'PIPES' CLEANING BY CHRIS BYRON
nypost.com
SEC CHIEF SHOULD ADDRESS $55B IN PRIVATE PLACEMENTS
April 24, 2006 -- TOMORROW morning Securities and Exchange Commission Chairman Chris Cox will make his first appearance before the Senate Banking Committee since becoming SEC chairman nine months ago.
Given the fact that well over half the American people now hold direct financial stakes in how he does his job, you'd think the public would be seething with interest.
Well, not really. In fact, scarcely a single daily newspaper has taken note. Indeed, even C-SPAN is ignoring the hearing.
And given the room-emptying title for the affair ("A Review of Current Issues in the U.S. Securities Markets"), it's hard to imagine the committee's members themselves looking forward to it.
So maybe we can help . . . to which end we offer the committee our own less-sanitized "Review," including some thoughts on a popular new type of investment known as the "private placement," which has begun spreading across Wall Street.
Much in vogue among hedge funds, private placements amount to a $55 billion-a-year end run around the stock registration requirements of the SEC itself.
Yet rather than crack down on the issuers of these investments, the SEC has chosen to target only the buyers - an approach that calls to mind the cop who arrests the heroin junkie while letting his pusher go free.
But before getting into the details, first a recap of the crisis of leadership that has turned the SEC into such a directionless, broken bureaucracy.
Under President Bush, no fewer than four individuals have held the title of SEC chairman, a record seemingly unmatched by any other federal department or agency of the current administration.
The latest to hold the job, Cox simply inherited the failures of his predecessors. But instead of fixing them, he's permitted them to get worse. What's more, with morale in a tailspin, upwards of a dozen top SEC officials have turned in their resignations since Cox's arrival, leaving him unable to fill a number of those vacancies.
Cox's biggest misstep has involved not recognizing, until it was too late, that the SEC's enforcement division had become a world unto itself, squandering manpower and resources alike on cases built out of imagined facts and bizarre legal theories.
In February, this led to the unauthorized subpoenaing of three journalists by SEC officials in San Francisco, followed by a series of contorted flip-flops by Cox, who publicly rebuked his enforcement staff for its actions, then claimed they had his full support.
In his latest flip-flop, Cox said nothing when the San Francisco enforcement team added six more journalists to their target list earlier this month by subpoenaing a research firm in Arizona to produce any evidence it possessed showing contacts with the reporters.
MEANWHILE, Cox has permitted a growing number of important and solid cases that have already been developed and are ready for trial to be ignored.
For example, it has been three years since domestic diva Martha Stewart was charged with securities fraud and insider trading in the ImClone affair. That fact alone makes the SEC's foot-dragging behavior an outrage. Faced with the only two choices that are fair - either to drop the case or to take her to trial - the SEC has done neither, preferring to leave her twisting in the wind in settlement talks that shouldn't even be taking place.
It is likewise three years since the SEC raided and shut down the $1.2 billion Lancer hedge fund operation, the largest hedge-fund swindle on record.
The SEC now claims lamely that it hasn't been able to go to trial because the fund's founder, Michael Lauer, refuses to turn over books and records.
That stonewalling occurs as more and more of Lancer's vast international bunco network has been coming to light in various civil-court filings while the SEC appears to have investigated none of it.
Caution lights are flashing as well regarding the SEC's newly aroused interest in so-called private placements. Technically, these deals are known as PIPES (for Private Investments In Public Equity Securities), and they have grown from a cottage industry of less than $1.9 billion in 1995 to more than $55 billion per year today.
Indeed, PIPES now constitute a major source of equity capital for Wall Street, and essentially their appeal derives from just one thing: they are an easy way for a financially strapped company to get a lot of money fast, by selling stock to investors without having to register the shares first.
Just as hedge funds are not supposed to sell shares in themselves to anyone but high net-worth investors who are supposedly sophisticated enough to know the risks regarding what they are buying, investors in PIPES also are restricted by law to high net-worth investors.
And since hedge funds often wind up as the buyers of the PIPES deals, the arrangement creates opportunities for collusion among the sophisticates. The basic ploy: to profit from pricing the unregistered PIPES shares at a steep but secret discount from the open market price being quoted for the same stock.
Thus in February, a Chinese fertilizer outfit called Bodisen Biotech, which trades on the American Stock Exchange, raised roughly $21 million by selling unregistered stock to private investors at $12.99 per share when Bodisen's stock price on the Amex was being quoted as high as $21.
No firm on Wall Street has enjoyed more success in this ploy than New York-based Rodman & Renshaw. Last year the firm ranked No. 1 in the field, raising more than $461 million for 29 different issuers - mostly obscure biotech companies trading for a few dollars per share on the OTC Bulletin Board.
Rodman & Renshaw sells PIPES deals the way now-defunct Drexel Burnham used to sell junk bonds - to a lavishly coddled network of clients who are stroked and fawned over at Rodman & Renshaw-themed investment conferences staged with the scope - and the hype - of a Busby Berkeley musical.
Last year's event, held in Paris, featured the imagined world of the French nobility at Versailles. This year's event is set for Monte Carlo on May 15.
But Rodman & Renshaw has lately begun dressing up its act, by recently signing former U.S. presidential hopeful and ex-NATO commander in Bosnia, retired Gen. Wesley Clark, as chairman.
IT is, of course, more than just the lavish jun keteering and the distin guished-looking chairman of the board that keeps Rodman & Renshaw's merry-go-round spinning. Ultimately, it's the discounts that keep buyers coming back for more, since once a company registers its PIPES shares the holders can dump them onto the market and sweep their winnings from the table.
The real losers are the shareholders, who are left with registered stock when the issuing company sneaks out its unregistered PIPES deal. Once word of the deal begins to spread, the price of the registered shares begins to sink, leaving anyone holding them stuck with a loss that is usually equal to the discount enjoyed by the investor in the unregistered PIPES.
Though the PIPES ploy is by its nature abusive, the SEC so far seems to be focusing only on the hedge funds buying the PIPES. Last month the commission won a $15.8 million settlement against a trio of New York hedge funds and their portfolio manager, Jeffrey Thorp, for illegal short sales structured to produce profits equal to the amount that a firm's stock price declined once news that it was issuing a PIPES deal reached the market.
So here is something the committee members can think about asking Chairman Cox to explain during his "review of current issues" at tomorrow's hearing: If it is illegal for a hedge fund to buy a discounted PIPES deal, shouldn't it be equally improper for the issuing company and its placement agent to have put the deal together in the first place? A fair enough question to be sure. Just don't count on it being asked, and certainly don't flip on C-SPAN looking for the answer.
cbyron@nypost.com |
