Stock Lobster

12/21/06 5:44 AM

#362 RE: AUdad #352

fyi: Insider Trading Linked to PIPE Offerings

[In several instances, according to the SEC, the trader's short selling was directly contrary to representations that his firm made to PIPE issuers in connection with their transactions.

Stephen Taub,
April 25, 2005

Guillaume Pollet, a former managing director of SG Cowen Securities Corp., pleaded guilty to insider trading after he learned about a private-equity offering, according to wire-service reports. Under his plea agreement, Pollet faces between 18 and 24 months in prison, plus fines, according to The Wall Street Journal.

In addition, the Securities and Exchange Commission charged Guillaume with insider trading and fraud for short-selling the stock of 10 companies before they closed on private offerings of stock, including offerings in which SG Cowen invested. According to the SEC, Pollet was in charge of investing SG Cowen proprietary funds in PIPEs — private investment in public equity.

Specifically, the commission alleged that during 2001, Pollet routinely sold short the publicly traded securities of 10 public companies that either engaged in, or were considering engaging in, PIPE financings after receiving confidential non-public information about the upcoming transaction, in order to secure gains for SG Cowen's proprietary account.

As a result, added the commission, SG Cowen locked in more than $4 million in trading profits in addition to other gains it made on the transactions. In several instances, SG Cowen also acted as the PIPE issuer's investment banker.

Further, alleged the commission, in several instances Pollet's short selling was directly contrary to representations that SG Cowen made to PIPE issuers in connection with their transactions.

"While PIPE transactions may help a company meet its financing needs, they also create opportunities for fraud," said Mark K. Schonfeld, director of the SEC's Northeast Regional Office, in a statement. "This case sends the message that we will actively patrol this area so that issuers and investors alike can have confidence in these financing vehicles."

Stock Lobster

12/21/06 5:46 AM

#363 RE: AUdad #352

FT: Hedge Funds, Shorting & PIPE strategy

The heat is on for funds' Pipe strategy

The Financial Times
by Jason Huemer
March 15, 2004

The crusade by Eliot Spitzer, New York's attorney-general, against market timing in mutual funds has opened a Pandora's Box, leaving hedge funds wondering what other practices will appear on the regulatory radar screen. To some, there is one obvious candidate: the so-called Reg D hedge fund investment strategy.

The Reg D sector, also known as the "Pipe" sector, for private investments in public entities, refers to the market in which securities in public companies are purchased directly in negotiated transactions, usually at a discount to current value. These sales are made under the auspices of Regulation D of the 1933 Securities Act, which allows the sale of certain unregistered securities to qualified investors.

Pipe financing has legitimate applications but it has also witnessed its share of abuse and controversy, so much so that many practitioners have come to be known as corporate America's loan sharks.

Perhaps the most controversy has been generated by "death-spiral" or "toxic" converts, convertible bonds that have a resetting conversion price, granting more stock to the Pipe investor as the stock price declines.

These bonds became especially popular several years ago, in the wake of the telecoms and internet bust, as rapidly sinking companies grasped at straws to keep themselves afloat.

As the true impact of these deals became felt, with massive shorting driving the companies' stocks further down, a number of transactions resulted in litigation, including Ariad Pharmaceuticals and Log On America, both of which sued hedge fund Promethean Investment Group.

These cases were settled but not before the world caught a glimpse of the hardball tactics employed by some Reg D investors in stripping value out of fading companies.

Because of its unsavoury reputation, many hedge fund investors avoid Reg D or Pipe investments. But while they may avoid firms such as Promethean or BayStar, two of the largest Reg D-focused firms, they may not realise how much exposure they have through multi-strategy firms. In fact, over the past few years, some of the largest buyers of Pipes have included firms such as Citadel, Angelo Gordon and Ramius, all blue-chip names in the hedge fund business.

Defenders of the Pipe strategy focus on cases in which the capital gives otherwise failing companies a new lease on life. They also say that bad publicity has made toxic converts a thing of the past. The data support that contention: figures compiled by PlacementTracker indicate that issuance of such so-called structured Pipes fell from a high of almost $3.2bn in 2000 to under $250m last year. It is worth noting, however, that year-to-date tallies already eclipse the 2003 total.

Pipe investors also stress that they make more money if the stocks they buy go up rather than down. That argument, however, is misleading at best. A closer look reveals that taking directional exposure would be a sucker's bet. In fact, a recent University of Virginia study looked at 2,158 Pipes issued by 1,062 firms from 1995 to 2000 and found that the median abnormal return for Pipes in the 12 months following issuance was -40.7 per cent for "protected" deals (including reset converts) and was -26.7 per cent for "unprotected" Pipes (fixed-price deals).

Instead, it seems that much of the return in the sector has been generated by arbitrage trades - buying securities at a discount and capturing a spread through short sales or options. While this offers an attractive risk-adjusted return to the manager, it usually has the effect of driving the stock price down sharply, shifting the burden to existing shareholders.

The SEC has said it is looking at all areas of the Pipe financing market. Unfortunately for regulators the sector may be difficult to police since it is largely private and most investors play within the letter, if not the spirit, of the law.

In one rare exception, the SEC last year completed an enforcement action against Rhino Advisors, alleging the firm manipulated the stock of Sedona Corporation through a toxic convert and shorting. Rhino agreed to pay $1m to settle the complaint.

Far more interesting are Sedona's civil actions, which expose a tangled global web of offshore investment vehicles, Canadian brokerage firms and even a US investment bank, Ladenberg Thalmann, in a story that makes Rhino's involvement look like just the tip of the iceberg.

Despite the difficulty in regulating the sector, many believe more can be done, starting with one of the biggest smoking guns in the industry: shorting into the overnight convert market (bonds marketed privately for next day issue). While the subsequent equity hedging activity could be expected to depress the company's stock price, what is remarkable is that the price action often begins before any announcement, meaning some investors may be shorting on material non-public information.

Where there's smoke, there could well be fire.

Stock Lobster

12/21/06 6:03 AM

#364 RE: AUdad #352

fyi: SEC charges hedge fund over shorting

By Judith Burns, Dow Jones Newswires | December 12, 2006

WASHINGTON --Federal regulators sued a Dallas-based hedge-fund manager Tuesday, alleging he pulled in more than $6.5 million of gains through illegal trading involving "naked" short sales of dozens of companies.

Edwin Buchanan Lyon IV, the managing partner and chief investment officer of Gryphon Partners LP, was charged by the Securities and Exchange Commission on Tuesday, along with Gryphon and six other related firms based in Texas and Bermuda.

According to the SEC's complaint, filed in federal district court in Manhattan, from 2001 to 2004, Gryphon would engage in "naked" short sales, typically through Canada, after agreeing to invest in PIPE deals, or private investments in public equity.

The SEC also charged Gryphon with trading on inside information on at least four PIPE deals, involving Celsion Corp., Gentner Communications Corp., Manufacturers Service Ltd. and PhotoMedex Inc., by selling their shares short ahead of public announcement of the stock offerings. Lawyers advised Lyon not to engage in trading in advance of the deals, but he did it anyway, according to the SEC.

Short selling, which involves sales of borrowed shares in hopes of replacing them later at a lower price, is legal. So-called "naked" short selling occurs when the short seller doesn't borrow shares before selling them, a practice that was legal in Canada at the time.

The SEC claimed Lyon and Gryphon engaged in deceptive sales involving at least 35 companies that sought PIPE financing, after telling those firms that the hedge fund wouldn't sell or transfer the shares it acquired through the PIPE deals. The companies included Guilford Pharmaceuticals Inc., IntelliData Technologies Inc. and Heartland Oil & Gas Corp.

The SEC is seeking to have Lyon and Gryphon return their allegedly ill-gotten gains, with interest, and pay civil penalties.

"Insider trading and fraud by hedge funds continues to be a high priority for the commission," said Robert Kaplan, an assistant director in the SEC's enforcement division in Washington. He added that the agency will seek "substantial" penalties from the defendants.

The case isn't the SEC's first to target alleged manipulation involving PIPE deals and hedge funds, which are lightly regulated investment vehicles meant for the ultra-wealthy. Hedge fund manager Jeffrey Thorp and three hedge funds paid $15.8 million in March to settle SEC allegations of insider trading and illegal sales of shares involved in PIPE transactions.

Lyon isn't the first Gryphon manager to run afoul of the law, either. Former manager Jonathan Daws pleaded guilty in 2005 to charges of manipulating the price of penny stocks using information obtained from U.S. government sources. Daws was charged in a scheme that included former Federal Bureau of Investigation agent Jeffrey Royer; Royer's former girlfriend, Lynn Wingate; and former short-seller and Web site operator Anthony Elgindy.

Kaplan said the conduct alleged against Lyon and Gryphon was unrelated to the charges against Daws.

Ralph Ferrara, an attorney who represents Lyon and Gryphon, was traveling and couldn't be reached immediately for comment.

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