U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19639 / April 4, 2006
SEC v. Andreas Badian, Jacob Spinner, Mottes Drillman, Jeffrey Graham, Pond Securities Corp. d/b/a Pond Equities, Ezra Birnbaum and Shaye Hirsch, Civ. Action. No.06 CV 2621 (Southern District of New York)
SEC Charges Four Securities Industry Professionals and a Brokerage Firm With Fraud for Engaging in Manipulative Short Selling
On April 4, 2006, the Securities and Exchange Commission filed a civil action in the United States District Court for the Southern District of New York charging Andreas Badian, Jacob Spinner, Mottes Drillman, Jeffrey "Danny" Graham and Pond Securities Corp. (doing business as "Pond Equities") with fraud and other securities violations in connection with manipulative short selling of the stock of Sedona Corporation. In addition, the Commission charged Pond and two of its principals, Ezra Birnbaum and Shaye Hirsch, with failure to supervise Spinner and Drillman.
The Commission alleges that Badian, acting for an unregistered investment adviser, used short selling to manipulate Sedona's stock price downward to enhance a client's economic interest in an agreement with Sedona. Under the agreement, the client loaned Sedona $2.5 million dollars in consideration for Sedona's promise to pay the client $3 million approximately four months later. The agreement permitted the client to convert Sedona's debt into Sedona common stock at a discount to the market price during a five-day period prior to the conversion. Based on the formula, the lower Sedona's stock price, the more shares the client would receive on conversion. To preclude the client from manipulating Sedona's share price, the agreement prohibited the client from short selling Sedona's stock.
Despite the prohibition against short selling, traders Spinner, Drillman and Graham, at Badian's direction, engaged in extensive short selling of Sedona through an account Spinner and Drillman controlled at Pond Equities and accounts at another brokerage firm. As Badian and the traders intended, the short selling depressed Sedona's stock price. As a result, Badian's client received more shares from Sedona when it exercised its conversion rights under the agreement. This operated as a fraud on Sedona and on the market for Sedona's shares.
The Commission alleges that Pond Equities violated the anti-fraud and certain record-keeping requirements of the federal securities laws in connection with its trading in Sedona. Defendant Ezra Birnbaum, Pond's president, and Defendants Pond and Shaye Hirsch, Pond's compliance officer, failed to adequately supervise Spinner and Drillman.
The Commission seeks an order permanently enjoining Badian, Spinner, Drillman, Graham and Pond from further violations of the antifraud provisions of the federal securities laws as well as other violations. The Commission also seeks an order permanently enjoining Pond, Birnbaum and Hirsch from further failures to supervise. The Commission also seeks civil monetary penalties and disgorgement of any ill-gotten gains.
The Commission acknowledges the assistance of NASD in the investigation of this matter.