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U.S. Securities and Exchange Commission


Litigation Release No. 19607 / March 14, 2006

SEC v. Langley Partners, L.P., North Olmsted Partners, L.P., Quantico Partners, L.P., and Jeffrey Thorp, Civil Action No. 1:06CV00467 (JDB) (D.D.C.)

SEC Files Enforcement Action Against Hedge Fund Manager Jeffrey Thorp and Three Hedge Funds for Engaging In Illegal "Pipe" Trading Scheme

Defendants Consent to Permanent Injunctions and Agree to Pay $15.8 Million to Settle Charges

The Securities and Exchange Commission filed securities fraud and related charges today against three New York-based hedge funds, Langley Partners, North Olmsted Partners and Quantico Partners (collectively, "Langley Partners"), and their portfolio manager, Jeffrey Thorp, in the U.S. District Court for the District of Columbia. Langley Partners and Thorp agreed to settle the Commission's charges that they perpetrated an illegal trading scheme to evade the registration requirements of the federal securities laws in connection with twenty-three unregistered securities offerings, that are commonly referred to as "PIPEs" (Private Investment in Public Equity), and engaged in insider trading. As part of the settlement, Langley Partners will disgorge $8.8 million in ill-gotten gains and prejudgment interest, and Langley Partners and Thorp will pay civil penalties totaling $7 million.

The Commission alleges in its complaint that Langley Partners and Thorp, after agreeing to invest in a PIPE transaction, typically sold short the issuer's stock, frequently through "naked" short sales in Canada. Among other things, the Commission's complaint alleges that:

  • Once the Commission declared the resale registration statement effective, Thorp used the PIPE shares to close out the short positions ? a practice Thorp knew was prohibited by the registration provisions of the federal securities laws. To avoid detection and regulatory scrutiny, Thorp employed a variety of deceptive trading techniques, including wash sales and matched orders, to make it appear that he was covering his short sales with legal, open market stock purchases. In fact, the covering transactions were not open market transactions because Thorp was on both sides of the trades.
  • In each of the transactions, Thorp made materially false representations to the PIPE Issuers to induce them to sell securities to Langley Partners. As a precondition of participation in a PIPE, Langley Partners had to represent that it would not sell, transfer or dispose of the PIPE shares other than in compliance of the registration provisions of the Securities Act of 1933. This representation was material to the PIPE Issuers, who, as the stock purchase agreements made clear, relied on the investors' representations in connection with qualifying for an exemption from the registration requirements for their private offering. At the time Thorp signed the securities purchase agreements, however, he intended, if he had not already done so, to distribute the restricted PIPE securities in violation of the registration provisions of the Securities Act.
  • On seven occasions, Thorp also engaged in insider trading by selling the securities of PIPE Issuers on the basis of material nonpublic information prior to the public announcement of the PIPEs. Thorp engaged in this conduct notwithstanding his express agreement to keep information about the PIPE confidential and/or to refrain from trading prior to the public announcement of the PIPE.

To settle the Commission's charges, without admitting or denying the allegations in the complaint, Langley Partners and Thorp consented to the entry of a final judgment permanently enjoining them from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 5 and 17(a) of the Securities Act of 1933. In addition, the final judgment orders Langley Partners, North Olmsted Partners and Quantico Partners to pay, jointly and severally, disgorgement of $7,048,528, prejudgment interest of $1,769,400, and a civil penalty totaling $4,700,000. The final judgment also requires Thorp to pay a $2,300,000 civil penalty.

The Commission acknowledges the assistance of the Investment Dealers Association of Canada. The Commission's investigation is continuing.

SEC Complaint in this matter



Modified: 03/14/2006