The law enforcement crackdown on manipulative trading in the private-placement market continues.

Federal prosecutors in New York this week charged a former

SG Cowen

managing director, Guillaume Pollet, with insider trading in connection with three deals. The transactions are part a category of finance known on Wall Street by the acronym PIPE, for public investment in private equity.

Pollet was charged shortly after authorities arrested him at John F. Kennedy Airport on Sunday evening, after flying into New York from his home in France. Prosecutors had been waiting to charge Pollet since September.

Prosecutors contend Pollet used non-public information to illegally short shares of

HealthExtras

( HLEX),

Sorrento Networks

and

Aradigm

(ARDM)

, three companies that had retained Cowen to find investors for their deals. The alleged insider trading took place between December 2000 and November 2001.

Earlier this year, SG Cowen paid about $1 million to settle a lawsuit brought by HealthExtras, one of the three companies whose shares Pollet allegedly manipulated. HealthExtras had alleged that Pollet secretly shorted the company's shares in order to score a quick profit from an anticipated decline in the company's stock immediately following a $12 million PIPE deal arranged by Cowen.

It's not uncommon for a company's stock to drop in conjunction with a PIPE, since PIPE investors often purchase stock at discounted prices. These deals, which are popular with hedge funds, often include sweeteners, such as warrants, that permit the private investors to buy additional shares at discounted prices.

This year the $14 billion PIPEs market has drawn increased scrutiny from regulators looking into allegations that hedge funds and brokerage firms are improperly shorting shares.

Regulators are concerned that some investors and traders may be finding out prematurely that a company is considering a PIPE deal. With that inside information, a hedge fund can then set up a short position on stock, betting that a flood of discounted shares will drive down the price.

In the spring, the

Securities and Exchange Commission

sent subpoenas and requests for documents to 20 brokerages that are major players in arranging PIPE deals for cash-strapped companies and finding hedge funds to invest in them. Recently,

Friedman Billings Ramsey

(FBR)

disclosed that the SEC and the NASD are jointly investigating the firm's role as the placement agent for a private stock deal in 2001.

The investigation into Pollet's trading, however, began several years ago with an initial inquiry by the SEC.

In all, prosecutors contend that Pollet made $4.6 million in improper short sales. The sales were made through Cowen accounts that Pollet managed. The trades violated an agreement Cowen had with the companies not to disclose information about the impending PIPE deals, or sell any of the stocks short.

Federal prosecutors in Brooklyn, N.Y., didn't file any charges against Cowen. The firm, part of the French banking concern

Societe Generale

, fired Pollet in December 2001 for violating firm policy following an internal investigation.

In a statement, Cowen said it fired Pollet soon after it discovered the improper trading in October 2001. The firm said it was blindsided by Pollet's actions and has "cooperated fully with the authorities for the past there years and will continue to do so."