Was SEC slow to probe NIR Group?

July 25, 2009

The Securities and Exchange Commission is joining the hunt into just what is going on at NIR Group, a Roslyn, NY small-cap focused hedge fund run by Corey Ribotsky.

The Wall Street Journal reports today that the SEC has sent a subpoena to NIR, seeking information about the stellar returns Ribotsky had reported to investors throughout much of 2008. It appears the SEC wants to know why Ribotsky suddenly froze redemptions in his fund last October, in the wake of Lehman’s demise, if the fund had been doing so well.

The Journal is late to the NIR story. Dealbreaker contributor Teri Buhl has been on this story for a while and gets kudos for pushing it forward. Forbes also was early in reporting on investor suits against NIR.

At this point, it’s not clear where this story will go. NIR investors have been grumbling about Ribotsky’s funds, which claim to manage some $700 million in assets, for a while now. It’s possible the SEC investigation is merely a response to some disgruntled investors.

But what’s surprising to me is why the SEC is just looking into the NIR funds now, given that it has been a dominant player in so-called “death spiral” convertible market. These securities have gotten a bad rap over the years because they include a trigger that permits bonds to be converted into common shares whenever there is a precipitous drop in the prices of a company’s stock.

Back in 2004, the SEC launched a sweeping probe into the market for these and other so-called PIPEs–private investments in public equity. Most PIPEs are a form of a convertible bond, mainly sold by small-cap companies, with terms highly favorable to hedge fund investors.

The shorts love PIPEs because the flood of stock in these highly-illiquid small cap companies invariably pushes the share prices lower. Not surprisingly, death spirals are real popular with short sellers.

The SEC probe led to a number of actions against hedge funds charged with improper short selling. Many of the hedge funds nabbed by the SEC were found to be shorting companies doing PIPES in advance of the offering–in effect trying to game the deal.

When I worked at TheStreet.com I did a lot of reporting on PIPE abuses and the SEC investigation. NIR was never charged with any wrongoing by the SEC during that long-running investigation. And it’s very well possible that NIR did nothing wrong in the death spirals it invested in–just as it is possible Ribotsky’s firm has done nothing improper this time around either.

But in 2006, I wrote a story for TheStreet.com about the surprising return of the death spiral, and in it I noted that NIR was one of the biggest players in this kind of PIPE deal. Back then I reported that there were no allegations of wrongdoing by NIR, but the firm did report having “some stellar annual returns.”

If Ribotsky is found to have done something wrong this time around, it makes you wonder whether the SEC missed an opportunity three years ago to take a hard look at his operation.

Oh, btw, back in 2006, NIR claimed to have $486 million in assets under management.

UPDATE: SEC, if you need some help, get a full copy of this October story from Opalesque, which had an exclusive interview with Ribotsky discussing his funds and the “small number of redemption” requests he had gotten from investors.

UPDATE 2.0: Here’s some irony: In May, Ribotsky set-up a trade group to help burnish the image of PIPE hedge funds. It looks like Ribotsky may need more than image consultant.

One comment

Comments are closed.