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October 05, 2006

Another Hedge Fund Breaks the Law - HBK Caught Short Selling Ahead of PIPES

posted by MR WAVETHEORY at 10/05/2006 12:34:00 AM
HBK is the latest hedge fund to be nailed by the Feds. The fund was caught short selling stocks ahead of their PIPEs. PIPEs are private investments in public equities - they are private stock offerings which means that investors agree not to short sell the stock ahead of the offering, because investors get access to private information. HBK abused the knowledge and short sold stocks of Plug Power Inc (Nasdaq PLUG).

In a typical PIPE deal, a small, cash-strapped company raises cash by selling discounted stock, or a bond that converts into discounted shares. Shares of the seller usually decline as investors anticipate a flood of discounted stock coming into the market. HBK got in trouble when it shorted shares of Plug Power Inc ahead of a PIPE in which it invested $58 million.

Over the past 5 1/2 years, HBK has invested $598 million in 104 PIPE deals, according to PlacementTracker. People familiar with HBK and the PIPEs market say it's reasonable to assume that HBK made between $50 million and $75 million from those investments.

The fund based in Dallas, Texas, manages $10 billion and employs 200 people. It was founded by Harlan B. Korenvaes, former Managing Director of Merrill Lynch in charge of the firm's convertible arbitrage trading and sales.

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