Post by jannikki on Apr 20, 2007 23:39:30 GMT -4
Latest Scam; Reverse PIPE's - April 19, 2007
David Patch
PIPE - Private Investment in Public Entity is a method of financing in the capital markets where private investors create an infusion of capital into public business. In most cases the private investor will receive discounted shares in the company in exchange for the investment capital provided. A PIPE typically takes place when a business is in need of capital and seeks out an advisor to go out and find these private investors.
In recent years regulators have taken a much closer look into PIPE offerings and the short selling that was taking place leading into those private offerings.
Under many circumstances, the PIPE offerings are negotiated under a confidentiality agreement and negotiated with a no shorting clause leading into the offering. Since the negotiations between company and investor are not made public until teh deal is completed, and since the offering of shares will most likely create a decline in market due to the dilution the offering introduces, the private investor is restricted by law from improving their profitability by shorting the stock in the days ahead of such an offering.
Regulators have considered shorting ahead of a PIPE illegal because it not only threatens that line of trading on inside information but in many cases it involves the sale of unregistered securities. Until the deal is completed the shares exchanged for capital are not yet issued and registered shares making them ineligible for use as a locate on the short sale transaction.
The SEC and NASD have stepped up enforcement in these offerings as evidence showed that while agreements were in place investors could not resist the added profit margins of shorting ahead of the news and did so in violation of contractual agreements and securities laws. Securities laws that strictly prohibit the use of offering shares in a PIPE to cover shorts created in the open market yet the private investors and banks did it anyway.
Enforcement cases against Hedge Fund Managers Hillary Shane, Jeffrey Thorp, and John Mangan all involved illegal shorting ahead of a private placement. In addition Friedman Billings & Ramsey CEO, along with his firm FBR settled on similar trading violations, as has Rhino Advisors, and SG Cowen's Managing Director Guillaume Pollet as well as others.
But hey, when you play on Wall Street you learn that there is more than one way to skin a cat.
Rumors now circulating in the markets is that due to Regulation SHO and the mandatory close-out provisions they include, short sellers are increasingly getting concerned over their short positions and the possibility of having to cover in "out of money" market conditions. But every loophole closed simply forces a new one to be opened and in this case the latest means of circumventing the laws and the spirit of the laws is a reverse PIPE.
In a reverse PIPE the short position is initiated long before any discussion takes place between public company and private investor. In fact, companies won't even know the investor exists as the short is being created. But exist they do.
After a short is created, and rumors of cover circulate on the street, savvy investors take the initiative to approach the company as a "friend of the company." They inform the company of how much interest they have in the company and the company prospects for the future. The investor will dangle the carrot of capital in front of corporate executives and offer to purchase out of market shares in exchange for capital infusion into the company.
If the company agrees to a deal, the shares issued will be shares issued at discounts to present market prices and can be used to cover the pre-existing short positions. The investor, who may have impacted the market by introducing the short position, will now attempt to cover that position at further profit by seeking off the market shares at discounted to already discounted market prices.
What a scam. And something undetectable to the regulators as all of the documentation involving the PIPE will have commenced well after the initial short was created.
Now how do I know this is actually taking place you may say.
Well, some of my sources involve traders and others who operate at the ground level of our markets. These guys hear everything. When a hot deal is in the works, the traders are hearing it first because the traders are getting the calls from the institutions and the clients. The traders have their own networking system and throughout the network information flows. As changing of attitude works it's way into market operations, these are the guys who hear it first.
Recall ifor example a previous Stockgate Article where I was able to provide inside information to upcoming non-public news that I had heard from such sources. That news turned out to be 100% accurate as the trading in the companies involved was halted 5 hours after I had submitted my information to the regulators. The trade halts being directly related to a non-public news announcement I passed along earlier that day.
So it was no surprise yesterday that a call came to me about this "reverse PIPE" logic. It was not something I had not heard before but something I glossed over the first time through. Yesterday however, one source had heard through the day's discussions of four such "offerings" taking place where companies were being contacted about out of market shares in exchange for capital. These particular occurrences involved four micro-cap markets and even involved one company that is presently under a trading halt.
Logically, what type of private investor would call a micro-cap company under a trading halt and offer to provide funding when little is known about the company itself and questions about trade resumptions are in place? What good would the shares be if trading failed to resume in the market?
For those that think this would only be limited to the micro caps you are also clearly mistaken.
Large business operations have also received such calls. Some of the large business operations from both the NYSE and NASDAQ with high short interest levels have received similar calls and in some cases businesses that presently trade under Regulation SHO short selling restrictions have received such calls.
What better way to cover an oversold security than to cover with discounted shares that only further dilute the market place?
Now I am not a regulator but I would think that these activities would raise serious concerns, as the scheme is simply a method of violating the spirit if not the letter of present day laws. Imagine the disrespect this portrays over regulator authorities as the regulators have bent over backwards to protect the members and preferred investors from settlement liabilities. In return these members act upon such exempted manipulation by trying to seek further profits on their liabilities by going outside the open market and outside the spirit of the laws in place today.
Heck we got reverse mergers, why not reverse PIPE's?
For more on this issue please visit the Host site at
www.investigatethesec.com
Copyright 2007 (posted with permission)
David Patch
PIPE - Private Investment in Public Entity is a method of financing in the capital markets where private investors create an infusion of capital into public business. In most cases the private investor will receive discounted shares in the company in exchange for the investment capital provided. A PIPE typically takes place when a business is in need of capital and seeks out an advisor to go out and find these private investors.
In recent years regulators have taken a much closer look into PIPE offerings and the short selling that was taking place leading into those private offerings.
Under many circumstances, the PIPE offerings are negotiated under a confidentiality agreement and negotiated with a no shorting clause leading into the offering. Since the negotiations between company and investor are not made public until teh deal is completed, and since the offering of shares will most likely create a decline in market due to the dilution the offering introduces, the private investor is restricted by law from improving their profitability by shorting the stock in the days ahead of such an offering.
Regulators have considered shorting ahead of a PIPE illegal because it not only threatens that line of trading on inside information but in many cases it involves the sale of unregistered securities. Until the deal is completed the shares exchanged for capital are not yet issued and registered shares making them ineligible for use as a locate on the short sale transaction.
The SEC and NASD have stepped up enforcement in these offerings as evidence showed that while agreements were in place investors could not resist the added profit margins of shorting ahead of the news and did so in violation of contractual agreements and securities laws. Securities laws that strictly prohibit the use of offering shares in a PIPE to cover shorts created in the open market yet the private investors and banks did it anyway.
Enforcement cases against Hedge Fund Managers Hillary Shane, Jeffrey Thorp, and John Mangan all involved illegal shorting ahead of a private placement. In addition Friedman Billings & Ramsey CEO, along with his firm FBR settled on similar trading violations, as has Rhino Advisors, and SG Cowen's Managing Director Guillaume Pollet as well as others.
But hey, when you play on Wall Street you learn that there is more than one way to skin a cat.
Rumors now circulating in the markets is that due to Regulation SHO and the mandatory close-out provisions they include, short sellers are increasingly getting concerned over their short positions and the possibility of having to cover in "out of money" market conditions. But every loophole closed simply forces a new one to be opened and in this case the latest means of circumventing the laws and the spirit of the laws is a reverse PIPE.
In a reverse PIPE the short position is initiated long before any discussion takes place between public company and private investor. In fact, companies won't even know the investor exists as the short is being created. But exist they do.
After a short is created, and rumors of cover circulate on the street, savvy investors take the initiative to approach the company as a "friend of the company." They inform the company of how much interest they have in the company and the company prospects for the future. The investor will dangle the carrot of capital in front of corporate executives and offer to purchase out of market shares in exchange for capital infusion into the company.
If the company agrees to a deal, the shares issued will be shares issued at discounts to present market prices and can be used to cover the pre-existing short positions. The investor, who may have impacted the market by introducing the short position, will now attempt to cover that position at further profit by seeking off the market shares at discounted to already discounted market prices.
What a scam. And something undetectable to the regulators as all of the documentation involving the PIPE will have commenced well after the initial short was created.
Now how do I know this is actually taking place you may say.
Well, some of my sources involve traders and others who operate at the ground level of our markets. These guys hear everything. When a hot deal is in the works, the traders are hearing it first because the traders are getting the calls from the institutions and the clients. The traders have their own networking system and throughout the network information flows. As changing of attitude works it's way into market operations, these are the guys who hear it first.
Recall ifor example a previous Stockgate Article where I was able to provide inside information to upcoming non-public news that I had heard from such sources. That news turned out to be 100% accurate as the trading in the companies involved was halted 5 hours after I had submitted my information to the regulators. The trade halts being directly related to a non-public news announcement I passed along earlier that day.
So it was no surprise yesterday that a call came to me about this "reverse PIPE" logic. It was not something I had not heard before but something I glossed over the first time through. Yesterday however, one source had heard through the day's discussions of four such "offerings" taking place where companies were being contacted about out of market shares in exchange for capital. These particular occurrences involved four micro-cap markets and even involved one company that is presently under a trading halt.
Logically, what type of private investor would call a micro-cap company under a trading halt and offer to provide funding when little is known about the company itself and questions about trade resumptions are in place? What good would the shares be if trading failed to resume in the market?
For those that think this would only be limited to the micro caps you are also clearly mistaken.
Large business operations have also received such calls. Some of the large business operations from both the NYSE and NASDAQ with high short interest levels have received similar calls and in some cases businesses that presently trade under Regulation SHO short selling restrictions have received such calls.
What better way to cover an oversold security than to cover with discounted shares that only further dilute the market place?
Now I am not a regulator but I would think that these activities would raise serious concerns, as the scheme is simply a method of violating the spirit if not the letter of present day laws. Imagine the disrespect this portrays over regulator authorities as the regulators have bent over backwards to protect the members and preferred investors from settlement liabilities. In return these members act upon such exempted manipulation by trying to seek further profits on their liabilities by going outside the open market and outside the spirit of the laws in place today.
Heck we got reverse mergers, why not reverse PIPE's?
For more on this issue please visit the Host site at
www.investigatethesec.com
Copyright 2007 (posted with permission)