Vaso Active Lets Millennium Out of Convertible Deal

The biggest investor in Vaso Active Pharmaceuticals managed to escape unharmed when securities regulators suspended trading in the troubled over-the-counter drug technology company.

Danvers, Mass.-based Vaso, which voluntarily agreed to delist its stock from the Nasdaq Stock Market following the April 1 trading suspension, has returned a $7.5 million investment Millennium Partners made in the company last month.

A Millennium subsidiary called Riverview Group was the sole buyer of a $7.5 million convertible note issued by Vaso Active in a private transaction. Millennium is a $3.3 billion hedge fund led by legendary Wall Street trader Israel Englander.

The Securities and Exchange Commission suspended trading in Vaso Active "because of questions regarding the accuracy of assertions" by the company about its lotion for fighting athlete's foot, Termin8. On April 8, the Nasdaq delisted the once highflying stock, after the company disclosed that it was being investigated by the Food and Drug Administration and the NASD.

Small investors haven't been nearly as lucky as Millennium. In the past week, at least five shareholder lawsuits have been filed against the company.

The company, in a press release, said the trading suspension "constitutes a breach" under the terms of the Millennium note, which was to convert into shares of Vaso Active stock when it hit $9. When the SEC suspended trading, the stock was frozen at $7.59 a share.

Before the suspension, shares of Vaso Active, a tiny money-losing company with just seven employees, had been one of the hottest small-cap stocks on Wall Street. The stock was up 314% since its December 2003 initial public offering, after adjusting for a 3-for-1 stock split last month.

Even if the SEC had not moved against Vaso Active, the 18-month convertible note had been structured in a way to give added protection to Millennium.

The deal, which falls under a category known on Wall Street as private investment in public equity, or PIPEs, required Vaso Active to make periodic payments of principal and interest to Millennium in either cash or stock. If the company chose to pay in stock, the $9 conversion price would be subject to an automatic downward revision if the shares declined in value. The downward conversion entitled Millennium to receive more shares than it otherwise would have obtained.

Millennium has one of the more active investors this year in the market for PIPE deals, a type of private financing that is often used by cash-strapped companies.

Millennium, meanwhile, is one of the big hedge funds at the center of the far-reaching investigation into improper trading in the mutual fund industry. Last year, one of Millennium's top traders pled guilty to making illegal trades in shares of mutual funds.

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