MINNETONKA, Minn. (HedgeWorld.com)–Deephaven Capital Management and one of its former employees have consented to Securities and Exchange Commission charges stemming from short selling within 19 different PIPE deals.

Private investment in public equity has been popular in recent years among hedge funds as a way to gain access to securities at a discount to the market price before the offering of shares is publicly announced. Hedge fund activity in the PIPE markets has been the subject of SEC scrutiny for the last couple of years.

The SEC alleges that Deephaven and Bruce Lieberman, acting as Deephaven’s director of private placements, between Aug. 2001 and March 2004 short-sold securities linked to PIPE agreements before those deals were announced to the public.

Deephaven and Mr. Lieberman, who left the firm in January 2005, both consented to the charges of insider trading without admitting or denying the SEC’s allegations.

The over $3 billion hedge fund firm agreed to pay $5.7 million in disgorgement, prejudgment interest and civil penalties. Lieberman has been barred from associating with any investment adviser for at least three years and was fined $110,000 for his involvement.

The PIPE offerings were part of short sales executed in the Deephaven Small Cap Growth Fund LLC, which is a sub-fund to the Deephaven Market Neutral Fund. The PIPEs included securities of Dave & Buster’s Inc., Overland Storage Inc., and Factory 2-U Stores Inc.

Short selling in advance of public PIPE announcements has been an ongoing source of concern at the SEC. In March, the U.S. regulator charged New York-based hedge fund firm Langley Partners with profiting from illegal short sales linked with PIPE agreements.

A Deephaven spokesman said, “We are pleased to have resolved this matter and remain focused on delivering strong returns for our investors.”


Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.