Card Shark's Son Busts

Jeffrey Thorp, the New York hedge fund manager charged this week with manipulating nearly two dozen small-cap private placements, has a gambler's pedigree.

His father, Edward Thorp, helped found the hedge fund business -- and also made a name for himself teaching card players one of the best-known systems for winning at blackjack.

In 1962, the elder Thorp, a math whiz and a university professor, published Beat the Dealer, a book that suggested it was possible to use a mathematical system to win by counting cards. The book caused such a stir that it led the Las Vegas casino industry to stiffen its precautions against card counting.

In card counting, a gambler tries to keep track of which cards have been dealt by the dealer, in order to determine the probability of getting a winning hand.

After cracking the casinos, the elder Thorp went on to tackle Wall Street, starting up one of the first hedge funds -- Princeton/Newport Partners. Relying on Thorp's mathematical trading strategies, the limited partnership was highly successful, generating 20% annual returns for years.

In 1989, Princeton/Newport ran into trouble with regulators over allegations of insider trading. Thorp was never implicated in any wrongdoing, but the fund shut down the following year.

Fast forward 16 years later, and now its Thorp's son, Jeffrey, who is in trouble with regulators over the trading strategies of his Langley Capital hedge fund complex.

On Tuesday, Thorp and Langley Capital agreed to pay a $16 million fine to the Securities and Exchange Commission to settle allegations arising from a two-year-old investigation into manipulative trading in the $18 billion-a-year market for PIPEs, or private investments in public equity. The penalty is the largest settlement assessed to date by the SEC in the investigation.

The PIPEs investigation is focusing on allegations of abusive short-selling by hedge funds trying to take advantage of the usual decline in shares of companies that sell these deals.