Ex-Hedge Fund Chief Settles Short-Sale Charges for $1.45 Million

A former hedge fund manager agreed to pay $1.45 million after being charged by securities regulators with fraud and insider trading in a four-year-old private placement.

The joint action taken by the Securities and Exchange Commission and the NASD against Hilary Shane is the first to emerge from a yearlong investigation into stock manipulation in the $14 billion market for private investments in public equity, known by the Wall Street acronym PIPEs.

In the settlement with regulators, Shane, a 37-year-old former hedge fund manager with First New York Securities, agreed to a lifetime ban from working in the brokerage business and a one-year suspension from serving as an investment adviser or hedge fund manager.

TheStreet.com first reported on the investigation of Shane in January.

Regulators charged Shane with illegally profiting from a series of short trades she made using inside nonpublic information about a $12 million private stock sale by Compudyne(CDCYE Quote). Unlike other investors, Shane knew that shares of Compudyne would price at significant discount to the stock's then-market price of roughly $17.

Shane, using the knowledge of the deep discount at which Compudyne shares would be priced, allegedly placed improper bets against the price of the stock in advance of the PIPE deal both for herself and the hedge fund she managed, First New York's FNY Millennium Partners fund. She also used some of the shares she obtained in the PIPE at a discounted price to close out her short positions.

In all, regulators charge Shane made $1.13 million from the deal.

"She [was] an institutional investor solicited in this particular PIPE, and therefore had access to unique non public information about Compudyne that the average investor did not have access to," said Cameron Funkhouser, NASD senior vice president for market regulation. "This demonstrates our commitment to ensuring a level informational playing field for any investor regardless of size."