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U.S. Securities and Exchange Commission


Litigation Release No. 19683 / May 2, 2006

Securities and Exchange Commission v. Deephaven Capital Management, LLC and Bruce Lieberman, Civil Action No. 1:06CV00805 (D.D.C.)


Defendants Agree to Injunction and Payout of $5.8 Million in Penalties and Disgorgement

The Securities and Exchange Commission today filed a civil injunctive action against hedge fund adviser Deephaven Capital Management, LLC and its former portfolio manager Bruce Lieberman, charging them with insider trading from August 2001 to March 2004 on the information that 19 private investment in public equity (PIPE) stock offerings were about to be publicly announced. In each case, the company's stock price fell on the announcement of its PIPE offering. The defendants learned confidential material nonpublic details about the upcoming PIPE offerings from placement agents for the companies and sold short the company shares on behalf of the Deephaven Small Cap Growth Fund, LLC, profiting from the price decline when the PIPE offerings were publicly announced. Short selling includes the practice of selling borrowed shares in the expectation that the price will fall, enabling the seller to then buy and deliver the shares at a lower price.

The Commission's complaint, filed in U.S. District Court for the District of Columbia, alleges that Deephaven and Lieberman violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, antifraud provisions of the federal securities laws. The complaint alleges that:

  • In each of 19 PIPE offerings, a broker-dealer retained by the company as placement agent advised Lieberman or his assistant of the upcoming offering and that the information was confidential nonpublic information. In each case, Deephaven and Lieberman had a duty to maintain the information in confidence and to refrain from trading in the company's shares;
  • In four of the offerings, the placement agent used a written telephone script that alerted Deephaven that knowledge of the PIPE offering was confidential and could be considered material nonpublic information;
  • In one offering, the placement agent cautioned Lieberman's assistant by letter about the obligation under the federal securities laws not to trade in the company's securities while in possession of material nonpublic information. Lieberman was alerted to the confidential nonpublic nature of the information when he signed a securities purchase agreement in which the company characterized the PIPE shares offering as material nonpublic information, yet he shorted the company's stock on 13 different days before public announcement of the PIPE offering; and
  • In two of the PIPE offerings, Lieberman falsely signed a written security purchase agreement expressly warranting that the Small Cap Growth Fund had not shorted the company's stock; he transferred short positions the fund had in fact taken to another Deephaven fund he controlled, in an attempt to hide the short sales in violation of the warranties.

Deephaven and Lieberman have each consented, without admitting or denying the allegations in the complaint, to final judgments permanently enjoining them from violating Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Deephaven also agreed to disgorge $2,683,270 in unlawful profits, plus $343,418 prejudgment interest, and to pay a $2,683,270 civil penalty. Lieberman agreed to pay a $110,000 civil penalty and to a Commission order barring him from associating with any investment adviser, with the right to reapply after three years, in an administrative proceeding to be instituted based on entry of the anticipated final judgment.

SEC Complaint in this matter



Modified: 05/02/2006