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SEC + Pipe Article + Hedge Funds
SEC Struggles to Pin Insider Trading on Fund Sales (Update1)
By Thom Weidlich
Feb. 26 (Bloomberg) -- Hedge-fund managers are battling the government to keep the right to make automatic profits from trading stock they buy privately. So far they're winning.
Since October, judges in three cases rejected the U.S. Securities and Exchange Commission's argument that closing out short positions with shares bought in private offerings is illegal. The SEC sued hedge-fund managers that engaged in the transactions.
``If the SEC losses are ultimately upheld, they're going to result in funds' being able to short more easily,'' said Steven Siesser, a partner at law firm Lowenstein Sandler in New York who counsels placement agents and investors in sales of ``private investment in public equity,'' or PIPEs.
The federal agency also argues in the three cases that the managers violated insider-trading laws by shorting stock before a private sale was announced. Prosecutors make a similar claim in a criminal case.
The SEC has encountered difficulty pressing insider-trading allegations. In keeping them alive in one case, the judge said he was making ``a very close call.'' In another, the agency was ordered to provide more specific information about the claims.
PIPE sales, used by companies to raise cash quickly, totaled $83.6 billion in 1,434 transactions in 2007, according to Sagient Research Systems Inc.'s PlacementTracker.
In a short sale, an investor seeks to make money on a price decline by selling shares that are borrowed, typically from brokers, and replaced later with what the trader expects to be cheaper ones.
PIPE Discounts
PIPEs offer a chance to make a guaranteed profit because the stock is sold for less than market prices. The average discount was 12 percent last year, according to PlacementTracker.
In a typical scenario the SEC has targeted, a hedge-fund manager learned of a PIPE through a placement agent and shorted the company's stock before the offer was announced. The fund bought the equity at a discount in the private sale to cover the short position.
The SEC lost its argument that the entire transaction was completed when the short position was created. The insider- trading claim is based on the SEC's accusation that the hedge funds used confidential information to trade before the PIPE was disclosed.
The accused managers argue in part they didn't have nonpublic information or agree to forgo trading before the PIPEs were announced.
Criminal Case
In the criminal case, Hilary Shane, 40, a former hedge-fund manager at New York-based First New York Securities LLC, was indicted in 2006 on five counts of insider trading. She pleaded not guilty. A trial is set for June 30.
Shane is accused of shorting CompuDyne Corp., an Annapolis, Maryland-based maker of security systems, before a $29.4 million PIPE was announced in 2001 and after promising to keep the information confidential. She made a $315,216 profit, prosecutors claim. Shane declined to comment.
On Oct. 24, a federal judge in Charlotte, North Carolina, threw out an SEC claim that John F. Mangan Jr., 47, a former Friedman Billings Ramsey Group Inc. broker and hedge-fund manager, illegally covered a CompuDyne short position with stock from the same PIPE. Friedman Billings was the placement agent on the transaction. A civil insider-trading trial is set for Aug. 4.
Mangan's lawyer, George Covington of King & Spalding in Charlotte, said he'll seek a ruling in his client's favor without a trial, ``and we expect to prevail.'' The SEC says Mangan made $56,937 from the transaction.
Civil Case Settled
Shane agreed to pay more than $1.45 million in 2005 to settle NASD and SEC claims of fraud and insider trading, and Mangan agreed to pay $125,000 over NASD claims, according to that agency, then the private-sector Wall Street regulator. Neither admitted any wrongdoing.
Trial dates haven't been set in the other two insider- trading suits.
Robert A. Berlacher, 53, on Feb. 15 asked a judge in Philadelphia to dismiss the insider-trading accusations in a case involving buying and selling Radyne Comstream Inc., now Radyne Corp., in 2004. Berlacher's lawyer, Perrie M. Weiner of DLA Piper in Los Angeles, said knowledge of a PIPE isn't the ``material nonpublic information'' required to show insider trading.
In the second case, Christopher Clark, a lawyer at Dewey & LeBoeuf for Dallas hedge-fund manager Edwin ``Bucky'' Buchanan Lyon IV, 41, said he would ask a judge to rule for his client.
Four Companies
The SEC says Lyon illegally shorted at least four companies from 2001 to 2003. They are Celsion Corp.; PhotoMedex Inc.; Manufacturers' Services Ltd., since bought by Celestica Inc.; and Gentner Communications Corp., now ClearOne Communications Inc.
``Some of these insider-trading claims that they brought were based on a unilateral e-mail saying, `By accepting this e- mail you agree to be bound by this confidentiality,''' Clark said. ``You can't unilaterally bind someone by an e-mail.''
Scott Friestad, an SEC lawyer on the Lyon and Berlacher cases, said it's ``factually wrong'' that the defendants didn't agree to keep the PIPEs confidential.
``We're very pleased that the judges in each of these cases agreed with our right to proceed on the more serious insider- trading claims,'' Friestad said.
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits.
To contact the reporter on this story: Thom Weidlich in New York at tweidlich@bloomberg.net .
Last Updated: February 26, 2008 08:22 EST
this is OLD news.... the pipes discussed in the this article and LINE are completely different.
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