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Regulation and Compliance > Federal Regulation > SEC

SEC Settles Hedge Fund PIPE Case

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WASHINGTON (–Jeffrey Thorp allegedly realized more than US$7 million in ill-gotten gains through illegal trading of private investment in public equity deals.

Mr. Thorp managed three New York-based hedge funds–Langley Partners LP, North Olmsted Partners LP, and Quantico Partners LP–that profited from the short selling of PIPE securities in the United States and Canada from 2000 through 2002, according to a complaint released by the Securities and Exchange Commission this week on the same day, March 14, it announced a settlement with Mr. Thorp.

As part of the settlement, Langley Partners will pay back US$8.8 million in illegal gains and pre-judgment interest. Mr. Thorp didn’t admit or deny the commission’s allegations. The final judgment ordered him to pay US$2.3 million in civil penalties.

At one time it is thought that the SEC had as many as nine ongoing PIPE-related hedge fund investigations. Although published reports last year indicated at least four high-profile firms were subject to regulatory scrutiny, only one other high-profile case has come to an end–that of Hilary L. Shane, who settled with the NASD and SEC over insider trading allegations stemming from a PIPE deal with CompuDyne Corp.

PIPEs have long been seen as an easy way for hedge funds to make quick profits by short selling the PIPE shares before the securities are available for resale. Taking large sums of PIPE equity, the offending hedge fund managers are thought to have covered their short position using the actual equity received in the PIPE deal.

In the case of Langley Partners, Mr. Thorp invested US$1.1 million in a PIPE offering from MGI Pharma, receiving 100,000 restricted shares at US$11 per share (a discount of 15% from the market price which is typical for a PIPE investment). Once the stock was freed up for resale, Mr. Thorp executed a “naked” short sale through a Canadian broker-dealer not named in the SEC complaint. The hedge fund recorded a net profit of US$235,500.

The commission said that on seven occasions Mr. Thorp was guilty of insider trading by selling the securities of PIPE issuers on the basis of material non-public information prior to the public announcement of the PIPEs.

Contact Bob Keane with questions or comments at [email protected].


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