Wall Street wheeling and dealing can make for some strange relationships, such as the one entered into this week between Millennium Partners and Vaso Active Pharmaceuticals ( VAPH).

On Tuesday, the embattled hedge fund led by legendary Wall Street trader Israel Englander made a big bet on the quirky little drug company that claims to have developed a miraculous cure for athlete's foot.

The private equity arm of Millennium, in a $7.5 million private placement, purchased an 18-month convertible 2% note that can be turned into roughly 833,000 shares of Vaso Active stock, if the share price reaches $9. The deal also included warrants to purchase 166,667 shares of Vaso stock at an exercise price of $8.75.

On Tuesday, the day the deal was inked, shares of the Danvers, Mass.-based company closed at $7.03. Vaso Active stock soared 15% Wednesday to $8.11 after the company announced the transaction, leaving the shares within striking distance of both magic numbers.

News of the deal comes as Millennium and Vaso Active face regulatory scrutiny.

With $3.2 billion in assets, Millennium is one of the big hedge funds at the center of the far-reaching investigation into improper trading in the mutual fund industry. Last year, one of Millennium's top traders pleaded guilty to making illegal trades in shares of mutual funds. Englander is bracing investors for the possibility the hedge fund could be ordered to pay a stiff fine when the investigation is completed.

Meanwhile, Vaso Active has stirred up a lot of controversy for a money-losing company with less than $100,000 in sales and just seven employees. The stock is up 306% since a mid-December IPO, even though the company has had to fend off questions about the endorsements for its athlete's foot lotion Termin8 and the authorship of a six-year-old clinical study of the foot lotion.

In a regulatory filing disclosing the private placement, Vaso Active revealed it has fielded a number of "telephonic inquiries" from the Securities and Exchange Commission and the Nasdaq Stock Market about those controversies and other issues, including "the level of trading" in its shares, "the Company's 3:1 stock split and possible institutional interest in the Company's Class A common stock," and "the technology relating to the company's OTC products."

Officials at Millennium and Vaso Active could not be reached for comment on the transaction. The SEC lawyer overseeing the agency's inquiries couldn't be reached for comment.

Private placements of this type are not unusual for Millennium and other hedge funds. In fact, a review of recent regulatory filings shows that Riverview Group, the private equity arm of Millennium, has entered into a number of similar transactions in recent months with other small companies, including VA Software ( LNUX), Neurobiological Technologies ( NTII) and U.S. Restaurant Properties ( USV).

A person familiar with Millennium's operation said the hedge fund makes many of these bets hoping that some of them will pan out with a big payoff.

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