Lawyer Tied to Past Small-Stock Scam Takes Up Contentious 'PIPE' Deals
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CONOLOG CORP PRE 14A 3/7/2006 4/19/2006
Closings shall take place at the offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, upon the satisfaction of all conditions to Closing set forth in this Agreement. secfilings.nasdaq.com
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Lawyer Tied to Past Small-Stock Scam Takes Up Contentious 'PIPE' Deals
By JOHN R. EMSHWILLER
August 25, 2006
IN 1991, Manhattan attorney Edward Grushko pleaded guilty in a Las Vegas federal court to conspiring to commit securities fraud, part of what government investigators said was a scheme to cheat investors through small-company stock offerings. While a felony conviction usually costs an attorney his law license, a provision of New York state law allowed Mr. Grushko to receive just a three-month suspension.
In recent years, the 50-year-old Mr. Grushko has turned his legal talents again to the field of small-company stocks, this time in connection with transactions that some contend harm the companies and their shareholders. And once again, Mr. Grushko is practicing in a contentious corner of the securities markets.
For the past few years, he and his law firm, Grushko & Mittman, have appeared regularly in connection with a new crop of small-company financing deals with the name of PIPE, or private investment in public equity. Critics use more pejorative descriptions, including "toxic converts" and "death-spiral financings."
Reached by phone, Mr. Grushko declined to answer questions.
In a typical transaction, well-heeled investors, such as hedge funds, agree to put money into a public company in return for stock at a below-market price. Often, the deal involves buying convertible bonds, which can be converted into stock over time. In recent years, hundreds of private financing deals have been done annually, often with cash-strapped small companies.
The deals are controversial because the hedge-fund investors often start shorting the company's stock even before the financing deal is signed or publicly announced. Defenders of this tactic say that it is done to protect the investors against possible drops in the price of the company's stock, which is essentially the collateral for the financing deal.
Short sellers borrow shares and sell them with the intention of replacing the shares in the future at a lower price. In the case of these private financing deals, the investors often cover their short positions using the shares that are eventually issued to them by the company.
Deal critics counter that too often PIPE investors are simply looking to profit from the short sales, rather than help the company's prospects. And under many of the financing arrangements, the number of shares the company has to issue is tied to the stock price. Thus, as the price declines, more shares must be issued to the investors, placing additional pressure on a company's share price.
Law-enforcement officials and securities regulators have filed criminal and civil actions related to some of these deals. The Securities and Exchange Commission, for instance, has filed lawsuits charging some of the PIPE players with illegally trading on inside information about pending financings and using stock from the deals to cover their short sales in improper ways.
Mr. Grushko hasn't been named as a party in any of those actions. His detractors contend that attorneys such as Mr. Grushko play an important support role in PIPE financings. And some of his clients have found themselves in hot water because of their involvement in financing deals.
"We believe he is a facilitator" for PIPE deals that have gone awry for the companies that do them, says Wes Christian, a Houston attorney representing companies that have filed suits against a number of individuals and entities for purported abuses in various financing deals.
Companies that do PIPE deals are usually small and already struggling and thus have few good options to secure additional financing. The criticisms center on Mr. Grushko's legal work for such parties as Amro International, a Zurich-based Panamanian entity that put money into a number of PIPE deals and whose investing was directed by a New York-based Austrian named Thomas Badian. Mr. Grushko represented Amro and other investors in a 2001 $1.1 million PIPE financing deal with Group Management Corp., a small Sugar Land, Texas, holding company. Elorian Landers, Group Management's chief executive at the time, recalls that Mr. Grushko did most of the negotiating for the investors and later made demands on behalf of his clients that the company issue stock under terms of the deal. In subsequent litigation, a federal judge ruled that the investors had a right to be issued shares and ordered that they be paid damages.
Peter Wokoun, a Group Management shareholder and associate of Mr. Landers, says that at one point he called a brokerage firm and voiced concern about possibly improper short selling and mentioned Mr. Badian's name because he had heard of a possible connection between him and the broker. Mr. Wokoun says he got an angry call within the next day or so from Barbara Mittman, Mr. Grushko's law partner, threatening to sue him if he made any more calls about Mr. Badian. Reached by phone, Ms. Mittman declined to be interviewed.
Mr. Badian's problems have since mounted. He was sued by the SEC in 2003 over a financing deal that didn't involve Mr. Grushko, and agreed to an injunction against future violations without admitting or denying wrongdoing. That same year, the U.S. attorney in Manhattan also criminally charged Mr. Badian with conspiracy to commit securities fraud in the same stock deal. An arrest warrant was issued by the court for Mr. Badian, who is living in Austria. An attorney for Mr. Badian has said his client denies wrongdoing.
Mr. Grushko's 1991 criminal case grew out of the "blind pool" scams of the 1980s, where a shell company would raise money without specifying what business line it planned to pursue. In a plea deal, Mr. Grushko acknowledged helping to make a false SEC filing, and got a year's probation and a $5,000 fine.
Write to John R. Emshwiller at john.emshwiller@wsj.com |
