HEDGE FUND THAT SHORTED STOCK AHEAD OF PIPE SUED FOR INSIDER TRADING

The SEC has filed a lawsuit against a hedge fund and its manager for insider trading in connection with engaging in a short sale based on confidential knowledge of an upcoming PIPE transaction. The fund’s manager learned of the PIPE from the placement agent. The fund manager agreed to keep the information confidential and acknowledged that he had received material nonpublic information. The fund manager presented the information to the fund which then shorted the underlying securities in advance of the PIPE offering.

OUR TAKE: The SEC has taken several actions against defendants who attempt to illegally profit from PIPE transactions, usually alleging violations of Regulation M. In this case, perhaps because the defendant was neither a broker-dealer nor a registered investment adviser, the SEC used the insider trading argument. This case demonstrates the SEC’s aggressiveness in preventing market manipulation especially by hedge fund managers. It also shows the SEC’s jurisdictional reach even to unregistered entities.

http://www.sec.gov/litigation/complaints/2008/comp20784.pdf