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Austrian lender

Bank fur Arbeit und Wirtschaft

, in a surprise move, announced Friday that it is no longer financing customers in the market for PIPEs, or private investments in public equity.

Austria's fourth-largest bank announced its decision to withdraw from the $18 billion-a-year U.S. PIPEs market in a

press release posted on its Web site. The bank's tersely worded statement said its managing board "decided in February 2006 to discontinue the financing of customer activities in the PIPE issuance market.''

In the U.S., Bawag, as the bank is commonly called, is best-known for its ties to


( RFXCQ), the bankrupt and scandal-tarred commodities and derivatives brokerage. Bawag was a one-time minority owner of Refco and made a $410 million loan to the CEO, Phillip Bennett, just hours before the brokerage disclosed that Bennett had been hiding hundreds of millions of dollars in customer trading losses for years.

Bawag offered no reason for the decision to stop providing financing for PIPEs, which are often last-ditch financing mechanisms used by small-cap companies, many of which trade for around a dollar share. The PIPE market has been under intense scrutiny the past two years, as U.S. regulators look into allegations of stock manipulation by the hedge funds that invest in PIPE deals.

A Bawag spokesman was unavailable to comment.

In January,

reported that Bawag had

quietly become a key player in the PIPEs market by becoming either a significant investor or controlling shareholder in at least four foreign hedge funds that invest in such deals. The four hedge funds with close financial ties to Bawag are Alpha Capital, Austinvest Anstalt Balzers, Austost Anstalt Schaan and Celeste Trust, all of which are based in the tiny European country of Lichtenstein.

also reported that Bawag has a financial interest in LH Financial Services Corp., an obscure New York investment firm that has sunk more than $70 million over the past two years into about 150 different PIPEs deals, almost all of them penny-stock companies.

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In 2004, LH Financial was the second-most prolific PIPEs investor in the country based on the number of transactions, placing money in 102 different deals, according to PlacementTracker, a research firm. The pace slowed in 2005, when LF invested in about 45 deals -- still good enough to rank in the U.S. top 10.

LH Financial is the official investment adviser to Alpha Capital, the main vehicle through which Bawag has invested in the PIPEs market the past two years.

LH Financial also has ties to Martin Schlaff, a controversial Austrian billionaire, who is one of Bawag's biggest individual customers. Schlaff is a partner with Bawag in the Alpha Capital hedge fund, along with other business ventures. A relative of Schlaff's briefly worked at LH Financial.

It's not clear what implications Bawag's decision to withdraw from the PIPEs market with have for LH Financial, a 10-person operation that is not registered with either the

Securities and Exchange Commission

or the


. A phone call to LH Financial, located in an office on Manhattan's Central Park South, was not returned.

In the press release, Bawag implied that it didn't directly invest in PIPE deals, but got involved as an intermediary on behalf of its customers.

"Bawag would only ever have been involved in such transactions as an intermediary for its customers,'' the release said.

It's possible that Bawag's board decided to exit the PIPEs business because it felt it was attracting negative publicity. The bank's role in providing the last-ditch loan to Bennett has made it a prime target for Refco creditors in the bankruptcy proceeding. Sources say federal prosecutors investigating the Refco scandal have been asking lots of questions about Bawag's dealings with the brokerage.

Bennett was indicted on securities fraud charges shortly after the broker disclosed that he had been hiding hundreds of millions of dollars in customer trading losses for years.

, meanwhile, reported that all four hedge funds affiliated with Bawag were once customers of Refco, and Refco helped each resell some of the cut-rate shares they acquired in PIPEs deals. Two former Refco brokers who worked closely with the Bawag funds are being investigated by securities regulators on allegations they engaged in manipulative trading on behalf of another entity.

Just this week, the SEC brought its biggest PIPE enforcement case to date,

fining a New York hedge fund manager $16 million for engaging in market manipulation in 23 PIPE deals.

More regulatory actions are on the way, including possible sanctions against

Knight Capital



Friedman Billings Ramsey


, plus a number of big hedge funds.