The SEC filed the civil suit after talks aimed at negotiating a settlement broke down. TheStreet.com previously reported that Gryphon told investors it was interested in settling with the SEC. But people familiar with the negotiations say the hedge fund balked at the amount of money the SEC was seeking. Regulators were believed to be seeking a penalty of at least $16 million, which is similar to one paid earlier this year by Jeffrey Thorp and his Langley Capital hedge fund. Langley carried out what regulators called an illegal short-selling scheme tied to 23 separate PIPE deals from 2000 to 2002. Gryphon, even as it was trying to negotiate a settlement, told its investors that it had done nothing wrong. But Lyon told investors this summer that settling with the SEC was in the best interests of the fund and investors. In the negotiations with the SEC, Gryphon hired securities law guru John Coffee , a professor at Columbia University School of Law and an expert on insider trading, to lobby for its cause. TheStreet.com first reported a year ago that Gryphon was under investigation in the PIPEs probe. "Bucky Lyon and Gryphon Partners made millions of dollars of illegal profits by employing a trading strategy whose success depended on telling lies to PIPE issuers," says Scott Friestad, an associate director in the SEC's enforcement division. "To address this misconduct, we're planning to pursue significant penalties and sanctions against the defendants."