The Securities and Exchange Commission recently filed a lawsuit against Edwin Buchanan Lyon, a hedge fund manager, and seven funds known as the “Gryphon Partners” regarding their alleged role involving 35 PIPE (Private Investments in Public Equities) offerings and Canadian short sales. Lyon is the managing partner and chief investment officer of Gryphon.
A PIPE is the purchase of stock in a company by a mutual fund, investment firm, or other qualified investor at a reduced rate per share for the purpose of raising capital. There are two major kinds of PIPE: traditional and structured. A traditional PIPE is where stock, either common or preferred, is issued at a set price. A structured PIPE issues convertible debt. PIPEs are a popular financing technique because of their relative efficiency in terms of time and cost. A PIPE can offer liquidity to a company in need of funds.
According to the SEC, the defendants allegedly attempted to “improperly realize more than $6.5 million in ill-gotten gains… without incurring market risk.” Three of the ways the defendants allegedly did this was to 1) evade registration requirements related to at least 35 PIPE offerings, 2) make material misrepresentations to PIPE issuers, and 3) engage in insider trading.
THE SEC is also accusing the defendants of selling short the issuer’s stock after agreeing to invest in a PIPE transaction. The Commission also say that the defendants used the PIPE shares to cover the short positions, engaged in pre-arranged trades, wash sales, and matched orders to make it look like they were covering their short sales with open market sales when, in fact, Lyon and Gryphon Partners were actually involved in both sides of the transaction.
The SEC is accusing the defendants of participating in illegal insider trading on more than one occasion despite their agreement to not trade before the public announcement of the PIPE.
The SEC wants the District Court for the Southern District of New York to order civil penalties, disgorgement plus prejudgment interest, and permanent injunctions.
The counsel to the defendants, Christopher J. Clark, says that his clients deny the accusations and will contest the complaint in court.
Securities Attorneys Shepherd Smith Edwards & Kantas LTD LLP represent individual investors who were burned in dealings with investment companies. Broker misconduct is common, despite the efforts of the brokerage industry to self-police, and unlike some law firms, we do not work for the other side, ever. You won’t find us representing the brokerages. We fight for the individual. For a free consultation, contact Shepherd Smith Edwards & Kantas LTD LLP today.
U.S. Securities and Exchange Commission charges hedge fund with breaking securities laws, Redherring.com, December 13, 2006
Private Investment in Public Equity – PIPE, Investopedia.com
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