Gryphon Hedge Fund Nears PIPEs Resolution

Gryphon Partners, a Dallas hedge fund, is weighing a settlement with securities regulators over allegations the $265 million money manager engaged in manipulative trading in shares of small-cap companies doing private placements of stock.

Within the past month, Gryphon sent a letter to investors in its flagship Gryphon Master Fund informing them the fund's managers are considering negotiating a settlement with the Securities and Exchange Commission to put the allegations behind them, according to people familiar with the letter.

The allegations of manipulative trading against Gryphon stem from an ongoing SEC inquiry into improper short-selling by hedge funds that invest in so-called PIPEs, or private investments in public equity. The allegations facing Gryphon were first reported by TheStreet.com last November.

The investigation into the $20 billion-a-year PIPEs market has focused on allegations of improper short-selling by hedge funds trying to profit from the usual decline in a company's stock after a PIPE deal is completed. Shares of companies doing PIPEs typically decline in anticipation of a flood of discounted stock coming into the market.

To some degree, every PIPE deal is a bit of a Faustian bargain for a cash-strapped company. In selling discounted stock, or a bond that converts into discounted shares, a small-cap company is often betting that a near-term hit to its stock price is justified by the cash it raises.

In the letter, Gryphon insists it has done nothing wrong and is prepared to fight the SEC if it can't come to an agreement, sources say. But the hedge fund, led by Edwin "Bucky" Lyon III, believes it's in the best of interest of investors to resolve the matter.

Investors in the Gryphon Master Fund also may be asked to approve the use of the fund's assets in an eventual settlement. Investors in Gryphon's Special Situations Fund would not contribute to any settlement regulators. There are no allegations of wrongdoing involving the Special Situations Fund.