The PIPEwire

Securities attorney David Feldman is asking the Securities and Exchange Commission to provide guidance on what he calls the "scarlet letter" for shell companies that was introduced in recent changes to Rule 144 of the Securities Act.

Feldman, partner at Feldman Weinstein & Smith, told PIPEwire that he has submitted a request for interpretive guidance from the SEC on the section 144(i) of the rule change.

Changes to Rule 144, which governs when a holder of restricted securities is allowed to freely trade them, took effect Feb.15. Section 144(i) states that if a company was ever once a shell company, and is not current with its financial filings, then its restricted securities can never be freely traded.

PIPE investors have said that the restriction discourages them from investing in companies that are former shells.

The SEC may not have intended to make the rule retroactive, Feldman said. The commission may issue guidance saying the rule does not apply to companies that ceased to be a shell prior to Feb. 15.

A group of attorneys – Brett Director of Schulte Roth & Zabel, Michael Maline of Goodwin Proctor, and Carol McGee of Alston & Bird – spoke about the subject during a recent online seminar. They agreed that having the rule not be retroactive would be preferable to the current interpretation of the rule, but that an immediate change is unlikely.

"Ultimately this will be changed I think, whether its six months or three years I'm not sure," said Feldman.

Robin Engelson, a managing director in Lazard's middle market group, will head the private placement practice in Lazard's Minneapolis office, the  investment bank announced Monday amid a flurry of new hires.

Lazard also said it hired Robert Frost to the middle market group in its Minneapolis office. Frost was formerly a middle-market advisor in mergers and acquisitions at Piper Jaffray. Lazard also hired Andrew Samett from Bear Stearns, who will focus on the distressed investing and restructuring practice out of New York; Scott Smith from the mergers and acquisitions group at Wachovia Securities, to work out of the Charlotte, N.C. office; and Andrew Torgove as managing director.

Investment bank Maxim Group hired Richard Kreger away from Midtown Partners to lead Maxim's PIPE and registered direct banking practice.

Former Midtown vice president Sal Renzo also went to Maxim, according to Bruce Jordan, president of Midtown.

Jordan said that Kreger's and Renzo's positions have already been filled, and that Midtown has grown to 18 employees this year, compared with 12 in 2007.

Kreger was senior vice president in the investment banking department at Midtown since 2004. Midtown arranged at least 47 PIPEs of $1 million or more for a total of $166 million while Kreger was with the firm.

Midtown is tied for seventh among the most active PIPE placement agents for the first six months of this year, along with Goldman Sachs and Deutsche Bank. Maxim is tied with two other banks as the 13th most active placement agent.

Health care investor Deerfield Management committed $100 million to protein drug maker ZymoGenetics, the company announced today.

ZymoGenetics will use the proceeds to push Recothrom, its blood-clotting drug approved by the FDA in January.

The loan facility comes in the form of non-convertible debt and warrants. A five-year note is priced at 4.9% per year, compounded quarterly. The rate will be increase by 2% per year if ZymoGenetics' cash and cash equivalents are less than $50 million at the end of any applicable quarter.

ZymoGenetics can draw the money in $25 million tranches, each giving Deerfield 2% of Rocothrom's net sales. ZymoGenetics will issue Deerfield 1.5 million warrants exercisable at $10.34 for the first draw, a 27.7% premium to the share price at closing. Deerfield then gets 1 million warrants for each subsequent draw, exercisable at a 25% premium to the average sale price for a previous 15-day period.

All warrants will have a six-year term and the company has agreed to register the common stock issuable under the warrants.

ZymoGenetics's share price went up 4% to close at $8.42 on June 30.

Norwegian oil tanker company Frontline Limited completed a $209.4 million (1.06 billion Norwegian kroner) private placement for the acquisition of five additional boats.

The placement, announced June 25, was made through Frontline's Bermuda holding company, which is listed on the New York Stock Exchange. Frontline has a market cap of $5.3 billion.

Hemen Holding guaranteed the subscription of 2.3 million of the 3 million shares of common stock issued, which were sold at the equivalent of $69.80 per share. Hemen is indirectly controlled by the CEO and largest shareholder of Frontline, John Fredriksen.

The price was a 1.5% discount to Frontline's trading price when the deal closed. The PIPE included no warrants.

Carnegie ASA was the lead manager of the placement. Fearnley Fonds, DnB NOR Markets, and Dahlman Rose & Co. were co-lead managers

Frontline's shares rose $1.07 to $70.87 on June 25 after the deal was announced.

Hedge fund manager Conative Capital Management recently launched CCM Partners Fund to make private placement investments in smaller companies facing special situations.

The fund will focus on sub-$1 billion companies, Conative said in a June 25 statement.

Conative Capital founders Christopher Rossman and Louis Rabman will serve as co-managers. The two co-founded a formerly frequent PIPE investor, Bushido Capital Partners, in 2004. Rossman was chief investment officer and Rabman served as head trader of Bushido until the sale of their interests in the partnership in 2007.

Bushido invested at least $31.1 million in over 65 PIPE deals from 2004 through April 2007, according to data provider PrivateRaise.

Viteos Fund Services announced June 24 it will be developing new software and organizational services specifically for PIPE funds.

Somerset, N.J.-based Viteos serves mainly hedge fund clients in processing deals. Its new service was spawned with the encouragement of four PIPE-focused funds, according to VP of business development Marshall Saffer.

Saffer declined to tell PIPEwire which funds, but said they had their origin in PIPEs, and sought to do a higher volume of deals.

"Essentially, we take care of a lot of the grunt work involved in keeping track on a post-trade basis," said Saffer.

Saffer said that there was a lot of operational risk for funds not capturing triggering events, while many funds have 50 or more deals open at a time. Most funds have been keeping track of deals in Excel, which Saffer believes is not the most efficient tool to store, access and tag all the deals electronically.

"We have one shop that has 100 deals open," he said.   

Viteos takes care of the deal documents; trades; reconciliations; conversions; follows the regulatory requirements and filings; and addresses valuation and FASB 157 requirements specific to PIPEs, according to a release from Viteos. Viteos, in addition to its own "proprietary applications", uses software designed by Paladyne System and Advent Software.

Yorkville Advisors, active PIPE investor and international frontiersmen for private placements, revealed June 24 that Axia Ventures Group is the consultant it has officially started a joint venture with to line up business in Greece and Japan.

Yorkville had told PIPEwire about tentative joint ventures in Greece and Japan as early as February this year, but had not named the cooperating parties nor formalized the plans.

Axia is an alternative investment advisory firm with international ties. Antonios Achilleoudis, managing director of Axia, also has positions at other investment firms that focus on upscale real estate. He is on the management board of Aisi Realty and a non-executive director of Dolphin Capital Partners, an AIM-listed company that invests in residential resorts in south-east Europe.

In a statement, Yorkville founder Mark Angelo said nearly half of Yorkville's investments this year have been in non-US companies, and that trend is continuing.

Pali Capital launched a high-yield desk from its headquarters in New York, the broker-dealer announced June 20.

Chuck Howard left his position as managing director at the high-yield fixed income sales and trading group desk at RBC Capital Markets to take the corresponding position for Pali's new service, according to Pali. Luke Lawrence and David Duong will be directors and Erica Pak will be an associate along with Howard, a company release stated.

Pali is getting into this area to take advantage of conditions of the current market, according to the release.

"The timing for expansion into high-yield/distressed is ideal given the extreme volatility and dislocation in the current market," Howard said in a statement. 

Pali Capital, which offers financial services to institutional investors internationally, has arranged at least 42 PIPEs of $1 million or more since 2001, totaling $314.1 million, according to PrivateRaise. Yet it has brokered only one deal this year, for FLO Corporation. By this time last year, Pali had already facilitated five PIPE transactions.

The Securities and Exchange Commission approved a one-year extension for small companies to comply with an internal-controls audit requirement of the Sarbanes-Oxley Act. 

The audit requirement falls under Section 404 of Sarbanes-Oxley. It requires audits of companies' internal controls over financial reporting. Larger companies have had to comply with 404 since 2004. Smaller companies found the requirement particularly harsh. Under Section 404, companies are required to assess their own internal controls over financial reporting, and get an auditor to sign off on those assessments.

Small companies now do not have to include assessments of internal controls until they file financial reports for their fiscal years ending on or after Dec. 15, 2009. The delay was announced June 20.

The SEC is delaying its implementation in order to collect more data on how well it would work. A new auditing standard, approved in July 2007, was intended to make 404 easier to comply with. Still, SEC Chairman Christopher Cox proposed a one-year delay for smaller public companies in December.

The companies who don't yet have to comply with 404 are those with the lowest 6% of total U.S. equity market capitalization.

Jefferies Group named Alec Ellison as co-head of investment banking. He was previously chairman of the firm's technology, media, and telecommunications investment banking effort.

Jefferies also expanded the management of its Jefferies Randall & Dewey energy investment bank. The firm promoted Ralph Eads III from co-president to chairman of Jefferies Randall. Eads will also serve as co-chairman of Jefferies & Co.

Jefferies named two new co-heads of Jefferies Randall, promoting investment banker David Rockecharlie and hiring Stephen Straty, formerly of Bear Stearns. 

Claire Farley, who had served as co-president of Jefferies Randall with Eads, is leaving, the firm said June 16. Farley is returning to the oil and gas industry, Jefferies said. She will also serve as a consultant and adviser to Jefferies, the firm said. 

Jefferies & Co. has arranged at least 48 PIPEs of $1 million or more for a total of $2.19 billion since 2001, but only facilitated two transactions this year, according to data provider PrivateRaise.  

Jefferies' investment banking revenue declined by $70 million in the first quarter, compared with a year earlier. That contributed to a net loss of $60.5 million, compared with a profit of $62.3 million in the year-earlier quarter.

Answers Corp. announced June 17 that it would issue $6 million in convertible preferred stock to investors including Redpoint Ventures, a venture capital firm whose last PIPE was in 2004 to Intermix Media. InterMix then owned social-networking website Myspace.com.

Intermix subsequently sold to News Corp. for $580 million.

The PIPE to Answers includes an option for investors to purchase $7 million more convertible preferred stock.

The deal comes after a costly failed acquisition by Answers in the first quarter.

Redpoint, based in Menlo Park, Calif., will appoint partner Allen Beasley to Answers' board of directors, and will be able to appoint a second director if the firm exercises further purchase warrants.

Answers, creator of the general-inquiry website Answers.com and owner of WikiAnswers.com, reported a fist-quarter net loss of $3.67 million, compared with a year-earlier loss of just $303,000. The larger recent quarter's loss mostly stemmed from the canceled acquisition of Lexico Publishing Group, which resulted in an operations charge of $2.54 million.

Answers' definitive agreement with Redpoint calls for Answers.com to issue preferred stock, convertible into 1.33 million shares of common stock at $4.50 each. That was a 15% premium to where Answers traded at the time of the announcement. Answers must file a registration statement with the SEC upon conversion.

The deal includes nearly 200% warrant coverage with warrants to purchase 666,667 shares of common stock exercisable at $4.95, and preferred stock convertible into a 1.27 million common shares at $5.50 each. The transaction also includes warrants exercisable upon the conversion of the convertible stock for 636,364 more shares at $6.05 each.

Thomas Weisel Partners acted as lead-placement agent and Canaccord Adams acted as co-placement agent.

The British Financial Services Authority said it will demand disclosure of "significant" short positions in U.K. companies doing rights issues.

The FSA said in a June 13 announcement that in current market conditions, there is greater potential for market abuse through short selling during rights issues.

Rights issues give existing shareholders the right to buy new shares. Shares are offered in proportion to their current shareholding.

Short selling during rights offerings, the FSA argues, can be "prejudicial to the interests of small investors."

"We consider that, in the first instance, improving transparency of significant short selling in such shares would be a good means of preventing the potential for abuse," the FSA said in a statement. "In these circumstances non-disclosure of significant short positions gives the market a false and misleading impression of supply and demand in the securities concerned."

The new rule will take effect June 20, the FSA said. It is defining a significant short position as a quarter percent of the issued shares. Short sellers will have to report their position to the Regulatory Information Service by 3:30 p.m. the following business day.

The FSA is also considering other rules to curb abusive short selling. Those include restrictions on the lending of securities meant to enable short selling, and restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.

The one exemption to the new rule is for market makers.  

Partners and affiliates of securities law firm Gottbetter & Partners have started a registered broker-dealer, Gottbetter Capital Markets, to take part in PIPEs and alternative public offerings, according to managing partner Adam Gottbetter.

The Gottbetter law firm is an active counsel to issuers of PIPEs, having provided legal services in 24 transactions of $1 million or more, totaling $202.3 million, according to PrivateRaise. That includes four this year. Gottbetter & Partners has also advised investors in 14 deals, but has not represented an investor in a PIPE transaction since February 2007.

Gottbetter also runs a fund that invested in PIPEs. Gottbetter Capital invested in at least 13 deals totaling $29.2 million from May 2006 through May 2007, according to PrivateRaise. Gottbetter said that the fund is still in place, and the broker-dealer is going to be the third leg of its business.

"We decided to add that as a third leg of our business, because we were giving a lot of business to placement agents in APOs [alternative public offerings], and this was an opportunity for us to participate in deals which we're running anyway," he said.

Gottbetter Capital Markets was formed in November, according to Financial Industry Regulatory Authority records. Georgi Anne Michelle is listed as president, financial principal and chief compliance officer of the brokerage, while Paul Gottbetter, Adam's father and the other current partner of Gottbetter & Partners, is listed as a partial owner.

Gottbetter said that FINRA approved it for business in March, and the brokerage has since provided services for clients including Kentucky USA Energy, which completed a $2.5 million PIPE of senior secured convertible notes and warrants on May 29; and a small capital raise for George Foreman Enterprises. Gottbetter was also legal counsel in those transactions.

California National Bank's parent company FBOP Corp. will acquire PFF Bancorp and loan it $7 million through a PIPE structure, PFF said on June 16. On the same day, PFF cancelled the $460 million PIPE that it had announced June 5 that it would have used to strengthen its capital levels. FBOP was not an investor in the previously announced transaction, according to a PFF employee familiar with the situation.

Stockholders of PFF, the holding company for Rancho Cucamonga, Calif.-based PFF Bank & Trust, will receive $1.35 for each share of PFF Bancorp common stock held. The stock closed at $1.18 on June 13, the last trading day before the announcement. PFF's share price has dropped 90% this year.

FBOP is loaning the $7 million to PFF in exchange for a secured note convertible into preferred stock with voting rights over 19.9% of the outstanding voting stock. Also, FBOP extended the term of a secured commercial bank loan to PFF, which still has an outstanding balance of $44 million, by an additional year to June 16, 2009.

Sandler O'Neill + Partners advised PFF in the transaction, and provided a fairness opinion. The merger needs to be approved by PFF's stockholders, and is expected to be complete by the end of September.

Wachtell, Lipton, Rosen & Katz and Paul, Hastings, Janofsky & Walker are legal counsel for PFF. PFF also asked for a 15-day extension of the deadline to file its 10-K, and expects to report a net loss of $204 million for the first quarter, the company said in a statement.

Canaccord Adams promoted investment banking head Jamie Brown to president. He replaced Kevin Dunn, who will remain with Canaccord as vice chairman of U.S. operations, the U.S.- and Canada-based broker-dealer said in a June 11 statement.

Brown previously led corporate finance activities, including PIPEs, in Vancouver. He is also on the National Advisory Committee for the TSX Group Venture Exchange.

Canaccord has been the most active PIPE placement agent this year through June 12. Including PIPEs done by foreign-based companies that trade on the Pink Sheets, Canaccord has arranged at least 21 placements of $1 million or more, for a total of $575.2 million. That number is less than half the number of deals that Canaccord arranged over the same period in 2007.

Holland & Knight announced on June 9 that Christopher DeLise joined the firm as senior counsel in its corporate, and mergers and acquisitions group. DeLise, a corporate and securities attorney for private equity funds, hedge funds and companies, was previously an associate in the Chicago office of DLA Piper.

Holland has been issuer counsel in at least 40 PIPE transactions of $1 million or more for a total of $455.6 million since 2001, according to PrivateRaise.

Billionaires Carl Icahn and Robert Rowling will take additional discounted shares of Guaranty Financial Group as it raises capital before real estate loan-related charge-offs. 

Austin, Texas-based Guaranty, the holding company for Guaranty Bank, announced an agreement on Saturday, June 7, to issue $286.6 million in convertible preferred stock to current shareholders, with a "significant" amount going to funds controlled by the two Forbes top-50 wealthiest men in the world.

This was in addition to a concurrent agreement for Guaranty to issue $275 million in subordinated debt. The bank also said May 30 that it would raise $38.4 million in a common stock PIPE to Rowling's TRT Holdings.

Funds managed by Icahn, through Icahn Associates, and Rowling through TRT, agreed to purchase convertible preferred shares paying a 14% dividend. Upon shareholder approval, the stock will be convertible at $5.17 per share, a 14% discount to Guaranty's share price at the time of the agreement. The dividend could increase by 2% every six months if the bank doesn't get shareholder approval to convert the preferred shares, up to a maximum of 18%.

Funds controlled by Icahn already held more than 9.97% of Guaranty's common stock, according to a January filing with the Securities and Exchange Commission. Upon conversion, TRT will hold 19.9% of the common shares.

For the first quarter, Guaranty recorded $58 million in provisions for credit losses, compared with a $2 million credit in the first quarter of 2007.

The bank said in an SEC filing that this is due to significant "declines in the financial condition and liquidity of our homebuilder portfolio customers, as a result of current residential housing conditions." 

On the horizon, "It is likely we will record significant charge-offs when we acquire collateral on those loans," the filing stated.

Guaranty granted both demand and piggy-back registration rights.

Keefe, Bruyette & Woods acted as placement agent for a $10.2 million fee.

Powell Goldstein acted as legal counsel to investors, while Fulbright & Jaworski provided legal advice to Guaranty.

New York-based corporate law firm Gottbetter & Partners recently hired attorneys Paul Levites and Barrett DiPaolo.

Levites was previously with Perkins, Smith & Cohen. DiPaolo was formerly an associate with Dewey Ballantine.

Levites has securities law experience with both public and private companies, including foreign private issuers, according to a brief biography on Gottbetter's website. DiPaolo has experience in placement of debt and equity for public and private companies, as well as a bachelor's degree in classical languages from Harvard.

Gottbetter is an active counsel to PIPE-issuing companies. The firm has advised on 24 PIPE transactions of $1 million or more, totaling $202.3 million, according to data provider PrivateRaise. That includes four this year. Gottbetter has also advised investors in 14 deals, but has not represented an investor in a PIPE transaction since February 2007.

Gottbetter partner Adam Gottbetter also led a fund that invested in PIPEs. Gottbetter Capital invested in at least 13 deals totaling $29.2 million from May 2006 to May 2007.

Lowenstein Sandler hired venture capital and corporate lawyer Lawrence Spector to its tech group in its New York office.

The May 28 announcement comes after other hirings and expansions. Yet the firm has reduced its activity significantly as investor counsel for PIPE transactions, according to data provider PrivateRaise. In 2007, Lowenstein was the third most active PIPE investor counsel. This year through June 6, the firm has only provided legal counsel in two transactions for investors.

Spector comes from Fulbright & Jaworski, a firm that has been issuer counsel in at least 29 PIPEs of $1 million or more since 2001, according to PrivateRaise. He was hired two weeks after Lowenstein announced the opening of a Silicon Valley office led by Kathi Rawnsley. She was previously general counsel for Intel Capital. In November, Lowenstein opened a Boston office.

Steven Siesser, chairman of the firm's Specialty Finance Group, told PIPEwire that Lowenstein isn't moving away from PIPEs, but that there is a lot of "price discovery" going on in the market.

Correction: An earlier version of this item misstated Lawrence Spector's name in the third paragraph.