It's been a rough year on the regulatory front for the Dallas hedge fund Gryphon Partners.

In April, Jonathan Daws, a former Gryphon portfolio manager, pleaded guilty in federal court to a conspiracy charge arising from a scheme involving confidential information about government investigations of publicly traded companies.

Daws, who left Gryphon in 2002, participated in a plot hatched by notorious short-seller Anthony Elgindy that involved betting against companies being probed, then driving down the stock prices by leaking the news on the Internet. Elgindy and former FBI agent Jeffrey Royer, the scheme's masterminds, were convicted in January after a lengthy trial in New York.

Now, sources say, Gryphon is one of several hedge funds under scrutiny in another federal investigation, one that also involves allegations of misused nonpublic information.

The Securities and Exchange Commission is weighing whether to pursue an enforcement action against the $265 million fund, say people familiar with the matter. The case is part of a sweeping investigation into allegations of manipulative trading in the $14-billion-a-year market for PIPEs, an acronym for private investment in public equity.

SEC attorneys in Washington have made numerous requests to Gryphon for documents and information about PIPE deals the hedge fund invested in over the past several years. SEC attorneys also have had several face-to-face meetings with lawyers for Gryphon to discuss the investigation, sources say.

A spokesman for the SEC declined to comment on the situation. Ben Rosenberg, a partner with Dechert, who is representing Gryphon, says, "I do not anticipate an imminent enforcement action against Gryphon.'' He declined to comment further.

Since 1999, the first year Gryphon began investing in PIPEs, it has sunk a total of $190 million into these private stock deals, which usually involve small companies selling their shares at a discount to their market price. According to PlacementTracker, a private placement research firm, Gryphon this year ranks is the 19th most active PIPEs player in terms of the number of deals it's invested in.

PIPEs are popular with hedge funds because of the market discount. Critics, however, contend that the ability of a hedge fund to purchase discounted stock makes the PIPEs market ripe for abuse by unethical short-sellers.

There's no indication that the insider trading scheme involving Daws is related to the PIPEs inquiry. No charges were filed against Gryphon in the Elgindy investigation, although Daws, in pleading guilty, said "others at Gryphon made trades in the some of the relevant stocks, independent of me, and not at my direction.''

There are some similarities between the allegations underlying the Elgindy case and the PIPEs inquiry.

One of the charges regulators are looking into in the PIPEs probe is that some hedge funds routinely shorted stock once they learned a PIPE deal is in the works. Regulators contend that such premature short trades are illegal, since knowledge of the PIPE deal is confidential, nonpublic information.

In any event, Gryphon won't be the only hedge fund to find itself in the regulatory cross hairs because of its trading in PIPEs.

Some 18 months ago, the SEC sent an initial round of subpoenas to 10 hedge funds and 20 brokerages that either arranged PIPE deals or handled trades for hedge funds that a major PIPE investors. The investigation is being coordinated with parallel inquiries by the National Association of Securities Dealers and the Department of Justice.

In October, TheStreet.com reported that the SEC formally notified an unidentified hedge fund that it is facing potential regulatory action by sending it a so-called Wells notice. In addition, securities regulators are taking a close look at a number of PIPE deals that HBK Investments, a $7 billion Dallas hedge fund, has invested in.

This summer, Alexandra Investment Management, a $1.4 billion hedge fund complex, disclosed that it "has been providing information'' about its investments in PIPEs to both the SEC and federal prosecutors. Alexandra's disclosure, which was first reported by Bloomberg, was contained in a copy of its 2004 audited financial statement. An Alexandra spokeswoman says investors in the fund have known about the inquiries since June.

To date, the broad-based inquiry has led to the criminal conviction of a former SG Cowen managing director on insider trading charges and a $1.45 million civil settlement with a former First New York Securities hedge fund manager. Emanuel Friedman, former co-CEO of Friedman Billings Ramsey ( FBR) also faces potential civil charges, as does the investment firm he co-founded.

Other Wall Street firms that face potential regulatory action arising from the PIPEs investigation include Knight Trading ( NITE) and Refco ( RFXCQ.PK), the scandal-tarred commodity and derivatives brokerage.

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