A wide-ranging investigation into stock manipulation in the private-placement market has tripped up
a brokerage that last month filed plans for an initial public offering.
The New York firm disclosed late Monday that the
Securities and Exchange Commission
is considering filing civil charges against it over short sales in shares of
, a tiny Pennsylvania software company.
The looming action against Refco stems from a 2003 SEC enforcement action against
, a defunct investment firm that regulators charged with manipulating shares of Sedona following a $3 million private stock placement in 2001.
Regulators charged that Rhino illegally shorted the stock on behalf of one of its clients, Swiss-based
, which had purchased a $3 million convertible note from Sedona in a deal negotiated by Rhino. Federal prosecutors in New York subsequently charged the principals of Rhino, Thomas Badian and Andreas Badian, with conspiracy to commit securities fraud.
The federal investigation of Rhino Advisors was one of the first enforcement actions involving PIPEs, short for private investment in public equity. The illegal shorting uncovered by the SEC in the Rhino case led regulators and prosecutors to launch a broad investigation into allegations of stock manipulation and insider trading by the placement agents and hedge funds in the $14-billion-a-year PIPEs market.
To date, the broad-based inquiry has led to the criminal conviction of a former
managing director on insider trading charges and potential civil charges against investment firm
Friedman Billings Ramsey
and a former
First New York Securities
hedge fund manager.
Refco, which filed for a $575 million IPO last month, disclosed in the offering document that the SEC has been investigating its involvement with Sedona since June 2001. In October 2003, the brokerage received subpoenas from the U.S. attorney in New York. But the firm, which specializes in the futures and derivatives markets, said it "has been advised orally that it is not currently the subject of the U.S. attorney's investigation.''
The SEC investigation, according to the filing, is focusing on two former Refco brokers who handled an account and short sales for Amro International, an offshore hedge fund.
A short sale is a market bet that the price of a security will fall. A trader borrows shares, and if the stock does fall, he makes a profit by purchasing replacement shares at a lower price and using them to repay his lender.
In the Rhino Advisors action, the SEC charged that the investment advisory firm shorted shares of Sedona on behalf of Amro, even though the $3 million PIPE deal prevented such activity. 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.