Securities regulators are suing Gryphon Partners, accusing the $265 million Dallas hedge fund of engaging in an "illegal trading scheme" in conjunction with three dozen small-cap private stock placements. The securities fraud charges against Gryphon, led by Edwin "Bucky" Lyon IV, arise from a more than two-year-old investigation into allegations of manipulative trading in the $22 billion-a-year market for PIPEs, or private investments in public equity. The Securities and Exchange Commission, in a civil lawsuit filed Tuesday in New York federal court, allege Gryphon and Lyon "realized more than $6.5 million in ill-gotten gains" from 2001 through 2004. Regulators allege Gryphon illegally shorted shares of at least 35 companies that sold discounted stock in PIPEs, a type of financing favored by small-cap companies in desperate need of cash. The SEC contends Gryphon "employed a variety of deceptive trading techniques" and misappropriated inside information to carry out its scheme. An attorney for Gryphon could not immediately be reached for comment. A short sale is a market bet that stock will decline in price. It's common for shares of a company doing a PIPE to decline after a deal is announced as investors adjust to a flood of discounted stock hitting the market. It's legal for investors in a PIPE deal to short a stock after the transaction is announced. But it's generally illegal to do so before the deal closes and is made public.