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Hedge fund giant

HBK Investments

is looking at paying the biggest penalty yet in a two-year-old investigation of abusive trading in the so-called PIPEs market.

The $7 billion Dallas-based hedge fund is in active settlement talks with the

Securities and Exchange Commission

to resolve allegations of improper short sales. The fund allegedly made improper trades in two companies that were selling discounted stock in private investments in public equity, or PIPEs, deals.

People familiar with the hedge fund say no settlement is imminent. HBK officials, however, have made it clear to investors who have inquired about the investigation that they want to put the matter behind them.

But regulators are driving a hard bargain, demanding a penalty greater than $16 million and the suspension of at least one employee at the multistrategy hedge fund, sources say.

An SEC spokesman declined to comment on the HBK settlement talks. Jon Mosle, HBK's general counsel, declined to comment.

In a typical PIPE deal, a small, cash-strapped company raises cash by selling discounted stock, or a bond that converts into discounted shares. Shares of the seller usually decline as investors anticipate a flood of discounted stock coming into the market.

Regulators are looking into allegations of improper short-selling by at least a dozen different hedge funds in advance of PIPE deals. The improper shorting, regulators contend, allowed the hedge funds to score a quick profit from the inevitable decline in the stock of the issuing company.

To date, the stiffest penalty imposed by regulators probing allegations of improper trading in the $20 billion-a-year PIPEs market was a $16 million sanction earlier this year against Jeffery Thorp and his Langley Capital hedge fund. The SEC

charged Thorp with manipulating shares of nearly two dozen small-cap companies, all of which had raised money by selling discounted stock in PIPE deals.

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The fine against Thorp has become the SEC's baseline for meting out penalties against hedge funds found to have repeatedly engaged in improper trading in the PIPEs market, say people familiar with the investigation. The $16 million penalty amounted to roughly twice the profits that Thorp's hedge fund generated from investing in the scrutinized PIPE deals over a two-year period.

Over the past 5 1/2 years, HBK has invested $598 million in 104 PIPE deals, according to PlacementTracker. People familiar with HBK and the PIPEs market say it's reasonable to assume that HBK made between $50 million and $75 million from those investments. It's not clear, however, how many of those PIPE deals the SEC is looking into.

In July,

TheStreet.com

reported that the SEC was looking into a series of short sales allegedly made by HBK just days before it invested in 2003 in a

$58 million private sale of stock by a company called

Plug Power

(PLUG) - Get Plug Power Inc. Report

. HBK was one of eight hedge funds that paid cash to acquire millions of shares of the Latham, N.Y., fuel-cell maker at a 14% discount to the then-market price of $5.79 a share.

The Plug Power transaction is the second private placement involving HBK that securities regulators are looking into. The SEC also is reviewing HBK's trading in connection with another 2003 transaction, in which

PFSWeb

(PFSW) - Get PFSweb, Inc. Report

, a Plano, Texas, outsourcing firm, raised $3.5 million.

HBK, founded in 1991 by former Merrill Lynch managing director Harlan B. Korenvaes, is the largest hedge fund to draw regulatory scrutiny in the PIPEs investigation. The fund employs more than 250 people and is perennially one of the biggest investors in private stock placements by public firms.