Growth Strategies

Six Accused in PIPE Scheme

The SEC alleges an elaborate cover-up of short sellers’ control over two companies and $55 million in illegal profits.
Stephen TaubOctober 23, 2007

The Securities and Exchange Commission has charged two short sellers and four corporate insiders with running an illegal scheme using PIPEs, or private investments in public equity.

The short sellers, Zev Saltsman and Menachem Eitan, were accused along with Edward Newman and Steven Newman, former officers and directors of Xybernaut Corp.; Martin Weisberg, a former director of Xybernaut and outside counsel to Xybernaut and Ramp Corp.; and Ramp’s former CEO, Andrew Brown.

The SEC alleged that the six participated in a scheme to conceal Saltsman’s and Eitan’s control over Ramp and Xybernaut. According to the complaint, Saltsman and Eitan, through 34 nominees, invested $88 million in PIPE transactions of Xybernaut and Ramp between 2001 and 2004.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

During that period, Xybernaut issued 123 million shares of common stock to 21 nominees of Saltsman and Eitan in return for $67 million in PIPE financing. And between December 2002 and November 2004, Ramp issued 161 million shares of common stock to 13 nominees of the two short sellers in exchange for $21 million in PIPE financing.

According to the SEC, Xybernaut and Ramp filed 18 registration statements registering the resale of those shares. The regulator asserted that those filings were misleading because, among other things, they created the impression that the investors were independent from one another and controlled by persons other than Saltsman and Eitan.

Those two profited by executing short sales and covering those positions with newly issued PIPE shares in violation of registration rules, the commission charged, adding that they often executed wash sales between their various nominee accounts in order to disguise the violations. The total amount of illegal profits they reaped was put at about $55 million.

The complaint also alleges that Saltsman and Eitan paid officers and directors of Ramp and Xybernaut to ensure access to future PIPE deals and maintain control over the companies. The two companies never disclosed those payments in regulatory filings.

Brown, Weisberg, and the two Newmans “provided valuable assistance” to the short sellers in the scheme, including transferring a total of 1.1 million shares of their own Xybernaut stock to Saltsman and Eitan to allow the pair to cover existing short positions in Xybernaut, the SEC said.

Weisberg allegedly lied to the commission in 2003 about sales of securities to Saltsman and Eitan, while Brown, Weisberg, and the Newmans were said to have concealed the short sellers’ control over the PIPE investments and the nominees.

The SEC is seeking disgorgement of illegally obtained gains, civil penalties, and officer and director bars against Weisberg, both Newmans, and Brown.

4 Powerful Communication Strategies for Your Next Board Meeting