Legal

FINRA Alleges Fraud, Stock Manipulation by PIPE Broker Carris

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A New York City based broker-dealer active in equity private placements with emerging growth companies has been accused of fraud on grand scale by its regulator FINRA. John Carris Investments, founded by George Carris in 2009, is facing multiple allegations centering on stock manipulation, fraudulent self-offerings of securities, use of firm funds to pay personal expenses, falsifying tax documents and not paying staff payroll taxes withdrawn from employee’s paychecks.  The regulator wants George Carris, along with other principals of the firm, Andrey Tkatchenko and Jason Barter sanctioned for securities fraud. In the FINRA complaint the regulator alleges Carris manipulated the price of shares of then-OTC Pink-quoted FibroCell Sciences (FCSC):

“This scheme was motivated by the Manipulation Respondents' interest in increasing the volume and price of sales of Fibrocell shares, including in ongoing Private Placements of Public Equity ("PIPEs") for which John Carris Investments acted as a placement agent. From these placements, the Manipulation Respondents earned commissions ranging from 7-10% and Fibrocell warrants- from which respondents could profit by cashless exercise. By engaging in prearranged trading during the Manipulation Period, between May 1, 2010 and September 30, 2010, the Respondents created volume and also gave the appearance of greater liquidity, manipulated the price by which the shares were bought and sold, and prevented large sales of blocks of shares from being sold into the market (which would depress the stock price).

Markets

Sponsored Deals Recovering from Slow Q1

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After a slow 2013 first quarter, sponsored growth equity private placements – deals taken by long-only fundamental investors such as venture capital, private equity, corporations, endowments, pension and mutual funds, generated more deals and more dollars in the second quarter. Sponsor investors in the second quarter include middle market PE firm GCP Capital Partners, Silicon Valley Bank, venture capital investor Oxford Finance Corp., institutional advisor MidCap Financial, John Hancock Regional Bank Fund, Fidelity Securities, Kaiser Permanente Ventures, CMEA, Bessemer Investment Management and Morgan Stanley Wealth Management. Sponsors active in the first quarter included pharma buyout specialist Frost Group, energy investor Natural Gas Partners, storied tech VC Kleiner Perkins, multi-stage VC firm Oak Investment Partners, long-biased hedge fund Aspire Capital, business development company Hercules Technology Growth Capital (HTGC), the Janus and Legg Mason mutual funds, and China sovereign fund CITIC Capital. Some 71 sponsored transactions in the second quarter raised $1.94 billion, or about four times as much as a mere 26 sponsored deals raised in the previous quarter. In the first quarter, the 26 sponsored deals raised only $480 million, representing just 10% of the deal activity and less than 7% of the capital raised in the broader equity private placement (EPP) market of 252 offerings that raised $7.23 billion.

Legal

Judge Limits Yuhe International Investor Suit against Underwriters

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The underwriters of a $40 million secondary offering in 2010 from chicken breeding company Yuhe International (YUII) are seeking the dismissal of a class action suit that claims they should have known about the company's alleged diversion of over $12 million. The court heard oral argument held last week, when counsel for underwriters including Rodman & Renshaw and Brean, Murray, Carret & Co. asked that the case against them be tossed out. A court ruling on July 10 whittled down the investors' claims to those involving five particular chicken farms Yuhe claimed to have under operation. The case against the underwriters was filed in a Los Angeles U.S. District Court, where the action by plaintiff aAd Partners LP was consolidated with the investor class action suit filed by Jeff Feyko.

Markets

Market Wobbles Fail to Deter Deals

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The recent spike in market volatility over the past few weeks has yet to temper the bullishness of growth companies, investors or bankers in what so far has been a robust year of private placement deal making. The pace of transactions remained steady in June despite a 500-point drop in the Dow Jones Industrial Average to begin the month. That was followed by a mid-month seesaw ride that led to a 760-point drop over two-and-a-half days and then a strong rebound in the final week. Companies raised about $1.1 billion in 33 growth equity private placement transactions (GEPPs) in June through the final trading day of the month, according to PlacementTracker, a division of Sagient Research. Additionally, eight growth issuers established at-the-market agreements that could raise a potential $370 million.