Matthew Goldstein
So, the SEC alleges, Rhino began shorting the stock as proxy for its client, in a move that dramatically drove the share price down and meant Amro ultimately collected more shares of Sedona stock than it otherwise would have received. Amro, which wasn't charged by the SEC, benefited from Rhino's action, because it got a ready supply of stock to cover earlier short bets it had made.
Long before the Rhino Advisors case, PIPEs had a bad rap on Wall Street, since many deals were structured on overly favorable terms to the hedge funds. The worst of the PIPEs were so-called "toxic converts," convertible debt notes with a bottomless conversion price that sometimes sent stocks into a downward death spirals. Toxic converts got their name because unlike typical convertibles, which only get converted into shares when a stock rises to a fixed price, the conversion price for these notes keeps getting adjusted downward when the underlying stock fell. The drop in the stock price also meant that buyers were entitled to receive more shares when the conversion occurred. But the bottomless conversion feature inspired short-sellers, including many of the hedge funds that bought the bonds, to literally short the stocks to death. Toxic converts were little more than desperation financing for companies on the brink of bankruptcy. Today, true toxic converts are rare. But cash-strapped companies are increasingly turning to so-called structured PIPEs, convertible notes that include limited downward conversion features that can still result in painful, if not fatal, results for shareholders in a down market. This year, PlacementTracker says, 35 companies have completed structured PIPEs with a combined value of $390 million. All of last year, there were 71 structured PIPEs, raising a total of $267 million. The stocks of those companies, on a weighted basis, are down an average of 11% one month after the deals were completed, says PlacementTracker. On an unweighted basis, the stocks are up an average of 19%, but that's only because of the skyrocketing performance of a handful of small stocks.
RSS
