U.S. Securities and Exchange Commission
Litigation Release No. 18003 / February 27, 2003
Rhino Advisors and Thomas Badian Settle Claims and Agree to Pay Jointly a $1 Million Penalty
SEC v. Rhino Advisors, Inc. and Thomas Badian, Civ. Action. No. 03 civ 1310 (RO) (Southern District of New York)
On February 27, 2003, the Commission filed a settled, civil action against Rhino Advisors, Inc. ("Rhino") and its president, Thomas Badian ("Badian"), for directing a series of manipulative short sales of Sedona Corporation stock that contributed to the decline in the price of Sedona's stock. Rhino, based in New York, NY, manages money for two overseas clients.
The Commission alleges that Rhino and Badian manipulated Sedona's stock price to enhance a client's economic interests in a $3 million convertible debenture (the "Debenture") that Sedona issued to Rhino's client. The Debenture, negotiated by Badian, obligated Sedona to pay the client $3 million on March 22, 2001. The Debenture granted the client the right to convert the Debenture into Sedona common stock at a discount to the market price during a five-day period prior to the conversion. Based on this formula, the lower Sedona's stock price, the more shares the client would receive on conversion.
The purchase agreement for the Debenture expressly prohibited Rhino's client from selling short shares of Sedona's stock while the Debenture remained "issued and outstanding." The Commission alleges that, despite this contractual provision, Rhino engaged in extensive short selling on behalf of its client prior to exercising the conversion rights under the Debenture and that this short selling depressed Sedona's stock price. According to the Commission, as a result of the depressed stock price, Rhino's client received more shares from Sedona when it exercised its conversion rights under the Debenture than it otherwise would have received. The Commission alleges that, following the conversions, Rhino engaged in wash sales and matched orders to cover the short positions and conceal the client's involvement in the scheme.
Without admitting or denying the allegations in the SEC's complaint, Rhino and Badian have consented to the entry of an injunction for violations of the anti-fraud provisions of the federal securities laws, specifically Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Rhino and Badian have consented to pay, on a joint and several basis, a $1,000,000 civil penalty. In addition, Rhino has agreed to respond to an order directed to it by the Commission pursuant to Section 21(a) of the Securities Exchange Act of 1934 and to hire an Independent Consultant, acceptable to the Commission, to review its compliance policies and procedures and to implement the Independent Consultant's recommendation. The settlement terms are subject to court approval.