Historically, it has been very difficult for investors to obtain allocations of shares of private companies that are anticipated to conduct an initial public offering of their shares.  To meet this need, a growing secondary market has developed to facilitate secondary market trading in the shares of such private companies, which are often purchased from an issuer’s employees and early investors.  Hedge fund managers have launched funds whose investment strategy is to invest in the shares of these popular private companies.  For the past year, the U.S. Securities and Exchange Commission (SEC) has intensified its scrutiny of this secondary market trading.  As part of that effort, on March 14, 2012, the SEC filed a civil enforcement action against a broker-dealer, an investment adviser and one of their principals who sponsored and managed hedge funds formed to engage in secondary market transactions in the shares of various popular startups, among them, Facebook, Inc., Twitter, Inc. and Zynga Inc.  This article highlights the factual allegations, causes of action and remedies sought by the SEC in its complaint and, in turn, identifies some of the pitfalls that hedge fund managers that employ this trading strategy should avoid.