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Hedge funds used deceit, suit says: Cyberlux claims millions were lost(News & Observer, The (Raleigh, NC) (KRT) Via Thomson Dialog NewsEdge) Sep. 6--A small Triangle company has accused a group of hedge funds of scheming to manipulate its stock for profit. Cyberlux, a Research Triangle Park company that designs and makes lighting, has sued the hedge funds, alleging fraud, securities violations and breach of contract, among other claims. The lawsuit was filed in federal court in New York. According to the lawsuit, the scheme resulted in Cyberlux losing hundreds of millions of shares of its stock that currently are worth nearly $2 million. Cyberlux, whose shares are traded over the counter, has 507 million shares outstanding. The "predatory and illegal trading scheme," according to the lawsuit, also "has forced Cyberlux's stock price to fluctuate dramatically and to ultimately decrease, causing serious erosion of the equity value of Cyberlux in an amount to be determined at trial." "Additionally, defendants' unlawful actions have caused Cyberlux to experience or will cause Cyberlux to experience greater difficulty in securing financing or issuing any debt or equity offerings," the suit states. The lawsuit seeks monetary damages and aims to stop further action by the defendants, which are four hedge funds that share a corporate parent, NIR Group of Roslyn, N.Y. Its executives could not be reached for comment. The lawsuit claims that the hedge funds lent money to Cyberlux, in the form of notes that were convertible to common stock, in transactions that began in September of 2004 and continued through July. The conversion price fluctuated with the stock price -- the lower the stock price, the lower the conversion price. Also, the lower the share price, the more shares the hedge funds would be issued. Such agreements are known as "death spiral convertibles" and are usually issued by small companies that urgently need cash. The suit claims the defendants manipulated Cyberlux stock by selling the shares short as soon as the notes were converted into stock -- that is, borrowing shares from a broker with an agreement to later buy the shares back at the prevailing price. Selling a stock short enables investors to profit when the share price falls. That maneuver triggered a "precipitous drop" in Cyberlux's stock price, which lowered the conversion price the defendants had to pay for their stock and led Cyberlux to issue more shares to the defendants than it would have otherwise, the lawsuit claims. The hedge funds had said in loan agreements that they would not get involved in short selling Cyberlux stock, the suit says. The suit also accuses them of violating restrictions in the loan agreements that limited the amount of shares they could convert. Cyberlux's attorney, Ernest E. Badway of New York, said neither he nor the company had any comment on the case. Cyberlux shares, which fetched 5 cents a year ago, closed at not quite six-tenths of a cent Wednesday. The company, which was incorporated in 2000, posted a loss of $12.2 million in the first half of this year. Revenue totaled $223,355 during that period, up from $130,226 a year earlier. The company announced last month that because of increased demand for its product, it expects to generate $3.7 million in revenue this year and to start generating positive cash flow. Staff writer David Ranii can be reached at 829-4877 or [email protected]. To see more of The News & Observer, or to subscribe to the newspaper, go to http://www.newsobserver.com. Copyright (c) 2007, The News & Observer, Raleigh, N.C. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |