HBK Eyed in Second Shorting Transaction

"From the [SEC's] perspective, if there was a term sheet and people were trading ahead of the term sheet, then the fact that it is a publicly registered deal is irrelevant,'' says Robert Mazzeo, a partner with Mazzeo Song, which represents hedge funds, many of which invest in PIPEs. "That's material nonpublic information.''

The SEC also has fined hedge funds for using the discounted shares purchased in a private placement to close out, or cover, an existing short position. The regulators argue that an investor who can cover an existing short position with discounted shares gets an unfair advantage over other traders who must buy those shares in the open market.

In an ordinary short sale, a bearish investor borrows stock from a broker, sells it and hopes to replace it with shares purchased later in the market at a lower price. The short-seller then pockets the difference.

The trading in shares of Plug Power around the time of the shelf offering does raise eyebrows. In the deal, which was managed by Citigroup(C) and Stephens Inc., the company sold 11.7 million shares at a price of $5 each to HBK and the other hedge funds.

The day before the deal was announced on Nov. 11, 2003, shares of Plug Power closed at $5.79. But by the close of trading on Nov. 11, the stock had fallen 13% to $5.04. More than 6 million shares were traded on Nov. 11, a ninefold increase in volume compared with the prior day.

Meanwhile, in the weeks leading up to the deal's announcement, shares of Plug Power were steadily falling. For most of October, the stock traded around $6.50 a share. On Oct. 15, it closed as high as $7.06 a share.

Investment firms typically will begin shopping a shelf offering, or a PIPE, to prospective investors at least a month or two before the deal is publicly announced. In the wake of the PIPEs investigation, most investment firms now require hedge funds to sign documents saying they will not make any trades in a company's stock before a deal is announced. But those documents were not in wide use in 2003.

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