The first one of 2 this month
SEC sues hedge fund for covering short with offering
2006-12-13 15:36 ET - Street Wire
by Mike Caswell
The U.S. Securities and Exchange Commission has charged a Texas hedge fund with illegal shorting, and it says a Canadian brokerage facilitated the transactions. In a civil suit filed Tuesday in New York, the SEC accuses Gryphon Master Fund LP of illegally covering shorts with discounted shares it bought in PIPE offerings.
The suit names Gryphon employee Edwin Buchanan Lyon, 40, and various entities connected to Gryphon as defendants. Gryphon apparently made $6.5-million shorting 35 companies between 2001 and 2004. Mr. Lyon received improper performance fees as a result of the scheme, the SEC claims. (All figures are in U.S. dollars.)
Gryphon evidently bought cheap stock in PIPE offerings, which are discounted shares typically restricted for two to four months. To avoid exposing any risk, the SEC says Gryphon shorted the stocks, hiding the transaction through a Canadian firm, and covered with the PIPE shares, which is illegal in the U.S.
"Lyon knew the lawful way to cover those short positions that were established to 'hedge' PIPE investments, but he chose instead to cover his [shorts] with PIPE shares," the complaint reads.
The SEC also accuses Mr. Lyon of wash trading, which he evidently used to get the PIPE shares to Gryphon's Canadian account. When the stock became unrestricted, the fund still had to move it from its U.S. to its Canadian account. It allegedly sold the shares through a U.S. broker, while simultaneously buying the same number of shares at the Canadian firm, the SEC alleges.
"These buy and sell orders would match ... and the Canadian broker-dealer would use the PIPE shares ... to cover Gryphon Partners' Canadian short positions," the complaint reads. Evidently this went on for three years.
For example, the SEC says Gryphon grossed $1.9-million on a $1.5-million investment in Medis Technologies Ltd., a New York fuel cell company, in January, 2004. The fund bought 150,000 restricted PIPE shares at $10, about a 30-per-cent discount from the company's $14.48 price.
Gryphon had shorted 149,887 shares between $11.57 and $14.06 through the Canadian brokerage, grossing $1,939,000, the SEC says. This pattern was mostly repeated in the 35 stocks Gryphon allegedly shorted.
The SEC does not identify the Canadian brokerage in its complaint, and SEC lawyers contacted by Stockwatch would not provide a name. The commission acknowledges the assistance of the Investment Dealers Association in its investigation.
Most of the 35 stocks shorted are U.S. companies, but the list does include one Canadian name, Richard Coglon's Heartland Oil & Gas Corp. Apparently Gryphon invested in a PIPE offering for Heartland in August, 2003.
(The investment was part of a $12-million financing Heartland did at $3.84 that summer. The stock traded at $4.68 at the time, and traded around $5 the rest of that year. It last traded at 3.3 cents.)
The SEC is seeking appropriate civil penalties and disgorgement of profits from Gryphon and Mr. Lyon.
The case is very similar to a suit the SEC filed this March against a New York hedge fund that allegedly made $7-million shorting through a Canadian firm. In that case, the SEC claimed fund manager Jeffrey Thorp shorted 23 stocks over two years, covering with PIPE shares. Mr. Thorp and the funds paid $15.8-million to settle that case, and the Canadian brokerage remained anonymous.