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Charges that a Dallas businessman and the hedge funds he managed unlawfully distributed unregistered securities have been dismissed by a federal judge in Manhattan. The Securities and Exchange Commission, in SEC v. Lyon , 06 Civ. 14338, accused defendants Edwin Buchanan Lyon, IV and seven of his hedge funds of evading securities registration requirements on 36 Private Investments in Public Equity (PIPE) offerings. The decision appears on page 30 of the print edition of today’s Law Journal. Such nonpublic offerings are generally exempt from the requirement of �5 of the Securities Act of 1933 that stock offerings be registered. The agency said that between 2001 and 2004, Mr. Lyon and the funds pocketed more than $6.5 million in gains by investing in PIPE offerings. A PIPE is a deal in which an accredited investor is allowed to buy restricted stock in a public company, often at below the market price. This stock is then registered with the SEC, and can later be passed along to the public. Once a registration statement is effective, investors in the PIPE can use the newly registered shares to cover earlier short sales, profiting from the difference between the pre-PIPE and post-PIPE prices. The SEC said that Mr. Lyon and the funds, which all include the name Gryphon, illegally distributed securities by engaging in short sales – selling stock that they did not own by first borrowing the securities from someone else in the hope of repurchasing them later at a lower price. The SEC’s unregistered-distribution claim was premised on the assumption that shares used to cover a short sale are deemed sold when the short sale is made. The agency also alleged that the defendants misrepresented these maneuvers to PIPE issuers and engaged in insider trading. However, Southern District Judge Sidney Stein ruled that the agency lacked a “plausible claim.” He agreed with the defendants that there had been no misrepresentation because the “short sales did not constitute a distribution under the Securities Act, and thus they did not misrepresent their investment intentions.” John Carroll, a partner at Clifford Chance who was not involved in the case but who has been following it, said the judge properly analyzed the claims under �5. He noted that defendants in six other cases were willing to settle “lesser” �5 charges when confronted with more serious charges. “As a consequence, a body of bad �5 law was developing,” Mr. Carroll said. He said Judge Stein’s decision has “stopped that evolution.” George S. Canellos and Joshua R. Pater of Milbank, Tweed, Hadley & McCloy said in a Law Journal column that the Lyoncase was an important one because confidentiality and investment intent issues were at stake (” Federal Courts Consider SEC’s Strategy in PIPE Cases,” page 4, NYLJ, Dec. 21, 2007). Mr. Canellos said Judge Stein’s rejection of the SEC’s theory that an investor engages in the unlawful sale of unregistered securities when the investor acquires restricted securities in a PIPE transaction while short-selling the issuer’s publicly traded securities was significant. “The weight of authority is . . . decidedly against the SEC on this legal question,” Mr. Canellos said in an e-mail. Judge Stein did allow to move forward separate claims that the defendants had committed fraud and insider trading by shorting the publicly traded stock of four PIPE issuers while they possessed material, nonpublic information about the corresponding PIPE offerings and in violation of their promises to keep that information confidential. He said the agency had stated “with particularity a plausible claim for the existence of such a duty.” Mr. Lyon and the Gryphon funds are represented by Christopher J. Clark and Kevin R.J. Schroth of Dewey & LeBoeuf. Mr. Clark, who said his clients were “very pleased,” noted that 33 of the allegations in the original complaint have been dismissed and only four remain. Mr. Clark said the unregistered-distribution claims were the “centerpiece” of the commission’s case. “The vast majority of monetary damages being sought have been thrown out,” he said. Scott W. Friestad, an associate director of the SEC’s division of enforcement who is involved in the case, said the agency is reviewing the decision to determine how to proceed with regard to the dismissed claims. “In the meantime, we are pleased that the judge confirmed our right to proceed with respect to the more serious fraud and insider-trading claims,” Mr. Friestad said. – Beth Bar can be reached at [email protected] .

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