U.S. securities regulators are reviewing a series of trades involving hedge funds and a Florida mortgage-bond dealer to see if they may have inflated prices for illiquid securities, according to people with knowledge of the matter.

At issue, the people said, are trades between hedge funds -- including Candlewood Investment Group -- and United Capital Markets, a brokerage owned by John Devaney. Investigators at the U.S. Securities and Exchange Commission are trying to determine if the prices in small transactions were reasonable or were inflated to allow the parties to record gains on bigger holdings of the securities, according to the people. Devaney said there has been no suggestion by regulators that his firm engaged in misconduct.

As part of the inquiries, investigators are also looking at whether hedge fund clients improperly accepted gifts from United Capital, the people said, asking not to be identified because they weren’t authorized to discuss the matter. Investors have been interviewed by investigators as part of the inquiries, the people said.

Janet Elise Miller, general counsel for Candlewood, did not respond to requests for comment. A spokeswoman for the SEC declined to comment.

‘Routine Audits’

United Capital, or its affiliates, have “not broken, nor has it been accused of breaking, any securities laws,” Devaney wrote by e-mail. The only requests it’s received for documents have been part of routine audits from regulators, and the firm doesn’t know of any investigation, he said. United Capital has never had any enforcement actions against it, he wrote, adding that it is possible that the firm was written up for a “minor books and records violation.” The firm has never had a single customer complaint or been to a customer arbitration, he added.

Devaney also wrote that United Capital hasn’t given gifts to clients that exceed the $100-a-year limit set by the Financial Industry Regulatory Authority. He has invited clients aboard his yacht, as he reported in his entertainment logs to regulators, he said.

Government officials have looked at Devaney’s dealings before. The Key Biscayne, Florida-based trader was the subject of a multiyear investigation that concluded in 2011, the Wall Street Journal said at the time. Devaney was never accused of wrongdoing. He told the Journal for that article that the SEC sent him a “very nice letter, thanking us for our cooperation and closing their case.”

The inquiry comes as the U.S. looks into improper trading activity in mortgage bonds and other debt, in an effort to identify potential wrongdoing across the industry in the opaque markets, where pricing data can be scarce.

Because hedge funds and dealers trade illiquid and distressed securities, prices can move sharply over short periods of time.

ZZ Top

Devaney amassed a fortune by trading subprime mortgage bonds in the decade before the financial crisis. He ran United Capital as well as a hedge fund management business. To woo clients, he threw lavish parties at conferences featuring acts like ZZ Top, the Doobie Brothers and Counting Crows and paid for celebrity speakers including Jay Leno and David Spade at dinners, according to the firm’s press releases. Wall Street firms often sponsor parties and other events to entertain clients.

The gatherings became smaller after the bottom fell out of the mortgage market in 2008, and Devaney was forced to liquidate his hedge fund holdings.

In recent years, Devaney has become an active investor once again in subprime mortgage bonds, this time sifting through piles of the old securities to find ones that may perform well. Devaney has also become a large shareholder in Ocwen Financial Corp., a mortgage payment processor that’s faced regulatory battles in recent years, according to company filings.

That trade has been a roller coaster, and Devaney said in a phone conversation that he lost as much as $50 million on the stock last year.