Archives - Business: Page 28
Author: paul carson (Fri Aug 25, 2006 3:25 am)
Title: business
WALL STREET, where information is transformed into cold, hard cash, is also a place where secrets have their own special currency. And while trading on inside information, to most people, means buying a stock ahead of news that sends it soaring, whispers about events that might depress a company’s stock — such as an imminent securities offering that will dilute existing holders’ stakes — can also produce stellar profits for those in on the chatter.
More often than not, according to recent regulatory actions and lawsuits, those in the know have been hedge fund managers. Over the last 18 months, the Securities and Exchange Commission has filed four lawsuits against individuals and hedge funds that the commission said had profited on nonpublic information about stock offerings.
Hedge fund managers are not the only ones drawing scrutiny, however. Brokerage firms that underwrite stock offerings and thereby have access to potentially market-moving information are being examined by regulators concerned about whether the firms are tipping off clients to deals.
The hot tips at issue in these cases involve an increasingly popular type of security called a “private investment in public equity.” These securities, PIPE’s for short, are not registered with the S.E.C.; companies that need cash quickly (sometimes because they are in financial trouble) sell PIPE’s privately to institutional investors, with brokerage firms getting a fee for acting as intermediaries on the transactions.
Because PIPE’s dilute existing shareholders’ stakes and are sold to buyers at a discount to the issuer’s prevailing stock price, news that such a deal is in the PIPEline can depress a company’s shares. Companies that issue shares this way are typically small enough that raising capital can have a more magnified impact on their existing shares than might be the case with a larger concern — making advance knowledge of a PIPE even more attractive to traders looking for stocks poised to head south.
A recent deal that has attracted regulatory interest is a $32 million PIPE that Javelin Pharmaceuticals, a small drug company in Cambridge, Mass., issued last November. Two small brokerage firms, Rodman & Renshaw in New York and Riverbank Capital Securities in Cary, N.C., placed Javelin’s offering, of 14.2 million shares.
Regulators want to know whether anyone got wind of the Javelin deal and traded in advance of it, according to people briefed on the inquiries. Given that the stock sale would have increased the pool of Javelin’s outstanding shares by about 35 percent, news of the PIPE was sure to push its stock down. Only an in-depth analysis of trading in Javelin’s shares can answer whether those in the know profited by shorting the company’s shares — borrowing them and selling, then profiting by buying them back after the PIPE had driven down the stock price.
To be sure, not every PIPE causes a company’s stock to drop. Measured Markets, a Toronto research firm that looks for anomalies in stock trading, examined PIPE’s valued from $100 million to $250 million that companies on then the American Stock Exchange issued in the first half of this year. Only half 9 of 18 had their shares of Nasdaq drop in the 30 days leading up to the deals. (One of the company’s stocks stayed flat and the other eight rose.) Of those that fell, the average decline was 8.6 percent. Of those that rose, the average increase was 20 percent.
Measured Markets also identified unusual activity in one-third of the deals that lost value in the 30 days leading up to the PIPE. The firm’s analysis showed abnormal trading volume in the stocks, an unusual number of trades executed on certain days, or odd movements in stock prices — sometimes all three. The unusual trading occurred on days when no news or other public announcements occurred that might have affected the stocks.
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