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Broker Busted Over PIPEs

EKN Financial is fined and suspended over improper short-selling in a PIPEs deal.

The regulatory crackdown on abusive trading and improper short-selling in the market for PIPEs keeps rolling along.

The NASD is suspending EKN Financial from participating in any private investments in public equity transactions for six months. The suspension is part of a settlement with the Woodbury, N.Y., brokerage and some of its principals.

In all, the firm and the executives are paying a $200,000 fine.

Regulators charge that EKN, formerly known as Ehrenkrantz King Nussbaum, engaged in improper short-selling in shares of three companies that did PIPE deals. The regulators allege that the firm used discounted shares purchased in the PIPE deal to cover pre-exiting short positions in the stock of those companies.

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Regulators have a brought a number of actions against hedge funds and other traders for using shares obtained in a PIPE deal to close out short positions.

A short sale is a bet that a stock will fall in a price. In a short sale, a trader borrows shares from a broker and then sells them in the hope that a stock will fall in price. The trader is betting that he'll later be able to buy those shares back at discount. If that occurs, the trader can close out his position with the broker by giving the broker the cheaper shares and in process pocketing the difference from the earlier sale.

It's not uncommon for the stock of a company doing a PIPE deal to decline in price, because the transaction leads to a flood of discounted stock coming into the market.