Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, September 15, 2010

Hedge Fund Manager Liable for Misrepresentations in PIPES Offerings

A federal court on September 13, 2010 found hedge fund manager Robert A. Berlacher, along with several of his investment advisory entities and various hedge funds he managed, liable for securities fraud in connection with the funds' PIPE investments. In the SEC enforcement action, the Court ordered the defendants to pay, jointly and severally, $352,363.68 in disgorgement.

According to the SEC's complaint, Berlacher - and his investment advisory entities (LIP Advisors, LLC, NCP Advisors, LLC, and RAB Investment Company, LLC) and the hedge funds he managed (Lancaster Investment Partners, L.P., Northwood Capital Partners, L.P., Cabernet Partners, L.P., Chardonnay Partners, L.P., Insignia Partners, L.P., and VFT Special Ventures, Ltd.) — made materially false representations to issuers in connection with two unregistered securities offerings that are commonly referred to as "PIPEs" (private investments in public equities).

In connection with the February 2004 Radyne ComStream, Inc. ("Radyne") PIPE, the Court found that Berlacher misrepresented in the securities purchase agreement that he did not hold a short position, directly or indirectly, in Radyne securities. Contrary to this representation, Berlacher, after learning about the PIPE, had established a "barrier option" position on a "basket" of securities (i.e., a portfolio of underlying assets), one of which included a short position in Radyne securities. Berlacher's "barrier option" on a "basket" of securities was an exotic derivative product that provided him with leverage and gave him the right to the underlying assets.  Similarly, in connection with the May 2004 International Displayworks, Inc. ("IDWK") PIPE, Berlacher misrepresented in the securities purchase agreement that he had not engaged in any transactions in the company's securities when he had in fact, after learning about the PIPE, established a "barrier option" position that included positions in IDWK as part of its underlying "basket" of securities.

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