To be sure, there's a big difference between the giant PIPE deals involving Santander and KKR and the far more modest-sized transactions that a hedge fund such as Cornell Capital or LH Financial tends to invest in.
In the classic PIPE deal, a small company raises money by selling discounted stock, or a bond that converts into discounted shares, to hedge funds and other institutional investors. The hedge fund investors turn around and unload the shares as soon as they are registered, hoping to score a quick profit. Hedge fund investors also typically short the company's stock as a way to protect themselves against a decline in the share price.
The stock of a company doing a PIPE typically falls after a deal is announced to the public, especially if the company is selling discounted shares. The regulatory investigation has focused on allegations of hedge funds trying to game this selloff by improperly shorting shares in advance of the PIPE being announced to the public.
But when a KKR invests in a PIPE, it's not necessarily looking for a quick exit -- or cleaning up on the short side. In fact, as part of its investment, KKR is getting a seat on Sun's board. That's a sign it plans to play a role in the management of the company. In its deal with Sovereign, Santander also got board representation.