U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19942 / December 12, 2006

SEC v. Edwin Buchanan Lyon, IV, Gryphon Master Fund, L.P., Gryphon Partners, L.P., Gryphon Partners (QP), L.P., Gryphon Offshore Fund, Ltd., Gryphon Management Partners, L.P., Gryphon Management Partners III, L.P., and Gryphon Advisors, L.L.C, Civil Action No. 06 CV 14338

SEC Files Fraud Charges Against Hedge Fund Manager Edwin "Bucky" Lyon, IV and the Gryphon Hedge Funds for Engaging in Illegal "Pipe" Trading Scheme

The Securities and Exchange Commission filed securities fraud and related charges today against Edwin "Bucky" Lyon, IV, Gryphon Master Fund, L.P., Gryphon Partners, L.P., Gryphon Partners (QP), L.P., Gryphon Offshore Fund, Ltd., Gryphon Management Partners, L.P., Gryphon Management Partners III, L.P., and Gryphon Advisors, L.L.C. (collectively, "Gryphon Partners") in the U.S. District Court for the Southern District of New York. The Commission's complaint alleges that the defendants collectively perpetrated an illegal trading scheme to evade the registration requirements of the federal securities laws in connection with at least thirty-five unregistered securities offerings, which are commonly referred to as "PIPEs" (Private Investments in Public Equities), made materially false representations to the PIPE issuers, and engaged in illegal insider trading.

The Commission's complaint alleges that, during the period 2001 through 2004, Lyon implemented an unlawful trading scheme that enabled Gryphon Partners to improperly realize more than $6.5 million in ill-gotten gains by investing in PIPE offerings without incurring market risk. Specifically, the complaint alleges:

  • Lyon and Gryphon Partners, after agreeing to invest in a PIPE transaction, sold short the issuer's stock, frequently through "naked" short sales in Canada. Once the Commission declared the resale registration statement effective, Lyon and Gryphon Partners used the PIPE shares to cover the short positions ? a practice prohibited by the registration provisions of the federal securities laws.
     
  • To avoid detection and regulatory scrutiny, Lyon and Gryphon Partners employed a variety of deceptive trading techniques, including wash sales, matched orders, and pre-arranged trades, to make it appear that they were covering their short sales with open market shares, when, in fact, Lyon and Gryphon Partners were on both sides of the transactions and were covering with their PIPE shares.
     
  • In each of the transactions, Lyon and Gryphon Partners made materially false representations to the PIPE issuers to induce them to sell securities to Gryphon Partners. As a precondition of participation in a PIPE, Lyon and Gryphon Partners had to represent that they would not sell, transfer or dispose of the PIPE shares other than in compliance with the registration provisions of the Securities Act of 1933. This representation was material to the PIPE issuers, who, as the stock purchase agreements made clear, relied on the investors' representations in order to qualify for an exemption from the registration requirements for their private offering. At the time defendants signed the securities purchase agreements, however, they intended to distribute the restricted PIPE securities in violation of the registration provisions of the Securities Act.
     
  • On at least four occasions, Lyon and Gryphon Partners engaged in illegal insider trading by selling short the securities of certain PIPE issuers prior to the public announcement of the PIPE, while using nonpublic information they received when being solicited to invest in the PIPE. Lyon and Gryphon Partners engaged in this conduct notwithstanding their agreement to keep information about the PIPE confidential and/or to refrain from trading prior to the public announcement of the PIPE. Although Lyon and Gryphon Partners received legal advice advising them not to trade prior to the public announcement of PIPE offerings, they disregarded this advice and continued to do so anyway.

By engaging in the foregoing conduct, the complaint alleges that defendants violated the registration provisions of the Securities Act (Sections 5(a), 5(b), and 5(c)) and the antifraud provisions of both the Securities Act (Section 17(a)) and the Securities Exchange Act of 1934 (Section 10(b) and Rule 10b-5, thereunder). The Commission's complaint seeks to permanently enjoin defendants from future violations of the applicable provisions of the federal securities laws, disgorgement of ill-gotten gains (with prejudgment interest thereon) and civil penalties.

The Commission acknowledges the assistance of the Investment Dealers Association of Canada. The Commission's investigation is continuing.

SEC Complaint in this matter