Monday, February 07, 2005

 

Latest on SEC PIPEs Probe

Short-selling probe snags three hedge fund managers
Fri Feb 4, 2005 07:37 PM ET

By Michael Flaherty
NEW YORK, Feb 4 (Reuters) - U.S. and Canadian regulators have charged three hedge fund managers with insider stock trading violations as part of a broad investigation launched last spring into a string of alleged short-selling abuses.

CompuDyne Corp. (CDCY.O: Quote, Profile, Research) said this week it recently learned that former investor Hilary Shane faces NASD charges of violating securities laws in a financing deal the security company did in October 2001.

Shane, a former hedge fund manager at First New York Securities, LLC, made $1.1 million from inside information of the deal, according to an NASD complaint filed in late December.

Michael Finkelstein and Elizabeth Leonard, of Toronto-based Stonestreet LP, face similar charges by the Investment Dealers Association, a Canadian regulatory agency.

The charges come less than a year after the U.S. Securities and Exchange Commission and the NASD pursued allegations of hedge funds profiting from inside knowledge of private investments in public equity, a transaction known on Wall Street as a PIPE.

PIPEs help cash-strapped companies raise money quickly by selling discount-priced shares to a group of investors. The stock of a company conducting a PIPE usually falls in the short-term because the transaction floods the market with additional shares.

Regulators are investigating whether individuals who helped finance a PIPE profited from selling short the company's shares before the deal closed, knowing its stock was about to fall.

Shane, who left First New York in 2002, is accused of doing exactly that.

Short sellers borrow shares of a company and then sell them in anticipation of a decline. They profit when the stock falls since they can buy back the shares at a lower price and pocket the difference.

In September 2001, a representative at investment bank Friedman, Billings, Ramsey Group Inc. (FBR.N: Quote, Profile, Research) contacted Shane about doing a PIPE with CompuDyne, according to the NASD complaint.

The complaint says Shane made false representations about her investment intent, obtained the right to acquire 475,000 shares of CompuDyne and then engaged in unlawful insider trading by selling the company's stock short while in possession of material, nonpublic information.

First New York has not been charged in relation to the case. Shane could not be reached for comment.

The complaint does not list charges against FBR, but FBR said on Nov. 9, 2004 that the SEC and the NASD were investigating the bank's role as a placement agent for an unspecified PIPE transaction in 2001. An FBR spokesman declined to comment further.

Finkelstein and Leonard face similar charges stemming from a PIPE involving Novatel Wireless Inc. (NVTL.O: Quote, Profile, Research) in 2001 and another with Trikon Technologies Inc. (TRKN.O: Quote, Profile, Research) a year later.

Stonestreet LP's Web site lists Finkelstein and Leonard as officers of the investment firm. The IDA complaint says that Stonestreet maintains a non-client account at Canaccord Capital Corp.'s Toronto office that operates as a hedge fund, which Finkelstein and Leonard co-manage.

The fund would hedge against its anticipated investment in a PIPE by "shorting the issuer's underlying stock," according to the complaint that was filed on Jan. 7.

Reached by telephone at Stonestreet, Finkelstein said he would not comment. Leonard could not be reached.

Last week drugmaker Nuvelo Inc. (NUVO.O: Quote, Profile, Research) said the SEC had contacted it about a private transaction the company did in 2002.

"We're concerned about instances in which hedge funds executed profitable short sales in an issuer's underlying equity after learning about a pending PIPE transaction," said SEC spokesman John Heine. "Our review is continuing."



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