Up until the past few months, Gryphon had been one of the more active investors in the PIPEs market. Since 1999, the first year Gryphon began investing in PIPEs, it has sunk a total of $190 million into these private stock deals, according to PlacementTracker, a research firm.

Some of the companies doing PIPE deals that Gryphon improperly shorted from 2001 to 2004, according to regulators, include HealthExtras ( HLEX), MGI Pharma ( MOGN), AuthentiDate ( ADAT) and Generex Biotech ( GNBT).

In the complaint, the SEC alleges Gryphon inappropriately began shorting shares of companies before a PIPE was announced. The hedge fund did this even though it was warned by a lawyer that doing so could be improper, regulators say.

Regulators say Gryphon also engaged in improper short-selling by using an unnamed Canadian broker to engage in an illegal trading practice called naked shorting.

Naked shorting is an improper trading strategy in which a hedge fund shorts a stock without first borrowing shares from a broker, as is required under federal securities laws.

In a traditional short sale, a bearish trader must first borrow shares from a broker and then sell them. The trader then hopes to pay off the loan at a later date with stock purchased at a lower price, pocketing the difference as profit.

The SEC, NASD and federal prosecutors are continuing to investigate other hedge funds and brokers for manipulative trading in the PIPEs market. TheStreet.com previously has reported that hedge fund giant HBK Investments, also based in Dallas, is being investigated over allegations of wrongful trading. Sources say Friedman Billings Ramsey ( FBR) is close to settling with regulators over allegations its proprietary hedge funds illegally shorted shares of a company for which it managed a PIPE.

"Fraud and insider trading by hedge funds are a high priority" for the SEC, says Robert Kaplan, an assistant director.

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