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.

To carry out the PIPE, a company will typically hire a placement agent who solicits interest from hedge funds in making a purchase in an unidentified company in a particular market sector. If there is interest, the agent requires the hedge fund to enter into a confidentiality agreement in order to be "brought over the wall" to learn the identity of the offering company. Only then will the hedge fund learn the details of which company is making the offer, the pricing, the number of shares, and so on.

The violation in these cases occurs if the hedge fund then trades on the confidential information about the pending PIPE prior to the public announcement of the PIPE— typically by selling short shares of the offering company in anticipation that the stock will dive when the PIPE is announced. The SEC alleges that in Ladin's case, he accepted a duty of confidentiality as to the information concerning the Radyne PIPE offering, but then "despite knowing, or recklessly not knowing, that he therefore could not trade Radyne securities until after the offering was announced, on February 11, 2004, Ladin, on the basis of material, non-public PIPE information, presented an investment in Radyne to Bonanza, resulting in Bonanza establishing a 100,000 share short position in Radyne stock."

The SEC alleges that when the PIPE was publicly announced before the markets opened on February 17, 2004, Radyne's stock price declined and Bonanza made a total of $371,429 in ill-gotten gains and prejudgment interest. Bonanza consented to a judgment against it for that amount. Ladin himself agreed to pay Ladin $10,895 in disgorgement (money he allegedly received as a result of Bonanza's profits), along with $2,532 in prejudgment interest. He was also ordered to pay a $317,000 civil penalty.

The SEC has brought several other "PIPE" insider trading cases against hedge fund managers prior to the Ladin case, all alleging similar conduct. These cases include actions against Hilary Shane (May 18, 2005); Jeffrey Thorp (March 14, 2006), Edwin "Bucky" Lyon IV (December 12, 2006), and Robert Berlacher (September 13, 2007).

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