," said Thomas C. Newkirk, Associate Director for the Division of Enforcement. "This case demonstrates this risk to issuers and investors. The $1 million penalty imposed here shows the Commission's determination to address these abuses."

Companies accessing the capital markets using financing alternatives are reminded to evaluate carefully the terms and risks of the securities being sold, including the impact on the company and the market for its securities. Certain types of financings, particularly those having conversion or issuance mechanisms tied to a company's fluctuating stock price, pose particular risks to companies and investors alike. These risks include dilution, as the result of the company issuing more shares, and, in some instances, downward manipulation of the company's stock price.

In deciding whether to enter into particular financing arrangements or make investment decisions, companies and investors should weigh the benefits of any alternative financing against the potential risks to the company and the value of the company's securities in the market. For more information, companies and investors should read "Convertible Securities" on the Commission's Web site at http://www.sec.gov/answers/convertibles.htm.

SEC Contacts:
Thomas C. Newkirk, [phone]
James T. Coffman, [phone]

Additional materials: Litigation Release 18003

Convertible Securities

A "convertible security" is a security - usually a bond or a preferred stock - that can be converted into a different security - typically shares of the company's common stock. In most cases, the holder of the convertible determines whether and when a conversion occurs. In other cases, the company may retain the right to determine when the conversion occurs.

Companies generally issue convertible securities to raise money. Companies that have access to conventional means of raising capital (such as public offerings and bank financings) might offer convertible securities for particular business reasons. Companies that may be unable to tap conventional sources of funding sometimes offer convertible securities as a way to raise money more quickly. In a conventional convertible security financing, the conversion formula is generally fixed - meaning that the convertible security converts into common stock based on a fixed price. The convertible security financing arrangements might also include caps or other provisions to limit dilution (the reduction in earnings per share and proportional ownership that occurs when, for example, holders of convertible securities convert those securities into common stock).

By contrast, in less conventional convertible security financings, the conversion ratio may be based on fluctuating market prices to determine the number of shares of common stock to be issued on conversion. A market price based conversion formula protects the holders of the convertibles against price declines, while subjecting both the company and the holders of its common stock to certain risks.

Because a market price based conversion formula can lead to dramatic stock price reductions and corresponding negative effects on both the company and its shareholders, convertible security financings with market price based conversion ratios have colloquially been called "floorless", "toxic," "death spiral," and "ratchet" convertibles.

Both investors and companies should understand that market price based convertible security deals can affect the company and possibly lower the value of its securities. Here's how these deals tend to work and the risks they pose:

The company issues convertible securities that allow the holders to convert their securities to common stock at a discount to the market price at the time of conversion. That means that the lower the stock price, the more shares the company must issue on conversion.

The more shares the company issues on conversion, the greater the dilution to the company's shareholders will be. The company will have more shares outstanding after the conversion, revenues per share will be lower, and individual investors will own proportionally less of the company. While dilution can occur with either fixed or market price based conversion formulas, the risk of potential adverse effects increases with a market price based conversion formula.
The greater the dilution, the greater the potential that the stock price per share will fall. The more the stock price falls, the greater the number of shares the company may have to issue in future conversions and the harder it might be for the company to obtain other financing.
Before you decide to invest in a company, you should find out what types of financings the company has engaged in - including convertible security deals - and make sure that you understand the effects those financings might have on the company and the value of its securities. You can do this by researching the company in the SEC's EDGAR database and looking at the company's registration statements and other filings. Even if the company sells convertible securities in a private, unregistered transaction (or "private placement"), the company and the purchaser normally agree that the company will register the underlying common stock for the purchaser's resale prior to conversion. You'll also find disclosures about these and other financings in the company's annual and quarterly reports on Forms 10-K and 10-Q, respectively, and in any interim reports on Form 8-K that announce the financing transaction.

If the company has engaged in convertible security financings, be sure to ascertain the nature of the convertible financing arrangement - fixed versus market price based conversion ratios. Be sure you fully understand the terms of the convertible security financing arrangement, including the circumstances of its issuance and how the conversion formula works. You should also understand the risks and the possible effects on the company and its outstanding securities arising from the below market price conversions and potentially significant additional share issuances and sales, including dilution to shareholders. You should be aware of the risks arising from the effects of the purchasers and other parties trading strategies, such as short selling activities, on the market price for the company's securities, which may affect the amount of shares issued on future conversions.

Companies should also understand the terms and risks of convertible security arrangements so that they can appropriately evaluate the issues that arise. Companies entering into these types of convertible securities transactions should understand fully the effects that the market price based conversion ratio may have on the company and the market for its securities. Companies should also consider the effect that significant share issuances and below market conversions have on a company's ability to obtain other financing.

Companies or investors seeking to learn more about the SEC's registration requirements for common stock issuable upon conversion of unregistered convertible securities, including the timing of the filing of the resale registration statement and the appropriate form that the company may use to register the resale, should consult the Division of Corporation Finance's manual of publicly available telephone interpretations.
http://www.sec.gov/answers/convertibles.htm

Short Sales

A short sale is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will fall. If the price drops, you can buy the stock at the lower price and make a profit. If the price of the stock rises and you buy it back later at the higher price, you will incur a loss.

When you sell short, your brokerage firm loans you the stock. The stock you borrow comes from either the firm’s own inventory, the margin account of another of the firm’s clients, or another brokerage firm.

As with buying stock on margin, your brokerage firm will charge you interest on the loan, and you are subject to the margin rules. If the stock you borrow pays a dividend, you must pay the dividend to the person or firm making the loan.

The rules of the SEC and the National Association of Securities Dealers, Inc. place restrictions on when you can sell. You can read about these restrictions in our search key topic, Short Sale Restrictions.
You can find out the total number of shares that have been sold short on a monthly basis in a particular company by visiting the New York Stock Exchange's "Press Releases" page and selecting "Short Interest" in the drop-down category box. You also can learn the short interest for individual stocks that trade on the NYSE, American Stock Exchange, and Nasdaq by visiting the Nasdaq's website. Simply enter the ticker symbol for the company in the “Quotes” box and click "GO". In the pull-down box, replace "FlashQuotes" with "Short Interest". There also are many commercial websites that offer this information. If you enter the words "short interest" into most Internet search engines, you'll quickly find websites that can provide this information.

For more information about selling short, please read our search key topic on Selling Short Against the Box.

http://www.sec.gov/answers/shortsale.htm

Selling Short Against the Box

A short sale against the box of a stock is where the seller actually owns the stock, but does not want to close out the position.

The rules of the SEC and National Association of Securities Dealers, Inc. place restrictions on when you can sell short. You can read about these restrictions in our Fast Answers databank on "Short Sale Restrictions."
http://www.sec.gov/answers/shortbox.htm

Short Sale Restrictions

A short sale is generally a sale of stock by an investor who does not actually own the stock.
The SEC, the New York Stock Exchange, and the National Association of Securities Dealers, Inc. (NASD) place restrictions when investors want to sell short. Their rules prevent investors from selling short unless the last trade of the stock is at the same or higher price—in other words, investors can’t sell short in a declining market. These restrictions aim to stop continuous short selling that would exacerbate a falling stock price. The SEC also has a rule that prohibits short-sellers from manipulating a securities offering.

The rules investors must follow are:

Exchange-Listed Stocks
Rule 10a-1 of the Securities Exchange Act, known as the uptick rule, seeks to limit short selling in a declining market. The rule prohibits investors from selling an exchange-listed stock short unless the stock's last trade was at the same price or higher than the previous trade. New York Stock Exchange applies a similar rule—Rule 440B—to its member brokerage firms and to its specialists.
In addition, Rule 10a-2 of the Securities Exchange Act requires brokerage firms that sell a stock short or allow their customers to sell short to first make sure that the shares can be borrowed or that delivery of the securities can be made to the purchaser by the settlement date.

Nasdaq Stock Market Stocks
NASD Rule 3350 prohibits NASD members from short selling in Nasdaq Stock Market stocks at or below the inside best bid when the best bid is below the previous inside best bid for that stock. The inside best bid is the highest bid by all market makers quoting a particular stock.

Stocks in a Securities Offering
Rule 105 of Regulation M seeks to prevent short sellers from manipulating securities offerings. The Rule prohibits the covering of short sales with securities obtained from an underwriter, broker, or dealer that is participating in the securities offering.
http://www.sec.gov/answers/shortrestrict.htm