Legal

Hedge Fund Complication at Heart of Western Pacific Action

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Western Pacific Capital Management failed to disclose hefty 10% commissions for marketers of its products, according to a settlement with regulators. But the agreement with the Securities and Exchange Commission goes beyond the fee issue to illustrate how investing in hedge funds and other private entities can involve liquidity issues and complex conflict of interest dilemmas. The ruckus with regulators started with Western Pacific’s placement agent activities for unregistered offerings of Ameranth Inc. stock in 2005 and 2006, according to the settlement. (Ameranth is unrelated to the defunct hedge fund Amaranth Advisors.)

The company and its principal Kevin James O’Rourke, who were not registered brokers, were to receive 10% “success fees” for placing sales of the stock. Ultimately, Western earned about $482,000 in such fees.

Legal
Corey Ribotsky

NIR Group Investors Faced with 97% Loss

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Investors in beleaguered PIPE fund manager N.I.R. Group received harsh news last week when the court-appointed liquidators for the firm’s hedge funds told them in a group conference call the once $800 million funds had lost of 97% of their value. The loss was disclosed on 2011 tax forms for reporting partnership income known as K-1s,  provided by the liquidator to the investors. The news was equally troubling because the funds’ general partner, Corey Ribotsky, had told them just months before that there was still near $400 million of value in the assets. Ribotsky was sued by the Securities and Exchange Commission for two counts of investor fraud and breach of fiduciary duties last September. Growth Capital Investor reported the SEC added to their fraud claims last month with an amended complaint detailing internal whistleblowers, investor emails, and testimony from outside auditors who explained the methods Ribotsky used to allegedly mislead investors about the value of the funds’ assets while he managed the money and took fees.

Legal

Internal Fixation Accused of Manipulation, Misleading Reporting

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Medical implant maker Internal Fixation Systems (IFIX) allegedly delayed numerous regulatory filings as part of a scheme to manipulate the company’s stock price, according to a lawsuit filed by investors. By delaying disclosure of financings and other events, the suit claims, executives of the South Miami-based company “secured the ability to sell-off over 1 million shares of IFS stock to the detriment of IFS shareholders who were not provided with the true picture of IFS until after the stock price had plummeted from $2.30 per share in December 2011 to less than 2 cents per share in June 2012.”

Near the end of that period, the company arranged a $7.5 million equity line with Hyde Park Advisors according to a regulatory filing. (The company was founded in 2006 and became public in May 2011 through the filing of an S-1 registration statement.)

The suit, which was filed on Aug. 29 in Miami’s U.S. District Court, seeks financial compensation of unspecified amount. The investors are a group of about twenty individuals and investment entities including Bromson Investments Ltd., AACJ Properties LP, J Bones Holding LLC and KAKT Inc.

Internal Fixation has not yet replied to the suit in court.

Legal
crowdfunding

Muddy Solicitation Proposal Takes Wind Out of Crowdfunders

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Judging by the glowing proclamations that the JOBS Act would revolutionize small business capital formation, equity crowdfunding proponents were one of the most eager constituencies waiting for the Securities and Exchange Commission to write rules lifting the ban on general solicitation when conducting Rule 506 offerings under Regulation D.

The commission’s blessing to advertise the sale of unregistered securities to accredited investors was considered to be the first step in a two-step process. The next step, which could occur as early as January, is supposed to open unregistered securities sales to non-accredited investors. For the most part, however, the commission delivered a gut kick to crowdfunding aspirations when in late August it issued a proposal rather than final rules – further delaying rulemaking that was supposed to be completed in July – and then decided to put the onus on issuers to determine whether an investor is in fact accredited. The vague explanation on how issuers should conduct their investigations added some sting, too. “If you want to get capital flowing to job creators, if you’re trying to solve the problem of the funding void that exists for entrepreneurs and small businesses, then undefined bureaucracy doesn’t help,” said Sherwood Neiss, a principal of Miami-based Crowdfund Capital Advisors, a strategy and technology consulting group that works with crowdfunding platforms and investors.