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BayStar Being "Scrutinized" by the SEC
Thursday, July 08 2004 @ 02:45 PM EDT

"The SEC is investigating 20 instances in which hedge funds may have used insider information to profit from coming stock offerings", the Wall St. Journal reports. And guess who is on the list?

BayStar Capital.

Here's what the Journal is reporting:

"The SEC is investigating whether hedge funds, tipped off to Pipe deals by brokers looking for interested buyers, made bets against the companies' stocks before the deals were consummated and disclosed publicly -- through the legal practice of 'shorting,' or selling borrowed shares in a bet that those companies' stock prices would decline."

The investigation began a couple of months ago. Puts a conceivable new slant on the posturing in the press recently, huh?

The Wall Street Journal has more:

"The SEC's investigation was launched several months ago by its office of compliance and inspections, or OCI.

"The unit sent out 22 requests for documents relating to Pipe deals to securities brokers and placement agents. In recent weeks, the unit referred details of roughly 20 instances in which it believes there may be violations of securities law to the SEC's enforcement unit, the people said.

"The enforcement unit has the ability to bring charges and lawsuits against firms and individuals involving alleged securities-law violations. It is uncertain whether the SEC will decide to bring charges relating to the suspicious trading detected by its OCI examiners.

"The brokerage firms and dealers whose Pipe activities the SEC is scrutinizing include Bank of America's Banc of America Securities LLC; Societe Generale's SG Cowen Securities Corp.; Piper Jaffray Cos.; and Jefferies Group Inc., the people said. Among the other firms being looked at are Roth Capital Partners LLC; Rodman & Renshaw LLC; and Sunrise Securities LLC, they said. Investors whose trading is under scrutiny include BayStar Capital, a California hedge fund. The SEC hasn't named formal targets of the investigation, however."

The investigation of PIPE deals was prompted in part by complaints from "a large mutual fund" whose traders had noticed a pattern, five small companies whose stocks declined before a public announcement of a PIPE deal. It's normal for a post-announcement dip to occur, but not just before.

If you don't have a subscription to the Journal, you can read all about it on Investors.com, plus a great deal more, unrelated to BayStar, so far as I know, about short selling on the German markets and some finger-pointing at the SEC, hints of the underworld, and news of an upcoming Dateline expose called "Stockgate". Heavens to Betsy! It's enough to make a girl's head spin.


  


BayStar Being "Scrutinized" by the SEC | 184 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections
Authored by: Anonymous on Thursday, July 08 2004 @ 03:40 PM EDT
So PJ can find them.

--Bill P

[ Reply to This | # ]

  • Corrections - Authored by: Anonymous on Thursday, July 08 2004 @ 04:48 PM EDT
  • Corrections - Authored by: Anonymous on Thursday, July 08 2004 @ 05:05 PM EDT
    • Corrections - Authored by: Anonymous on Friday, July 09 2004 @ 02:11 PM EDT
Trolls, word play, and spelling exceptions
Authored by: Anonymous on Thursday, July 08 2004 @ 03:42 PM EDT
For weeble to enjoy ;->

[ Reply to This | # ]

OT topics, URLs for things
Authored by: Anonymous on Thursday, July 08 2004 @ 03:43 PM EDT
But see above for trolls and corrections

[ Reply to This | # ]

BayStar Being "Scrutinized" by the SEC
Authored by: Anonymous on Thursday, July 08 2004 @ 03:58 PM EDT
Does this have any connection to why not BoA was sued by SCO? Or it is just pure
coincidence and unrelated.

[ Reply to This | # ]

BayStar Being "Scrutinized" by the SEC
Authored by: eamacnaghten on Thursday, July 08 2004 @ 04:13 PM EDT
I do not know if "news" of the baystar PIPE deal got "leaked" to a select few to make killings on shorts - but my take on the essence of the BayStar/SCO PIPE was relatively straight forward and above board - that is for what it was.

My take on it is that BayStar - and probably RBC too - were pointed to SCO by Microsoft and were gambling on Boise et all being able to make a killing against either IBM or Linux commercial users in general - and I think they both made losses when it did not happen. I do not think there was any illegal dealing as such there - just some very clever old fashion lieing and manouvering by McBride and his gang.

Web Sig:Eddy Currents

[ Reply to This | # ]

Finally it seems some forward momentum, Re: BayStar Being "Scrutinized" by the SEC
Authored by: martimus on Thursday, July 08 2004 @ 04:17 PM EDT

It seems like the various complaints about TSCOG and Baystar et al were falling on deaf ears; maybe this will lead further down the Rabbit Hole and actually get into the financial shenanigans that have kept SCOX elevated as long as it has. It has been speculated here and elsewhere over the past year that TSCOG has been manipulating the price of their stock and other financial scams, so maybe, finally there will be an accounting.

[ Reply to This | # ]

Too bad it's Dateline...
Authored by: kawabago on Thursday, July 08 2004 @ 04:20 PM EDT
They have to be the worst news magazine on the planet.
The last time I subjected myself to their drivel they
babbled on about 3 facts, restating them repeatedly for
over 20 minutes without ever getting to the point. I
doubt that this report will be any better. Dateline?
Gimme a break!

[ Reply to This | # ]

Check This
Authored by: Anonymous on Thursday, July 08 2004 @ 04:36 PM EDT
BayStar's involved in a lot of PIPEs. Presumably only one or some of the BayStar PIPEs are suspected.

To check if the BayStar-SCOX PIPE might be on the suspect list, check this:

The investigation of PIPE deals was prompted in part by complaints from "a large mutual fund" whose traders had noticed a pattern, five small companies whose stocks declined before a public announcement of a PIPE deal. It's normal for a post-announcement dip to occur, but not just before.

How to:

1. Look up the date of the BayStar announcement

2. Look up historic SCOX stock chart, and see if a dip occurs before the BayStar announcement

All the info for this research is online.

[ Reply to This | # ]

BayStar's Activities
Authored by: Anonymous on Thursday, July 08 2004 @ 05:02 PM EDT

Here's a run down of how I see things.

BayStar probably had the PIPE deal with SCO written up and on ice. They jumped to close in on Oct 18, 2003, right after Skiba recommended SCO stock and it rallied. Since the conversion rate averaged in the four lower priced days, this meant an instant paper profit of $8M or so for the investors.

The key question is was there coordination between Skiba and BayStar, or were they just opportunists who picked a great time to the disadvantage of common shareholders.

I tend to think BayStar did not have a large short position at that time. They had a deal on ice waiting for a pop, so they weren't in a good position to short before the pop. Also, they really believed SCO stock might go to the Skiba target of $45. A hedge would cut down on their gains, so I expect they were fully exposed long.

IIRC, as part of the deal, BayStar said it had not traded SCO stock while they were in discussions. SCO also claimed that it was releasing all material information that they had told BayStar and agreed to transfer no further material non-public information to the preferred shareholders. The point of this was that the PIPE holders could manage their hedges without being accused of insider trading.

Well, SCO popped up only one more day after they deal and then headed down. In effect BS/RBC bought at the top, but due to the 5-day averaging they bought at a discount.

SCO announced a payment to BS&F that seemed to take BS/RBC by surprise. BS/RBC negotiated a veto over future actions the company might take.

Around this time, SCO first announced a large charge due to a beneficial conversion feature, then delayed earnings and announced it would redo the accounting as a derivative. In this way they managed to show positive earnings for FY2003, although not for Q4 or ever again.

After the price was stagnant for a while, Eric Savitz of Barron's wrote a piece which talked about SCO's situation very sympathetically and quoted Skiba and Goldfarb. It did not quote IBM or Red Hat sources and said that HP's then recent indemnification (which hurt SCO's stock price) was in fact a sign that SCO's position had merit. Skiba had totally fictitious earning projections and called the stock cheap. The article even made the outrageous claim that the loud opposition to SCO showed that SCO was positioned to have a big effect. The article came out over the weekend and SCO had a large rally on Monday.

Still, the stock slowly sank afterwards, and in December Goldfarb is quoted saying that they can redeem the note(!!!). My guess is it is around this time when they realized the $45 target was not going to come through and entered into ordinary hedging activities. The problem was that by entering the hedge at that point, they lost money compared to their buy-in price of $16.93 from the deal's close.

SCO and BS/RBC negotiated an exchange of A series for a new A-1 series in February 2004, just after Q1 closed. The new shares had a floating conversion rate with a greatly lowered floor of 13.50, which presumably means that the BS hedge established earlier at a loss might now be profitable under the right circumstances.

But the floating conversion rate has a very perverse effect. If the stock price slowly rose by small steps up and down until conversion was forced, the deal would make very little money for BS/RBC because their conversion rate would also slowly rise along with the trailing average price.

Instead the way to make big money was to have a sudden jump in stock price on high volume. Then the investors could sell at the high price, while converting at a much lower floating price averaging in the previous days pre-jump. (Basically what happened when the deal originally closed after Skiba's announcement.)

Fast-forward to the earnings announcement of Q1 results and recall Skiba and SCO execs have been warning of impending lawsuits for months. They day before the earnings call and release of information, SCO stock closed just pennies below the 13.50 conversion floor, with a good trailing average that would keep the floating rate pinned for the floor for a few days. Then on that day SCO announced the two long-threatened lawsuits against AutoZone and DaimlerChrysler. Unfortunately for them their financial results were so poor, the stock tanked, never to rise to those heights again.

It really looks like things were nicely set up for the preferred shareholders to profit after the Q1 earnings call if investors had been enthusiastic about the lawsuits. Since that didn't happen, it appears the preferred shareholders gave up hope.

Eventually BayStar demanded redemtion citing a number of contract clauses that SCO violated. IIRC, one was that SCO would not pass on material non-public information.

RBC ran away, and finally a bit later BayStar too decided it couldn't recover much by fighting SCO in court. BayStar struck a deal to get in one lump the same that it could get by multiple conversions plus an extra $1M or so in cash.

And now we read rumors in the paper that the SEC are looking at hedge funds and PIPE, and BayStar in particular. I wonder why that might be. I wonder what Skiba and Savitz think too.


Additional note: I have seen one article which rehashed the WSJ report (haven't seen the original yet) and I was struck that the focus seems to be on the question of whether BayStar short sales manipulated the price down. We could be seeing a complaint of Royce, Capital Guradian and so against BayStar. Maybe they blame them and all is not so friendly among the big SCO investors. Also quite possible the reporters have the point of the story quite wrong. All of this comes from leaks, so until we something official who knows what party is trying to push what line.

[ Reply to This | # ]

BayStar Being "Scrutinized" by the SEC
Authored by: John M. Horn on Thursday, July 08 2004 @ 05:06 PM EDT

About time there is an investigation of BayStar. Hopefully the investigation of
BayStar will somehow lead to an investigation of SCO. They appear to have been
playing shenanigans with their stock for nearly the last year and a half.

John Horn

[ Reply to This | # ]

BayStar Being "Scrutinized" by the SEC
Authored by: MplsBrian on Thursday, July 08 2004 @ 05:29 PM EDT
It certainly is easy to get excited about such news when it appears to reflect
poorly on one of the villians in our little soap opera. However, at this point,
all we know is that the SEC is investigating. There is not yet evidence
supporting the hypothesis that this investigation involves the SCO PIPE deal.
While I, for one, would not be surprised if BayStar were involved in various
unethical and/or illegal deals, its a bit premature to celebrate their demise.
For now the story is an interesting sidebar. Nothing more.

[ Reply to This | # ]

Based on comments from Baystar RE: new SCO management
Authored by: Anonymous on Thursday, July 08 2004 @ 05:39 PM EDT
Remember not long ago when Baystar threatened SCO, saying they needed new
management?

Rumor was Baystar shorted SCO right before making that announcement.



[ Reply to This | # ]

long and short at same time... how?
Authored by: dbc on Thursday, July 08 2004 @ 06:05 PM EDT
Somebody explain to me how Baystar could be both long and short SCOX at the same
time, when they clearly fall under insider rules. Every time I've ever had a
brush with this, an insider was prohibited from being both long and short at
the same time. In fact, at my last employer, anyone at a 2nd level manager or
above was presumed to have access to inside information and was prohibited from
either directly shorting or from buying puts in our company's stock. There were
times where a put or two would have been nice as a hedge on employee stock
options, but it was a big no-no.

How can Baystar do this? I've been mystified over this for a long time. Or is
there some strange reason why Baystar is not considered an insider? IIRC, they
have a board seat, and also > 5% ownership, either of which is an automatic
insider trigger, is it not?

Oh... IANASL -- I am not a securities lawyer

[ Reply to This | # ]

BayStar Being "Scrutinized" by the SEC
Authored by: Sunny Penguin on Thursday, July 08 2004 @ 06:18 PM EDT
Hmmmm, In SCO speak;
The agreement with Baystar is pending SEC approval.

Translation:
I hope they do not catch us!

---
Litigation is no sustituite for Innovation.
Say No to SCO.
IMHO IANAL IAALINUXGEEK

[ Reply to This | # ]

BayStar Being "Scrutinized" by the SEC
Authored by: Anonymous on Thursday, July 08 2004 @ 06:47 PM EDT
It doesn't look like that this piece of news does have anything to do with SCOG
at all. Am I wrong?

[ Reply to This | # ]

OT: New article about AdTI
Authored by: Anonymous on Thursday, July 08 2004 @ 07:30 PM EDT
http://www.pcmag.com/article2/0,1759,1619714,00.asp

If anybody has evidence that Adti received money from Microsoft (and I was under
the impression, that there was supposed to be some such evidence), you might
want to forward it to this guy, as he states:

"Nobody I know has proved that the AdTI was taking money from Microsoft,
but a lot of critics are making the claim. And if you look at the institute's
Web site, you have to wonder what Linux has to do with anything else these folks
do. It seems off the wall; thus, it's suspicious."

[ Reply to This | # ]

More shells "Hatching"???
Authored by: Anonymous on Friday, July 09 2004 @ 12:03 AM EDT
The Salt Lake Tribune online has an article about "shell game"
transfers in a state-funded agency, run by one "Dale Hatch". Anybody
know if he's related to Orrin and Brent?

Also, Ken Lay was indicted today (Enron). Seems the SEC thinks he may have been
involved in shell games.

Does this sound rather like things some suspect Yarro may be doing with Canopy,
Caldera, SCO, and Angel Investments?

And still MORE: the SEC is also looking into Baystar, for improper use of inside
information. Now, was that another shell game, for Microsoft to hide payoffs to
SCO, and payola to senior Hatch-lings?

[ Reply to This | # ]

BayStar Being "Scrutinized" by the SEC
Authored by: Anonymous on Friday, July 09 2004 @ 12:15 AM EDT
E-COR MOTION: USE BAYSTAR/SCO AS STEPPING STONE

[ Reply to This | # ]

More scrutiny available
Authored by: inode_buddha on Friday, July 09 2004 @ 03:46 AM EDT
here (finance.yahoo.com), here (sec.gov), here (Pearson tearsheet from Forbes), and here (contracts.onecle.com).

The behaviors that I noticed overall include how many people's names are in common to all companies, and how often they seem to sit on both sides of the bargaining table. Some of the dates are interesting too, IMHO especially with the MTI and Altiris deals. And let's not forget Vultus. Does anybody see a pattern here?

---
"When we speak of free software, we are referring to freedom, not price." -- Richard M. Stallman

[ Reply to This | # ]

Slightly Off-topic alert…
Authored by: Anonymous on Friday, July 09 2004 @ 06:32 AM EDT
This angle has renewed my interest in a question I’ve asked elsewhere previously
– but for which I’ve never had a satisfactory answer. “What is insider
trading?”

It is obvious that if I were a director of a company I should not benefit from
using my control of a company to optimise my private stock trading where I
directly influence share price. However, I wonder where the line is drawn?
Suppose I stacked shelves at a retail store and noticed a change of strategy
leading to substantially improved sales volumes coupled with substantially
increased mark up… would that sort of information prevent me from investing?
What would be the situation if, I noticed that a once carefree and happy
executive no-longer drove their expensive company car, frowned lots in the
morning and had cancelled a holiday after months in planning?

To my uninformed self, it seems as if insider trading is the sort of trading
every investor must aim for – without getting caught by investing where the
connection is too blatant. Surely it must be possible to distinguish between
legitimate and illegitimate trades? Exactly what constitutes insider
information?

[ Reply to This | # ]

The stock market, the SEC and the underworld
Authored by: Anonymous on Friday, July 09 2004 @ 10:46 AM EDT
I am posting this anonymously for hopefully obvious reasons.

I worked for a company that traded in stock market data. (You've probably never
heard of them.) From my experience I believe the following fairly well covers
the industry on the whole.

I have witnessed first hand what can occur when the SEC raids an office.
Frankly, it looks pretty much like a large-scale drug-trafficking bust.

The SEC uses the FBI for their "muscle" when they move in on someone.
It pretty well involves coming in through the least expected route with weapons
drawn. This ranges from handguns to at least semiautomatic rifles.

In my case I was not the target and having a number of friends in law
enforcement, I knew just to stay put unless instructed otherwise. When they
came in they looked in the room I was in and said, "Just stay where you
are." I don't know why, but that was actually very comforting.

One of the companies principles in the next room was scared senseless and ran,
he rapidly found himself face down on the floor with a rifle barrel pointed at
the back of his head. I've been around martial arts much of my life, but it was
really interesting to see a 5'2" female officer take a man over 6' tall
that was running away from her, grab him, flip him up through the air and
straight into a face down position quickly placing a foot on his back and a gun
to his head.

The poor fella that just happened to be shredding some unrelated documents when
they came in nearly messed himself.

All in all it was very efficient. Documents were gathered, the two senior
members were taken in for questioning and after the better part of a day were
bailed out. The long and short of it is that my boss had casually mention that
he thought a particular stock was interesting in a public forum, people jumped
on it like it was the next hot thing. He sold his stock because he saw it was
overdone and when he told everyone that they were overreacting nobody listened.
When the stock crashed back to its actual value a few days later that triggered
the SEC investigation.

It is an unfortunate truth that in opening this business my boss had stumbled
into a hornet's nest of underworld activity. He rapidly found out that business
was harder than he expected because all of the big boys on the block are wired
up to organized crime. This includes certain well-known indices and their
support organizations.

It is a shame, he really had a good business idea and plan. He just got in over
his head.

I was behind on a project, so I came in late one night to work on it. When I
did, I could see into the boss's office through a glass window. He never worked
this late at night, and I knew he had left much earlier that day. But there he
was in his office, sitting down having a nice one-on-one discussion with the mob
boss from the next city over. They weren't arguing. They weren't fighting.
They were just having a nice civil discussion. Fortunately they hadn't seen me
and I just backed out. The interesting thing was that none of the stereotypical
goons were around. So you know it had to be a really big deal for the local
boss to come down there on his own.

Up until that point, I thought my boss was one of the "good" guys.
But apparently he realized he just couldn't make it unless he played ball.

At the time I was married to a woman who was part sicilian. She nearly choked
whe I told her about this. When she was young her family would get anonymous
calls warning them to avoid a certain location. They'd go by days later and the
place would be shot up or burned to the ground. Given that background I decided
to wait a few days to avoid raising any suspicions and quit my job.

So if you've ever had an inkling that certain things related to the market are
dirty. You might just be right. This does not mean however that just because
you lost money on a trade or when the bubble-popped that it was somehow part of
a dark conspiracy.

More often than not the small-fry simply lose out because the cannot compete
with the big players. This is true of software, this is true of the market,
this is true of good old brick and mortar shops. But maybe just maybe enough
small fry all doing the right thing can win out in the long run.

[ Reply to This | # ]

PJ's head
Authored by: Stoneshop on Friday, July 09 2004 @ 11:05 AM EDT
It's enough to make a girl's head spin.

Well, you sure got it screwed on straight.

---
Rik
IANALJLMOY


[ Reply to This | # ]

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