SEC Probing Two Hedge Funds for Certain Trades

The WSJ has reported that the U.S. Securities and Exchange Commission [SEC] is probing two hedge funds in regards to their trading activities.

The SEC is scanning trades made by Appaloosa, a $13 billion New Jersey-based hedge fund run by David Tepper, around the time that Wells Fargo (WFC) agreed to purchase Wachovia Corp in 2008.

Mr. Tepper is considered one of the most successful managers in the industry. His fund racked up about $7 billion of profit in 2009—with Tepper earning more than $2.5 billion for himself.

The SEC is also scrutinizing trades made by the $4.9 billion Dallas-based Carlson hedge fund, run by Clint Carlson, who previously was a senior investment manager for the billionaire Bass family of Fort Worth, Texas, relating to four secondary stock offerings made between 2007 and 2009.

The Carlson probe is related to a federal provision known as Rule 105, which prohibits shorters from covering short sales with offering securities purchased from an underwriter or broker five days prior to pricing of the securities.

The reason for the prohibition is that pre-pricing short sales that are covered with offering shares artificially distort the market price for the security.

Both hedge funds are said to be cooperating with the probes.

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