Post by jcline on Oct 7, 2006 22:44:23 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
A Matter of Selective Prosecution - October 5, 2006
David Patch
For the 40 years or so, PIPEs - which stands for Private Investments in Public Equity - have become popular menu items for hedge fund managers and other institutional investors looking to beef up their returns. These private investors find small business issuers who are finding it difficult to raise capital and provide that infusion of capital at a cost of discounted stock shares. The shares take place as a “convert” at or near the time of the deal at which time the fund can sell those shares into the open market.
The PIPE deal has evolved over time into what has now become known as a toxic PIPE to the business issuer. In a toxic PIPE the private investor begins shorting the stock in anticipation of a stock decline associated with the undisclosed PIPE with the intent of using the discounted shares as the cover to the short position taken. The result of such activity is two-fold as the shorting can negatively impact the pre-convert stock value causing a higher level of shares to be issued in the convert and, the shorting will increase profit for the fund over the profits provided by the conversion of shares at discounted rates.
To the securities regulators this type of trading is illegal and recent enforcement activities against the private investors have escalated.
Since 2004 enforcement proceedings against hedge fund managers Hillary Shane, John Mangan, Jeffrey Thorp, and Bruce Lieberman have all taken place. The $7 Billion hedge fund HBK Capital is reportedly in negotiations with the SEC as is placement agent Friedman Billings Ramsey and the co-founder Emanuel Friedman over illegally trading ahead of PIPE placements.
But with these cases brought forward by the regulators there continues to be something missing; the executing broker-dealers.
Simplistically, a trade is only illegal if executed. Thinking about violating the laws is not a violation until acted out.
In the case of Hedge Funds, they do not execute trades on their own; they pay a commission just as we would to have a trade executed. In this case it was short sales executed with the “locate” consisting of shares that were not legally registered and available for the locate.
So who is responsible for the locate in a case like this?
That would be the executing broker. The executing broker must, by law, verify a locate or have reasonable grounds that they could borrow shares for delivery under T+3 guidelines. In each of the cases presented, locates were not entered into by the executing broker-dealer but instead the unregistered shares to be made available under the PIPE conversion was the collateral used to satisfy the short sale.
Problem being, the securities laws specifically identify this as illegal and thus the executing broker-dealer theoretically aided and abetted the fraud through the illegal execution of a short sale. Where are the regulators cracking down on the co-conspirators in the fraud?
Affirmative determination is a requirement every executing member must process through when a short sale is executed. Affirmative determination requires that there be a share located that can be borrowed upon execution in the process of settling a short sale.
In 2005 the SEC initiated Regulation SHO in which the SEC stated that settlement failure abuses associated with naked shorting could provide for added market leverage and be used to manipulate a stock value. That naked short comes from the sale of a security in which affirmative determination was not executed.
How the Securities and Exchange Commission can pass by the executing brokerage firms who administer these illegal trades, illegal trades the SEC freely admits exist, is inexcusable.
In a story released just yesterday TheStreet.com senior columnist Matt Goldstein broke the news that, “Hedge fund giant HBK Investments is looking at paying the biggest penalty yet in a two-year-old investigation of abusive trading in the so-called PIPEs market. “
The penalty being sought is rumored to be greater than the $16 Million already levied against Deephaven Capital for similar violations inferring that HBK’s abuses exceeds that of Deephaven. Goldstein also indicated that a single employee of HBK was being considered for a suspension although clearly more than a single individual is involved here. The SEC apparently willing to put on a show by walking a single pirate off the plank of a ship full of pirates.
Investors can only watch in disbelief and wonder how much longer this selective prosecution will persist. How much longer will the SEC provide a free pass to the industry members who aid and abet this fraud making it a viable option for hedge funds to continue to utilize?
Hillary Shane, John Mangan, Jeff Thorpe, Deephaven Capital, HBK Investments, are all associated with the hedge fund as the list will continue to go on and on. But since the crime was the actual execution of an illegal trade, where are the actions against those that executed the actual trade? The regulators have the evidence of the trades taking place so they also have the evidence of who and otr what firm it was that executed these illegal trades. It can't be rocket science after that, or for the members of the SEC can it? Where were the procedures and policies in place at the executing broker-dealers and the self regulating compliance departments required to insure laws were not being broken?
Answers to these questions will not be forthcoming as the SEC continues to make “liquidity” excuses about our capital markets? How much fraud are you willing to accept for liquidity? Former SEC Chairman William Donaldson asked that question in 2004 and ironically nobody has yet been willing to answer it.
Maybe a major scandal is the pre-requisite to the answer. The Dow is at new highs, how much can a scandal really hurt?
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
A Matter of Selective Prosecution - October 5, 2006
David Patch
For the 40 years or so, PIPEs - which stands for Private Investments in Public Equity - have become popular menu items for hedge fund managers and other institutional investors looking to beef up their returns. These private investors find small business issuers who are finding it difficult to raise capital and provide that infusion of capital at a cost of discounted stock shares. The shares take place as a “convert” at or near the time of the deal at which time the fund can sell those shares into the open market.
The PIPE deal has evolved over time into what has now become known as a toxic PIPE to the business issuer. In a toxic PIPE the private investor begins shorting the stock in anticipation of a stock decline associated with the undisclosed PIPE with the intent of using the discounted shares as the cover to the short position taken. The result of such activity is two-fold as the shorting can negatively impact the pre-convert stock value causing a higher level of shares to be issued in the convert and, the shorting will increase profit for the fund over the profits provided by the conversion of shares at discounted rates.
To the securities regulators this type of trading is illegal and recent enforcement activities against the private investors have escalated.
Since 2004 enforcement proceedings against hedge fund managers Hillary Shane, John Mangan, Jeffrey Thorp, and Bruce Lieberman have all taken place. The $7 Billion hedge fund HBK Capital is reportedly in negotiations with the SEC as is placement agent Friedman Billings Ramsey and the co-founder Emanuel Friedman over illegally trading ahead of PIPE placements.
But with these cases brought forward by the regulators there continues to be something missing; the executing broker-dealers.
Simplistically, a trade is only illegal if executed. Thinking about violating the laws is not a violation until acted out.
In the case of Hedge Funds, they do not execute trades on their own; they pay a commission just as we would to have a trade executed. In this case it was short sales executed with the “locate” consisting of shares that were not legally registered and available for the locate.
So who is responsible for the locate in a case like this?
That would be the executing broker. The executing broker must, by law, verify a locate or have reasonable grounds that they could borrow shares for delivery under T+3 guidelines. In each of the cases presented, locates were not entered into by the executing broker-dealer but instead the unregistered shares to be made available under the PIPE conversion was the collateral used to satisfy the short sale.
Problem being, the securities laws specifically identify this as illegal and thus the executing broker-dealer theoretically aided and abetted the fraud through the illegal execution of a short sale. Where are the regulators cracking down on the co-conspirators in the fraud?
Affirmative determination is a requirement every executing member must process through when a short sale is executed. Affirmative determination requires that there be a share located that can be borrowed upon execution in the process of settling a short sale.
In 2005 the SEC initiated Regulation SHO in which the SEC stated that settlement failure abuses associated with naked shorting could provide for added market leverage and be used to manipulate a stock value. That naked short comes from the sale of a security in which affirmative determination was not executed.
How the Securities and Exchange Commission can pass by the executing brokerage firms who administer these illegal trades, illegal trades the SEC freely admits exist, is inexcusable.
In a story released just yesterday TheStreet.com senior columnist Matt Goldstein broke the news that, “Hedge fund giant HBK Investments is looking at paying the biggest penalty yet in a two-year-old investigation of abusive trading in the so-called PIPEs market. “
The penalty being sought is rumored to be greater than the $16 Million already levied against Deephaven Capital for similar violations inferring that HBK’s abuses exceeds that of Deephaven. Goldstein also indicated that a single employee of HBK was being considered for a suspension although clearly more than a single individual is involved here. The SEC apparently willing to put on a show by walking a single pirate off the plank of a ship full of pirates.
Investors can only watch in disbelief and wonder how much longer this selective prosecution will persist. How much longer will the SEC provide a free pass to the industry members who aid and abet this fraud making it a viable option for hedge funds to continue to utilize?
Hillary Shane, John Mangan, Jeff Thorpe, Deephaven Capital, HBK Investments, are all associated with the hedge fund as the list will continue to go on and on. But since the crime was the actual execution of an illegal trade, where are the actions against those that executed the actual trade? The regulators have the evidence of the trades taking place so they also have the evidence of who and otr what firm it was that executed these illegal trades. It can't be rocket science after that, or for the members of the SEC can it? Where were the procedures and policies in place at the executing broker-dealers and the self regulating compliance departments required to insure laws were not being broken?
Answers to these questions will not be forthcoming as the SEC continues to make “liquidity” excuses about our capital markets? How much fraud are you willing to accept for liquidity? Former SEC Chairman William Donaldson asked that question in 2004 and ironically nobody has yet been willing to answer it.
Maybe a major scandal is the pre-requisite to the answer. The Dow is at new highs, how much can a scandal really hurt?
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006