I have come across Socius before in the UK market as they were...

I have come across Socius before in the UK market as they were creditors of ANGM as is teetered on the edge of insolvency and administration.

I wondered why would the name of Socius always crop up in relation to so many similar firms i.e. distressed and deeply indebted.

Then I came across this :-

http://www.zamansky.com/cases/zamansky-investigates-cell-therapeutics-for-breaches-of-duties-to-shareholders.html

"Seeking Alpha has raised questions concerning CTIC’s private financing deal with Socius Capital, its CEO compensation and current financing activities."

The original Seeking Alpha article is here :-

http://seekingalpha.com/article/1070571-ctic-strong-sell-therapeutics

No Cure for Chronic PIPE Syndrome

CTIC's stock price decline can be traced to the terms of a recent financing. An examination of the deal reveals the "you scratch my back and I'll scratch yours" relationship between CTIC and a hedge fund known as Socius Capital. Over the summer, CTIC announced a private placement deal, known on Wall Street as a "PIPE," which was structured as a riskless transaction for Socius Capital, the principals of which are a convicted criminal and legendary stock promoter.

The offering consisted of $40,000,000 of preferred stock, convertible to 40,000,000 shares of common stock, and over 25,000,000 5-year warrants to purchase shares of the company, according to company filings.

While this deal may have appeared benign, there was a toxic feature in the warrants' fine print. According to the warrant agreement, in section 5, if any of the warrants are out-of-the-money, meaning CTIC's market price is below the exercise price of the warrant, Socius Capital can exchange the warrants for shares of common stock or cash, equal to the "Black-Scholes Exchange Value" of the warrant. The formula for the "Black-Scholes Exchange Value" was made up for this deal, and rigged to make sure that the warrants are always worth a lot of money. The formula, buried in section 17(b), uses an expected volatility of 135%, more than double any reasonable estimate at the time as illustrated below, and a time value of five years, regardless of the actual time to expiration.

Putting substance over form, CTIC and Socius Capital gave the market the impression that they had priced a good deal near the market price of the stock at the time, but in reality Socius Capital's cost basis was much lower. If CTIC's stock went up, Socius Capital made money from the appreciation of the value of the warrant, and if CTIC's stock price went down, CTIC would send more shares or simply wire money back to Socius Capital.

Allowing the warrant to be exchangeable for stock or cash virtually guaranteed Socius Capital would make money, always at the expense of CTIC and its common stock investors. The PIPE deal, by its design, put significant downward pressure on the stock, so much pressure that the company had to effect a 1:5 reverse split to regain compliance with NASDAQ's minimum bid price rule.