On October 20, 2008, the SEC announced that it had filed a settled enforcement action alleging insider trading against Brian D. Ladin, a former analyst for a hedge fund called Bonanza Master Fund Ltd. (“Bonanza”), in the U.S. District Court for the District of Columbia. The SEC’s complaint alleges that Ladin engaged in insider trading in connection with a 2004 “PIPE” (Wall Street jargon for “private investment in public equity”) offering conducted by Radyne Comstream Inc.
The fact pattern of the Ladin “PIPE” insider trading case presents a recurring issue that the SEC is targeting as part of its campaign against insider trading by hedge funds. The typical pattern involves a public company that wishes to sell its publicly traded securities to a private investor such as a hedge fund. PIPE offerings are generally regarded as material, negative news likely to drive down the price of the company’s stock. The reasons for this perception include that a PIPE offering may be dilutive to existing shareholders, may be seen as “last resort” financing for a company in poor health, and is often at a steep discount to the market price.
