Risk Management

“PIPEs” Plea for Deephaven

Under the settlement, Deephaven would disgorge $2.7 million, and pay $3 million in interest and penalties, as SEC files civil suit.
Stephen TaubFebruary 10, 2006

Officials at Deephaven Capital Management LLC, the asset-management subsidiary of Knight Capital Group Inc., have submitted a settlement offer to the Securities and Exchange Commission to resolve an investigation concerning trading activity associated with certain private investments in public equities (PIPEs). The SEC’s staff has agreed to recommend the deal to the commission, according to a regulatory filing.

Under the terms of the settlement offer, Deephaven would disgorge about $2.7 million, and pay $343,000 in prejudgment interest and $2.7 million as a civil penalty. In addition, the settlement would clear the way for the SEC to file a civil complaint in federal district court in which the commission would allege that Deephaven traded in possession of material, nonpublic information concerning 19 PIPEs offerings.

According to the settlement proposal, Deephaven would not be required to admit or deny the allegations in the SEC’s complaint.

“We believe that reaching a settlement at this time, as opposed to pursuing lengthy and expensive litigation, is in the best interests of the firm and our clients. You should know that Deephaven’s investors will not bear the costs associated with the settlement,” stated Colin Smith, chief executive officer and chief investment officer of Deephaven, in a letter to investors.

In June, Deephaven and a former employee received Wells Notices from the SEC related to alleged fraudulent trading of PIPEs from June 1, 1999, through March 2004. Company officials stressed that the settlement offer does not address the Wells Notice received by the former Deephaven employee.

More than a year ago, TheStreet.com reported that the SEC issued subpoenas and requests for documents to about 20 brokerage firms and 10 hedge funds in connection with PIPE transactions. In April, Friedman Billings Ramsey offered to pay $7.5 million to the SEC and the National Association of Securities Dealers to settle charges related to trading in a company account and the October 2001 offering of a PIPE on behalf of CompuDyne Inc. Emanuel Friedman retired as co-chairman and co-chief executive officer of the firm last year.

Also in April, the SEC charged Guillaume Pollet, a former managing director of SG Cowen & Co., with insider trading and fraud. The commission alleged that during 2001, Pollet traded in the shares of 10 public companies that either engaged in or were contemplating engaging in PIPE financings after receiving confidential nonpublic information about the upcoming transactions.