Wednesday, November 25, 2009

PIPE's Face Flaw

The affects of recent economic shock waves have reverberated throughout the entire World and can be felt everywhere- from Beijing to Bahrain; Wall Street to Main Street, no investor or manager has been safe from the troubling aftershocks of this credit crisis. The PIPE’s (Public Investment In Private Equity) industry has been no exception, in fact most of the industries leaders facing insurmountable liquidity requests, have utilized provisions in their Private Placements allowing for restructure of the original investment vehicle which should serve to protect the investor from a run on the fund and lead to a more orderly sale of positions and redemption process. In the case of PIPE’s, the shockwaves may have a much more costly long term unintended affect.

The capital markets in the United States provide many exchanges for public and even private trade. As a company grows they have the ability to utilize these markets. In order for a company to grow, they must be funded. As we are discussing companies that are small by nature whether a company is self- funded or funded by an investor it relies on this capital heavily- as typically small companies lack the cash flow necessary to operate week to week or month to month- investment is critical to survival.

It is a fact that roughly half the capital invested in the PIPE’s market was requested for redemption during the crisis. Billions upon billions of dollars had flowed into the PIPE’s space from 2001-2006, literally half of it was being requested back at the same exact time. This is the same capital that was being utilized to fund nano and micro cap companies that relied upon the investment funding to survive. At the time, with the credit markets frozen and absolutely no inflows of new capital, yet massive net redemptions the issue becomes obvious- how will all these companies operate on half as much investment? The answer is as obvious, they cannot. The numbers simply don’t work.

The choices are extremely difficult for a fund manager amidst financial crisis. For most of us financial crisis is realizing we bounced a check, can’t afford the cable bill or we wonder- ‘how will we pay for our children’s college?’ During this crisis managers all over the world were put in the position of asking themselves “hard questions.” Many of these questions had no answers. Many of these questions were answered in theory and conjecture as are typically the only way to answer questions regarding uncharted territory.

In the case of the PIPE’s market there were gates, SPV’s (Special Purpose Vehicles), restructures, liquidating classes, non-liquidating classes and even a secondary market developed. The managers are obviously doing everything in their power to theorize their way through this uncharted territory in order to take the appropriate steps to move forward on behalf of their investors, but as they do so their valuations are being taken into question by regulatory authorities, their investments are being scrutinized by government agencies and their reputations are being destroyed by unsubstantiated innuendo- all in the name of truth and justice- this type of scrutiny tends to instill a massive lack of confidence in ones investors and only leads to reputation issues and further redemption.

We are all for truth and justice, but we also believe in a reality check from time to time. As we saw in the case of Bear Stearns employees Cioffi and Tannin, sometimes things happen and there is no one to blame. The reality is that their was nothing these two men could have possibly done to their investors or for their investors because they couldn’t have ever conceived of such a melt down. In fact, the greatest economic minds of our times, the worlds largest investment banks and several multi-billion dollar ratings agencies didn’t foresee the implosion at our heels.

The state of financial quagmire we are living through will not just end, it needs to be managed in order to assure an appropriate economic climate change that will lead to future prosperity. From Ben Bernanke to Larry Sommers, we have the greatest economic minds of our time doing their best to lead us forward through the implementation of economic policy which include: TARP’s, TALF’s, restructures, new management, programs like ‘Cash for Clunkers’, all with a common goal of strengthening the economy and all utilizing a theorized plan. A PIPE’s manager has to restructure without a TARP or a TALF and has to do it in the face of mass redemptions, lawsuits, investor ire and government scrutiny. Most are doing everything in their power to realize appropriate solutions. Ironically, the unfortunate fact may be that the strategy was simply flawed- in the face of a credit crisis, tightening liquidity and massive redemption- the PIPE’s market froze and contracted. In other words, its not a valuation issue, its not a shorting issue and its not a question of investment, what we have here are the affects of economic shock waves which have lead to tremendous aftershocks which constituted the ‘perfect storm’ that obliterated the PIPE’s market even while the managers did everything in their power to try to right a sinking ship, while desperately gasping for their last breath.

Monday, November 16, 2009

Tannin & Cioffi Win Criminal Acquittal

When the verdicts were read their wives burst into tears.

The case was seen as the first major litmus test of the U.S. effort to obtain convictions tied to the subprime mortgage crisis and subsequent recession. The trial was the first stemming from a federal probe of the collapse of the subprime mortgage-market, which cost investors as much as $396 billion. These two men were indicted in June 2008, by Brooklyn U.S. Attorney Benton Campbell a year after their hedge funds failed.

Last week a jury of eight women and four men deliberated less than a day before reaching a verdict of not guilty on all counts. Cioffi, 53, the portfolio manager for the hedge funds, and Tannin, 48, their chief operating officer, went on trial Oct. 13 in federal court in Brooklyn, New York. The charges were conspiracy, securities fraud and wire fraud. They faced as many as 20 years in prison if convicted. Although their wives were noticeably relieved, the two men remained stoic. Perhaps all too aware, that this was a major victory, but far from the end of the battle.

Experts agree, this acquittal makes it more difficult for the Justice Department to bring additional prosecutions for fraud related to the subprime market and the various financial instruments that were based upon it, as it should. A jury of their piers answered quickly as well as emphatically that these men are innocent, as we at The Cold Truth had predicted. The public will require more than simple scapegoats as signaled by this jury's public push for the end of this era of prosecutorial permissiveness. According to juror Serphaine Stimpson, “As the witnesses began to testify I had my doubts...the defense tore the government witnesses apart.... jurors just weren’t 100 percent convinced." She then added, the defendants, “were scapegoats for Wall Street.”

Another Juror commented, “When people are making money, they say anything, when people are losing money they want to put the blame on somebody." The juror, Hong, said that if she had money, she would invest it with Cioffi and Tannin.

Assistant U.S. Attorney James McGovern said during the trial, “There is evidence here of a conspiracy which is ‘Let’s not tell anybody about the problems we’re having,” It’s also about ‘Let’s not tell the investors about the level of redemptions we’re having, because then there will be a run on the bank.’” AUSA McGovern shows himself to be clearly uneducated when it comes to markets as preventing a run on the fund is not a fraudulent activity in fact nothing could be further from the truth. It is an imperative as a manager in such a situation. It is a managers fiduciary responsibility to do so, most especially when the facts are rapidly changing and it it is ones job to disseminate information on a moment to moment basis, even as that information is changing too rapidly for one to do so.

Larry Ribstein, a professor of law at University of Illinois completely agreed with our position at The Cold Truth when he stated, “This never should’ve been the subject of a criminal prosecution. It was a case of standard business dealings where the views of the markets were shifting rapidly and these guys were being criminally punished for expressing views on one day and acting differently another day,”

This battle has just begun as the SEC plans to sue the Cioffi and Tannin in civil court because the burden of proof is much lower than the criminal court- this is why the two remained unmoved upon their acquittal as they have many more legal challenges ahead, including answering the numerous client law suits that Tannin and Cioffi have face as an unfortunate bi-product of the US Attorneys criminal charges. “We of course respect the criminal verdict,” SEC spokesman John Nester said. “But at this time, we expect to go forward with litigating our civil action.”

More to follow.....

Wednesday, November 11, 2009

Yorkville Possible Subject of SEC Investigation

Yorkville Advisors, LLC- which has operated a PIPE (Private Investment in Public Equity) fund since 2001 -may be in hot water with the Securities and Exchange Commission. Sources indicate that the SEC may have already or is about to launch a formal investigation of this fund and its managers. Our sources confirm the commission has been contacted by several concerned Yorkville investors, though SEC representatives have not made any comment regarding the inquiry.

Clients may have been prompted to go to the SEC by what some could consider questionable investments, in addition to the onerous fees collected by Yorkville (YA Global Investments). Yorkville deal documents and their audit show the following:

* Yorkville and its funds take fees on all sides of their transactions- including structuring.

* They take their management fee as well as a healthy portion of the profits from their funds and then write-off all their costs against these fees. In simple terms – it would appear they have no costs of their own.

* 'Double Dipping' - Investors being charged twice.

Sources close to the SEC allege that Mark A. Angelo and Matthew Beckman – key people at Yorkville's PIPE fund– may soon be hit with inquires. Yorkville also operates under the name YA Global Investments. It is a complex structure many theorize is utilized to circumvent taxes, among other reasons. It is possible that there may be some irregularities on a deal announced October 19, 2009 with Finnish drug developer Biotie Therapies Oyj (HEL: BTH1V)

What is wrong here? The deal is as follows:

Oct 23, 2009 (M2 EQUITYBITES via COMTEX) -- 23 October 2009 - Finnish drug developer Biotie Therapies Oyj (HEL: BTH1V) said today the fund YA Global Master SPV Ltd committed to subscribe and pay up to EUR20m for ordinary no-par Biotie shares in the next 36 months, under a stand-by equity distribution agreement. The deal aims to secure the financing of Biotie's working capital in the short and medium-term. YA Global is entitled to a one-time commitment fee of EUR200,000 in shares and has already received customary structuring and due diligence fees. At any time during the 36 months Biotie may request YA Global to purchase shares. The maximum portion of the commitment amount to be used at a time is EUR50,000 for the first tranche, EUR100,000 for the second tranche and EUR300,000 for the subsequent tranches. The pricing of the shares will be determined as 95% of the lowest daily volume-weighted average price of the five days after the date on which Biotie shall have sent YA Global a notice to buy shares, but will be at least 85% of the volume-weighted average price of Biotie shares on OMX Nordic Exchange in Helsinki on the last trading day preceding the notice.

Maple Energy could be another target of the eagle eyes at the SEC as some believe that Yorkville Advisors artificially inflated the funds value with the goal of tidying up its balance sheet so its PIPE fund looked stronger to attract new investors.

November 05 2005- Maple Energy secures $30m funding facility for new opportunities
Peru-based oil and gas group Maple Energy has secured a US$30 million financing facility with American investment group Yorkville Advisors, which manages YA Global Master SPV Ltd.

As is usual with Yorkville – which funds numerous small cap natural resources companies – the package has been structured as a standby equity distribution agreement (SEDA). This means that Yorkville has agreed to subscribe for up to US$30 million of Maple’s shares as and when the company needs the cash over the next 30 months. Maple will use the proceeds from the SEDA as a means of raising additional working capital, including for its Ethanol Project, and for general corporate purposes.

Rex Canon, Maple’s chief executive, said the facility gave Maple certainty and flexibility of funding. “The capital can be accessed quickly and at attractive pricing enabling Maple to respond to new opportunities and funding requirements as and when they appear,” he said.

In addition some industry experts are speculating that the SEC may be looking at cases of possible manipulation by Yorkville in SEDAs or Standby Equity Distribution Agreements.

Also at issue is- Richard Y. Roberts - his activities believed to include influence peddling, on behalf of Yorkville, behind closed doors. Roberts served as a Commissioner of the U.S. Securities and Exchange Commission (SEC) 1990-1995. In addition to his service at the SEC, from 2002 to 2004 Mr. Roberts served as a member of the District 10 Regional Consultative Committee of the National Association of Securities Dealers, Inc., and from 1999 to 2001, he served as a member of the Market Regulation Advisory Board of the NASD and from 1996 to 1998 he served as a member of the Legal Advisory Board of the NASD. Currently Mr. Roberts is a partner at Roberts, Raheb and Gradler, a regulatory and legislative consulting firm he co-founded in March 2006, where he provides legal, consulting and advisory services to clients on issues relating to financial institution regulation and legislation. He is closely linked to Yorkville.

Lastly, on the Yorkville table at the may be a question of special inside knowledge utilized in the following deals:

Wednesday, November 4, 2009

SAC Capital Ensnared in Insider Trading Scandal

The recent financial crisis has led to many investigations of instances of malfeasance including the charge of insider-trading that has engulfed Raj Rajaratnams Galleon Group. Recently, several sources close to the investigation revealed that Choo Beng Lee, who is cooperating with authorities, admitted that his illicit trades began at SAC Capital in 1994. This revelation has far reaching consequences which include ensnaring another man considered to be a Wall Street darling as well as one of the biggest names in the hedge fund business- billionaire and SAC founder- Steven A. Cohen.

SAC is a multi-strategy, private asset management firm founded by Steven A. Cohen in 1992 with 9 employees and $25 million in assets under management. SAC's initial investment style was "trading" oriented. However, they have evolved into a multi-strategy, multi-disciplinary, investment management firm emphasizing rigorous research and risk management practices. SAC's investment strategies include, but are not limited to: Fundamental and Technical Long/Short Equity Portfolios, Global Quantitative Strategies, Fixed Income and Credit, Global Macro Strategies, Convertible Bonds, and Emerging Markets.

Lee has pleaded guilty to insider-trading charges in along with 19 others. According to his recently released cooperation agreement, he acknowledged that his illicit trading has been going on for over 15 years-since 1994,including while the entire decade he was working at SAC. In return for helping the government, Lee won’t be further prosecuted for any insider trading he may have committed at SAC, which oversees $14 billion, or at his next two employers, as long as he has disclosed the crimes, according to his Oct. 8 plea agreement. Although no one at the Stamford, Conn.-based hedge fund have been accused of any wrongdoing, authorities will certainly be searching further to see who knew what and very likely will have many questions for Cohen himself.

Investigators are expected to examine transactions at SAC, the Wall Street Journal reported on Nov. 7, citing people familiar with the matter. Cohen declined to rehire Lee because he was suspicious about the abrupt closing of San Jose, California-based Spherix, the newspaper said. Spherix Capital LLC, which Lee started in 2007 with Ali Far, closed in March after returning about 10 percent in 2009. Before Spherix, Lee worked for about three years at Stratix Asset Management LLC, a defunct hedge-fund firm in New York run by two former SAC traders.

The SEC has been quite vigilant in their investigation and have made it clear that they will pursue the case, no matter how long it takes or where it may lead. According to reports clients of the firm are being advised that SAC has reviewed its buying and selling of stocks cited in the Galleon Group LLC insider-trading cases and has found nothing suspicious. In addition, it is believed no subpoenas have been served as of yet, but cannot be ruled out as the investigation
is ongoing.