Post by jcline on Dec 13, 2006 12:56:51 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
SEC Arrives Late to Party...Again - December 13, 2006
David Patch
As first reported by TheStreet.com Tuesday, the Securities and Exchange Commission has issued yet another complaint against a hedge fund for what it calls abusive short selling relative to a private placement (PIPE) offering.
In a suit filed by the SEC in the US District Court for the Southern District of New York, Gryphon Partners LP and managing partner and chief investment officer Edwin Lyon IV are accused of perpetrating an illegal trading scheme to evade the registration requirements of federal securities laws. The SEC claims Lyon, through Gryphon, "naked shorted" at least 35 publicly traded companies while in possession of non-public materials and in violation of US securities laws through a period between 2001 and 2004.
But is this all more of the too little too late game? The case sounds good on paper and all but is the SEC really serious?
The scheme that Gryphon is accused is not new to the markets or the market regulators. In fact, the SEC fined hedge fund manager Jeffrey Thorp 15.8 Million in March 2006 for orchestrating a similar scheme to defraud regarding 23 other PIPE offerings through a time span of 2000 - 2002. The SEC has also filed a claim against former fund manager Guillaume Pollet regarding at least 10 separate illegal shorting schemes in the 2000 - 2001 timeframe and has fined and barred hedge Fund Manager Hillary Shane for a similar episode in 2001.
According to TheStreet.com, the SEC is looking into several other hedge funds involved in PIPE offerings as well.
If it seems like a lot of illegal PIPE offerings and illegal shorting was taking place dating back to at least 2000, it was. In a WSJ article published in 2004, one hedge fund manager was quoted as saying that this was common practice back then, "everybody did it."
That only leaves us to wonder where the regulators were back then.
To answer that question you only have to look in two places, the SEC archives and Canada.
In October 1999 the SEC put out for public comment a concept reform to existing short selling rules. The SEC wanted to feel out the public's views, or so they said. In that concept release the SEC admitted, "Although short selling serves useful market purposes, it also may be used as a tool for manipulation."
In response to this release, the SEC reported to have received over 2250 comment letters from the public and in 2003, when the SEC again proposed a short selling rule change, the SEC identified nearly 2000 comment letters in 1999 voiced concerns over abusive and manipulative naked short selling.
In fact, in the summary document of the concept proposal, issued by the SEC in September 2000, the SEC stated, "Another group of letters exhibiting a uniform pattern complained about " naked shorting" by market makers and offshore brokers. These letters contained identical language referring to "penny" stocks as "volatile" due to "rampant naked shorting" that has gone "unchecked." According to these investors, naked shorting must be abolished and reporting requirements should be established for issuers. Another group of letters exhibiting a uniform pattern complained about " naked shorting" by market makers and offshore brokers."
So clearly, by this admission, the SEC was forewarned as early as 1999 that naked shorting abuse existed, was manipulative, and involved offshore entities. It was a concern of the investors at least.
So lets venture offshore, or in this case, over the border to Canada.
According to the SEC suit against Gryphon, "Typically, after agreeing to invest in a PIPE transaction, Defendants sold short the issuer's stock, frequently through "naked" short sales in Canada." The SEC spelling out more graphically in the complaint how damaging such transactions were to the issuers involved and how easily Canada was used to circumvent the US regulations.
So did the SEC only now come to these conclusions about Canada? Not according to the Canadian regulators.
In a trail between the British Columbia Securities Commission and brokerage Pacific International starting in July 2001, enforcement director Sasha Angus testified that Pacific International was a Canadian conduit to launder money for the US Organized crime families in a manner to circumvent US laws. Angus further testifying that naked shorting was one venue used to conduct such money laundering.
But Angus also implicated the SEC in his case against Pacific International. Testimony revealed that the SEC closely watched Pacific International and that the U.S. regulator issued complaints against 18 Pacific International clients between February 1996, and August 2001.
The SEC was watching naked shorting abuses and illegal money laundering in 1996?
And to only make matters worse, in 2000 the NASD recognized this problem had significance and submitted to the SEC a proposal for a rule change to close down the loophole associated with naked shorting through Canada. The SEC failed to act on such a proposal until 4Q03. The NASD specifically identifying the proposed rule was to shut down a loophole between Canadian laws and US.
And thus, as you start to unwind this terrible mess you are left to wonder where and how the negligence persisted for so long.
By my simple counts of the cases mentioned above, a minimum of 70 companies saw their share values manipulated by fraud leaving both business issuer and investor picking up the past and present burdens of such activities. The profits seen by each manipulator pales in comparison to the losses incurred by the issuer and investor as losses are distributed equally across the entire shares issued and outstanding while profits are reflective of only a small percentage of total shares issued.
The SEC can never recover investor losses they can only take away profits making this risk vs. reward game by the criminals much more appealing.
And all of this does not even include the companies Anthony Elgindy was recently federally convicted and sentenced to 11 years in prison for manipulating through his illegal shorting practices. The number of companies involved is reported to be near 100 as Elgindy used this same Canadian loophole to his advantage as well. Elgindy had one other advantage working for him though; he had the help of Federal agents who provided him inside information to trade on.
And for all this evidence, the SEC continues to try to diffuse this issue as a non-event. A settlement failure, the direct result of abusive naked short selling, is a pond situated in the middle of an ocean.
In 2005 former SEC Director of Market Regulation and now Commissioner Annette Nazareth told the NY Times that investors who suffered losses in the market were just whining that laws passed earlier that year did not make their stock go up. Nazareth content that those laws, now already being re-written due to loopholes the investing public identified, simply allowed the abusers to walk free with the money stolen.
Ultimately this comes down to the most basic of answers. A four year old could have wrapped this up decades ago if not for the conflicts regulators have with the financial services industry. Conflicts that require the profits of prime brokers is always sustained regardless of what it means to the investing public.
SETTLE THE TRADES. The laws require it and the regulators should enforce it.
A naked short exists only because a trade does not settle accordingly. Force Wall Street Broker-Dealers to settle the trades and the abuse never would have happened. But forcing trades to settle would slow down liquidity and thus begs the question "How much fraud are you willing to accept for liquidity"? That was the question former SEC Chairman William Donaldson asked former Fed Chairman Alan Greenspan in a public hearing. The Fed Chairman offering no answers.
I'll leave you with one last parting shot.
Gryphon illegally shorted a minimum of 35 public companies in which they were specifically involved in a PIPE offering. But issuers do not immediately settle on a placement offering, they bid it around looking for the best deal ultimately selecting the most beneficial one for their business. During the bidding process a confidentiality agreement is standard.
So now the question: If Gryphon was willing to trade illegally, against the terms of a contract, and trade on inside information regarding deals they were directly involved in, do you not also suspect that they illegally shorted stocks in which they were approached but were not offered a placement? After all, they knew an infusion of cash for a dilution of shares was forthcoming and if everybody in the PIPE business trades as they did, it this event most certainly result in a drop in market value making any short position profitable.
Just an avenue I am sure those at the SEC will come to realize --- too late.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006
An online newspaper reporting the issues of Securities Fraud
SEC Arrives Late to Party...Again - December 13, 2006
David Patch
As first reported by TheStreet.com Tuesday, the Securities and Exchange Commission has issued yet another complaint against a hedge fund for what it calls abusive short selling relative to a private placement (PIPE) offering.
In a suit filed by the SEC in the US District Court for the Southern District of New York, Gryphon Partners LP and managing partner and chief investment officer Edwin Lyon IV are accused of perpetrating an illegal trading scheme to evade the registration requirements of federal securities laws. The SEC claims Lyon, through Gryphon, "naked shorted" at least 35 publicly traded companies while in possession of non-public materials and in violation of US securities laws through a period between 2001 and 2004.
But is this all more of the too little too late game? The case sounds good on paper and all but is the SEC really serious?
The scheme that Gryphon is accused is not new to the markets or the market regulators. In fact, the SEC fined hedge fund manager Jeffrey Thorp 15.8 Million in March 2006 for orchestrating a similar scheme to defraud regarding 23 other PIPE offerings through a time span of 2000 - 2002. The SEC has also filed a claim against former fund manager Guillaume Pollet regarding at least 10 separate illegal shorting schemes in the 2000 - 2001 timeframe and has fined and barred hedge Fund Manager Hillary Shane for a similar episode in 2001.
According to TheStreet.com, the SEC is looking into several other hedge funds involved in PIPE offerings as well.
If it seems like a lot of illegal PIPE offerings and illegal shorting was taking place dating back to at least 2000, it was. In a WSJ article published in 2004, one hedge fund manager was quoted as saying that this was common practice back then, "everybody did it."
That only leaves us to wonder where the regulators were back then.
To answer that question you only have to look in two places, the SEC archives and Canada.
In October 1999 the SEC put out for public comment a concept reform to existing short selling rules. The SEC wanted to feel out the public's views, or so they said. In that concept release the SEC admitted, "Although short selling serves useful market purposes, it also may be used as a tool for manipulation."
In response to this release, the SEC reported to have received over 2250 comment letters from the public and in 2003, when the SEC again proposed a short selling rule change, the SEC identified nearly 2000 comment letters in 1999 voiced concerns over abusive and manipulative naked short selling.
In fact, in the summary document of the concept proposal, issued by the SEC in September 2000, the SEC stated, "Another group of letters exhibiting a uniform pattern complained about " naked shorting" by market makers and offshore brokers. These letters contained identical language referring to "penny" stocks as "volatile" due to "rampant naked shorting" that has gone "unchecked." According to these investors, naked shorting must be abolished and reporting requirements should be established for issuers. Another group of letters exhibiting a uniform pattern complained about " naked shorting" by market makers and offshore brokers."
So clearly, by this admission, the SEC was forewarned as early as 1999 that naked shorting abuse existed, was manipulative, and involved offshore entities. It was a concern of the investors at least.
So lets venture offshore, or in this case, over the border to Canada.
According to the SEC suit against Gryphon, "Typically, after agreeing to invest in a PIPE transaction, Defendants sold short the issuer's stock, frequently through "naked" short sales in Canada." The SEC spelling out more graphically in the complaint how damaging such transactions were to the issuers involved and how easily Canada was used to circumvent the US regulations.
So did the SEC only now come to these conclusions about Canada? Not according to the Canadian regulators.
In a trail between the British Columbia Securities Commission and brokerage Pacific International starting in July 2001, enforcement director Sasha Angus testified that Pacific International was a Canadian conduit to launder money for the US Organized crime families in a manner to circumvent US laws. Angus further testifying that naked shorting was one venue used to conduct such money laundering.
But Angus also implicated the SEC in his case against Pacific International. Testimony revealed that the SEC closely watched Pacific International and that the U.S. regulator issued complaints against 18 Pacific International clients between February 1996, and August 2001.
The SEC was watching naked shorting abuses and illegal money laundering in 1996?
And to only make matters worse, in 2000 the NASD recognized this problem had significance and submitted to the SEC a proposal for a rule change to close down the loophole associated with naked shorting through Canada. The SEC failed to act on such a proposal until 4Q03. The NASD specifically identifying the proposed rule was to shut down a loophole between Canadian laws and US.
And thus, as you start to unwind this terrible mess you are left to wonder where and how the negligence persisted for so long.
By my simple counts of the cases mentioned above, a minimum of 70 companies saw their share values manipulated by fraud leaving both business issuer and investor picking up the past and present burdens of such activities. The profits seen by each manipulator pales in comparison to the losses incurred by the issuer and investor as losses are distributed equally across the entire shares issued and outstanding while profits are reflective of only a small percentage of total shares issued.
The SEC can never recover investor losses they can only take away profits making this risk vs. reward game by the criminals much more appealing.
And all of this does not even include the companies Anthony Elgindy was recently federally convicted and sentenced to 11 years in prison for manipulating through his illegal shorting practices. The number of companies involved is reported to be near 100 as Elgindy used this same Canadian loophole to his advantage as well. Elgindy had one other advantage working for him though; he had the help of Federal agents who provided him inside information to trade on.
And for all this evidence, the SEC continues to try to diffuse this issue as a non-event. A settlement failure, the direct result of abusive naked short selling, is a pond situated in the middle of an ocean.
In 2005 former SEC Director of Market Regulation and now Commissioner Annette Nazareth told the NY Times that investors who suffered losses in the market were just whining that laws passed earlier that year did not make their stock go up. Nazareth content that those laws, now already being re-written due to loopholes the investing public identified, simply allowed the abusers to walk free with the money stolen.
Ultimately this comes down to the most basic of answers. A four year old could have wrapped this up decades ago if not for the conflicts regulators have with the financial services industry. Conflicts that require the profits of prime brokers is always sustained regardless of what it means to the investing public.
SETTLE THE TRADES. The laws require it and the regulators should enforce it.
A naked short exists only because a trade does not settle accordingly. Force Wall Street Broker-Dealers to settle the trades and the abuse never would have happened. But forcing trades to settle would slow down liquidity and thus begs the question "How much fraud are you willing to accept for liquidity"? That was the question former SEC Chairman William Donaldson asked former Fed Chairman Alan Greenspan in a public hearing. The Fed Chairman offering no answers.
I'll leave you with one last parting shot.
Gryphon illegally shorted a minimum of 35 public companies in which they were specifically involved in a PIPE offering. But issuers do not immediately settle on a placement offering, they bid it around looking for the best deal ultimately selecting the most beneficial one for their business. During the bidding process a confidentiality agreement is standard.
So now the question: If Gryphon was willing to trade illegally, against the terms of a contract, and trade on inside information regarding deals they were directly involved in, do you not also suspect that they illegally shorted stocks in which they were approached but were not offered a placement? After all, they knew an infusion of cash for a dilution of shares was forthcoming and if everybody in the PIPE business trades as they did, it this event most certainly result in a drop in market value making any short position profitable.
Just an avenue I am sure those at the SEC will come to realize --- too late.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006