Three New York Hedge Funds
Settle Charges Tied to Trading
By KARA SCANNELL
March 15, 2006; Page C4
WASHINGTON -- Securities regulators filed and settled charges against three New York hedge funds and their portfolio manager for allegedly engaging in a deceptive trading strategy involving insider trading, unregistered stock transactions and "naked" short sales.
Langley Partners LP, North Olmsted Partners LP and Quantico Partners LP, along with their portfolio manager, Jeffrey Thorp, agreed to pay $15.8 million in disgorgement and penalties to settle, without admitting or denying wrongdoing, insider-trading charges and allegations of trading unregistered securities of 23 companies.
Andrew Gordon, a lawyer representing Mr. Thorp and the hedge funds, didn't return a phone call seeking comment.
The allegations come amid heightened attention to hedge funds and their trading practices by regulators and are part of a broader Securities and Exchange Commission probe into improper trading in the private-issuer market, where companies raise money through a type of unregistered security known as a Private Investment in Public Equity, or PIPE.
"This case is an example of our ongoing effort to stamp out fraud and other trading abuses by investors in the PIPEs market," said Scott Friestad, an associate director in the SEC's division of enforcement. "We have devoted substantial resources to these investigations and will continue to do so." Hedge funds, lightly regulated investment pools that invest money for wealthy investors and institutions, are among the most active investors in the PIPEs market.
In a PIPE transaction, a company sells unregistered shares that are usually locked up for two to four months until the shares are registered and free to be traded on the open market. PIPE deals are sold at a discount because of their illiquidity.
Many investors hedge the PIPE by shorting the public stock, but to do so legally an investor needs to borrow enough publicly traded shares to cover the short. It is against U.S. securities laws to use unregistered stock to cover a short sale.
According to the SEC complaint, from 2000 until 2002 "to avoid detection and regulatory scrutiny, Thorp employed a variety of deceptive trading techniques, including wash sales and matched orders, to make it appear that he was covering his short sales with legal, open-market stock purchase." Mr. Thorp also used the "naked" shorts, which were legal at the time in Canada, where he used a broker dealer, according to the complaint. A naked short is when the person doesn't own or intend to borrow shares to cover the trade. Mr. Thorp traded in shares of Amtech Systems Inc., BriteSmile Inc., Rail America Inc. and PurchasePro.com Inc., among others.
The SEC also alleged that Mr. Thorp and the hedge funds violated insider-trading laws by shorting stock of seven companies before it was publicly known that the companies sought to raise money in the PIPE market.
Write to Kara Scannell at kara.scannell@wsj.com
