U.S. Securities and Exchange Commission
Litigation Release No. 18003 / February 27, 2003
Rhino Advisors and Thomas Badian Settle Claims and Agree to Pay Jointly a $1 Million Penalty
SEC v. Rhino Advisors, Inc. and Thomas Badian, Civ. Action. No. 03 civ 1310 (RO) (Southern District of New York)
On February 27, 2003, the Commission filed a settled, civil action against Rhino Advisors, Inc. ("Rhino") and its president, Thomas Badian ("Badian"), for directing a series of manipulative short sales of Sedona Corporation stock that contributed to the decline in the price of Sedona's stock. Rhino, based in New York, NY, manages money for two overseas clients.
The Commission alleges that Rhino and Badian manipulated Sedona's stock price to enhance a client's economic interests in a $3 million convertible debenture (the "Debenture") that Sedona issued to Rhino's client. The Debenture, negotiated by Badian, obligated Sedona to pay the client $3 million on March 22, 2001. The Debenture granted the client the right to convert the Debenture into Sedona common stock at a discount to the market price during a five-day period prior to the conversion. Based on this formula, the lower Sedona's stock price, the more shares the client would receive on conversion.
The purchase agreement for the Debenture expressly prohibited Rhino's client from selling short shares of Sedona's stock while the Debenture remained "issued and outstanding." The Commission alleges that, despite this contractual provision, Rhino engaged in extensive short selling on behalf of its client prior to exercising the conversion rights under the Debenture and that this short selling depressed Sedona's stock price. According to the Commission, as a result of the depressed stock price, Rhino's client received more shares from Sedona when it exercised its conversion rights under the Debenture than it otherwise would have received. The Commission alleges that, following the conversions, Rhino engaged in wash sales and matched orders to cover the short positions and conceal the client's involvement in the scheme.
Without admitting or denying the allegations in the SEC's complaint, Rhino and Badian have consented to the entry of an injunction for violations of the anti-fraud provisions of the federal securities laws, specifically Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Rhino and Badian have consented to pay, on a joint and several basis, a $1,000,000 civil penalty. In addition, Rhino has agreed to respond to an order directed to it by the Commission pursuant to Section 21(a) of the Securities Exchange Act of 1934 and to hire an Independent Consultant, acceptable to the Commission, to review its compliance policies and procedures and to implement the Independent Consultant's recommendation. The settlement terms are subject to court approval.
SEC Complaint in this matter
sec.gov
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The lender of last resort
Stacy Mosher*
From www.thedailydeal.com
October 11, 2001
The growing tally of bankrupt dot-coms over the past 18 months masks another trend among many middle-market technology companies still on their feet. These companies, which mostly went public amid the '90s tech boom, have survived by turning to so-called PIPE (private investments in public equities) financings — an expensive and potentially explosive form of funding that has nonetheless proved a life-saver for many small-to-medium-sized tech companies.
Some PIPEs have earned a more troubling sobriquet, toxic financings, because the structure of some kinds of equity lines of finance and convertible debentures have been associated in the markets with the collapse of companies' stock prices amid short selling. But the upside — money to ensure a company's survival — and the fact that not all PIPEs are toxic, has led to their growing popularity over the past 18 months.
"My PIPE absolutely saved my company," said Joseph Boyle, chairman, president and CEO of Affinity Technology Group Inc., a Columbia, S.C.-based developer of electronic and online technologies for consumer financial services. Affinity signed on for a convertible debenture from New York-based hedge fund Rhino Advisors' offshore investment fund, Amro International S.A., in mid-2000, after Affinity's stock had taken a nosedive in the Nasdaq slump.
Boyle, who was formerly a CPA with PricewaterhouseCoopers, carried out a great deal of research before entering into the Amro PIPE, and was able to negotiate a financing that has helped the company weather its financial difficulties. "I just restructured that debenture in terms very favorable to the company, and have been very content," he said. "I've worked with Rhino very closely, and have been able to term out and eliminate the conversion features."
Boyle has plenty of company. Total PIPE financings in the U.S. in 2001 to date equaled $9.1 billion, according to PlacementTracker.com (see tables). This is less than last year's record $24 billion in total PIPE financings, which include private placements, convertible debentures and structured equity lines, but close to the previous annual record of $10 billion set in 1999 — with more than two months to go.
PIPE FITTINGS
Traditional PIPEs (those not structured as 144-A convertible placements or Reg S placements) now total $8 billion, compared with $21.3 billion last year. Structured PIPEs, which include floating convertibles, reset convertibles, common stock with resets, and structured equity lines, are running at $1 billion so far this year, compared with a total of $3.2 billion for the year 2000.
Certain types of PIPEs, such as equity lines and so-called floorless convertibles (debentures where no minimum share price is set for conversion) have come under increasing criticism because of allegations that they are sometimes associated with short-selling that sends the issuing company into a "death spiral."
But statistics and anecdotal evidence suggest that all types of PIPEs are here to say. The year 2000 was a peak year for the number of structured equity line financings, with 149 closed so far. But this year may produce even higher numbers, with 118 equity lines closed as of the end of September.
Figures for another popular form of PIPE, convertible debentures, also remain high, although the trend to date indicates the number of deals this year will be lower than in 2000. A total of 220 deals for fixed, floating, and reset convertibles have been closed so far this year, compared with 436 last year. Demand for fixed convertibles has held up the strongest, with a substantial drop in deals for floating and reset convertibles.
The types of companies hard-hit by last year's Nasdaq slump are the ones mostly seeking financing through PIPEs, according to PlacementTracker figures. Internet-related companies, from Internet application software providers to Internet security services companies, have signed up for 23.5% of the equity lines and 27% of the various convertible debentures closed in 2000.
Software and computer-related companies took up a fifth of the equity lines and about 13% of the convertible debentures. Other frequent PIPE clients included middle-market biotechnology, pharmaceutical, healthcare products, telecommunications and retail companies.
PIPE DREAMS
These same industries continue to show the highest demand for PIPEs in 2001, with Internet taking 22% of the equity lines and 16% of the convertibles, and computer and software using 16% of the equity lines and 15% of the convertibles to date.
John Wittwer, CFO of Alpnet Inc., said that the Salt Lake City-based provider of computerized translation and other language-based services for international trade benefited from its convertible debenture, arranged in mid-2000 by New York investment bank Ladenburg Thalmann & Co. Inc. with two investment funds in the U.S. and overseas.
"It was a very straightforward investment, and we developed a close relationship with the overseas fund," Wittwer said. "We'd worked with another firm on the West Coast, and it fell through, but Ladenburg came through for us, and I'd recommend them to anyone."
One financing actually resulted in the development of a close friendship. Grant Kesler, president and CEO of Metalclad Corp., says a convertible debenture with an overseas fund pulled his company through a financial crisis it might not have otherwise survived.
Back in 1997 Metalclad, a Newport Beach, Calif.-based asbestos-abatement firm, obtained overseas funding for expansion of a project in Mexico through a London investment fund, Oakes, Fitzwilliams & Co. One of the investments was a convertible debenture from Ultra Pacific Holdings SA, a fund set up under the Liechtenstein firm of Dr. Dr. Batliner & Partner, which has recently come under investigation in Europe for allegations of money laundering.
Unlike many Batliner funds, the ultimate investor in this case was known. He was a Norwegian businessman, Jan Sundt, who took a strong personal interest in the Mexico project for moral and environmental reasons, and even visited Mexico himself.
Two years later, when Metalclad ran into trouble with a long-standing Nafta claim, Sundt came through with another convertible debenture. Metalclad finished paying off the financings this summer.
"Jan Sundt is a friend for life," Kesler said. "I have spent my adult life doing financings, and I recognize the potential for abuse. We came close to a horrible experience. But Sundt saved our company."
Other companies haven't been so fortunate. Customer relationship management software provider Sedona Corp. last week announced it had requested investigations by the U.S. Securities and Exchange Commission and the national Associations of Securities Dealers regarding alleged improprieties in the trading of its stock. The King of Prussia, Pa.-based company said that pending an investigation it would not honor requests for conversion of its outstanding convertible debentures.
The Daily Deal reported last Friday that 60 companies, including Sedona, had been identified as market recipients of PIPE financings from trust companies established by Dr. Dr. Batliner & Partner, an offshore law firm, and Rhino Advisors' Amro International. The report, a copy of which has been obtained by The Daily Deal, had been sent to U.S. regulatory authorities and the Senate Permanent Sub-committee on Investigations.
Another corporate executive, who requested that neither he nor his company be identified, said he had "only the highest regard" for Thomas Badian, president of Rhino Advisors, after arranging an equity line with Amro International. "Rhino's dealings with us have always been above-board and high quality."
The executive added that PIPE financings often exacerbate pressure on a stock in a bad market. "If a company is stupid enough to get financing and then not perform, it's their own fault if the investors sell off their stock."
A number of other company executives, while not enamored of PIPEs, acknowledged that alternatives are simply not available to many middle-market companies in the current economic environment.
"It's like someone going to a high-interest lender when he can't get a conventional loan from a bank," said one executive. "It's expensive, but it may be the last chance you have to save your company."
*Stacy Mosher is a senior writer at The Daily Deal. She can be reached at: (212) 313-9281 or smosher@thedailydeal.com
Sedona challenges PIPE financiers By Stacy Mosher* From www.thedailydeal.comOctober 7, 2001 Hundreds of publicly listed small-to-medium-sized companies in the United States have been obliged over the past four years to turn to expensive equity line financing and convertible debentures to keep themselves afloat. Some of those companies, however, have discovered why these financings, known as PIPEs — for private investment in public entities — are also sometimes referred to as "toxic financings." Sixty companies identified in a report submitted recently to U.S. government authorities were all recipients of so called PIPE fundings via trustee companies of a Liechtenstein law firm, Dr. Dr. Batliner & Partners, and a Monaco- and Panama-based investment fund called Amro International S.A. Many of these companies saw their share prices drop precipitously after the financings were closed. Now, one of the 60 is fighting back.Customer-relations management software provider Sedona Corp. last week announced it had requested investigations by the U.S. Securities and Exchange Commission and the National Association of Securities Dealers regarding alleged improprieties in the trading of its stock. The King of Prussia, Pa.-based company said that pending such investigations it would not honor requests for conversion of its outstanding convertible debenture.Sedona Chairman Laurence Osterwise said that unexpected downward trading patterns had early on raised concern and suspicion among company management, and Sedona brought those concerns to the attention of the NASD at the end of last year. After learning recently that a report mentioning Sedona and other companies had been submitted to the authorities, the company felt compelled to take further action.Indeed, Sedona is not alone. Further research by The Daily Deal suggests that companies identified in the market professional's report performed on average less well than companies that received financings from other investment funds at the same time.This stock performance was traced on PlacementTracker.com, a popular Web site for PIPE investment operated by DirectPlacement Inc., a subsidiary of PPI Capital Group Inc. Data on the Web site for 149 equity line financings closed between Jan. 1, 2000 and Dec. 31, 2000 show that the 25 companies identified by The Daily Deal which closed financings with Batliner trusts during this period lost an average of 74.58% of their stock price value since that time. In comparison, the average drop in share price for the other 123 companies closing equity lines during this time was only 59.53%. Losses for the periods one month, three months, six months and 12 months after closing on Batliner financings were also higher than the average for those periods.According to information provided on PlacementTracker, most of the financings for these 60 companies were arranged by Rhino Advisors, a New York hedge fund that is one of the major players in the equity line finance field. Rhino manages two families of private funds, Creon Management and Amro International, whose investors are described as "European high net worth individuals." An SEC filing in April 2000 states of Rhino that "in three years of operation its investment strategies have nearly quadrupled the base capital deposited into Amro and Creon."Rhino's name seldom appears on any filings in connection with the deals, which is a common practice among hedge funds. But Brian Overstreet, the president of DirectPlacement, said filings patterns established through known Rhino deals suggested that Rhino regularly had set up investment funds through the Batliner firm and a few other overseas firms. Overstreet says his company has repeatedly asked Rhino to confirm or deny the information on the Web site, but Rhino has declined to assist. "A lot of the hedge funds enjoy doing things this way," Overstreet said.The president of Rhino Advisors, Thomas Badian, confirmed that Rhino had dealt with the Batliner firm in the past. But after becoming aware of The Daily Deal's article last September on investigations being carried out on Batliner in Europe, he said Rhino moved its accounts to another service provider. "We had no way of knowing what was going on over there, but we take our reputation and our investors' reputations very seriously," Badian said.Among the 60 companies mentioned in the report which were PIPE-financed by Batliner and Amro International, 29 of them also involved Ladenburg Thalmann & Co. Inc., a New York investment bank, according to separate research by The Daily Deal. Available records at the SEC also indicate that Ladenburg arranged PIPEs for public companies very frequently through Batliner and Amro in 1999 and 2000.The majority shareholder of Ladenburg Thalmann is New Valley Corp., a company controlled by corporate raiders Bennett Lebow and Carl Icahn. Ladenburg's minority shareholder is Berliner Effektengesellschaft AG, a German group that controls the largest market maker on the Berlin Stock Exchange.SEC filings indicate that Ladenburg first began arranging investments from the Batliner trust companies in late 1999, around the time that Berliner Effektengesellschaft acquired its stake in Ladenburg. Epstein Becker & Green, P.C., a New York law firm, served as escrow agent for 46 Batliner and Amro PIPEs.Ladenburg Thalmann's current managing director for its Structured Finance Group is Joseph A. Smith, previously a partner with Epstein Becker who was signatory for a large number of the Batliner and Amro PIPEs.A spokesman for Epstein Becker, Jim Haggerty, said all of the escrow accounts referred to were closed or transferred after Smith left the firm. When first contacted by The Daily Deal, Joseph Smith said that Ladenburg Thalmann "never dealt with the Batliner firm directly."Later he added that Ladenburg "remains absolutely comfortable with its due diligence."*Stacy Mosher is a senior writer at The Daily Deal. She can be reached at: (212) 313-9281 or smosher@thedailydeal.com |
