A long-running investigation into allegations of manipulative trading in the market for private stock placements by small companies is about to heat up.

The Securities and Exchange Commission is close to bringing enforcement actions against at least two hedge funds that have been active players in the $14 billion-a-year market for PIPEs, or private investments in public equity, people familiar with the inquiry say.

Within the past few months, the SEC formally notified one of the hedge funds that it is facing potential regulatory action by sending it a so-called Wells Notice. The other hedge fund has yet to receive a Wells Notice, but regulators are close to taking that next step, sources say.

The identities of the hedge funds could not be confirmed. But the looming regulatory actions would be the first taken by the SEC against any hedge fund in the nearly 2-year-old inquiry into PIPEs, financing transactions that are often used by cash-strapped companies.

The probe is focusing on allegations of stock manipulation by hedge funds, which tend to be the biggest investors in these shadowy stock sales, and allegations of wrongdoing by the Wall Street firms that round up buyers. PIPEs are popular with hedge funds because the buyers usually get to buy shares at a steep discount to the current market price.

Critics contend the ability of a hedge fund to purchase discounted stock makes the PIPEs market ripe for abuse by disreputable short-sellers, traders who place market bets that a stock will decline in price.

Some 18 months ago, the SEC, in conjunction with the NASD, began a broad inquiry into the PIPEs market. Regulators issued subpoenas and requests for documents to 20 brokerages that have arranged the majority of PIPE deals. The SEC issued subpoenas to about 10 hedge funds, several of which are big PIPE investors.

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