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Former hedge fund manager Hilary Shane may not be the only investor facing criminal charges over a five-year-old private placement of shares in

Compudyne

( CDCY).

TheStreet.com

has learned that a federal grand jury in Manhattan has been hearing testimony about other investors in the so-called PIPE, or private investment in public equity. Sources say federal prosecutors are trying to determine how many of the more two dozen investors in the $12 million deal made improper trades in shares of the Maryland security company.

Two weeks ago, federal prosecutors in New York

unsealed an indictment against Shane, charging the 39-year-old hedge fund manager with insider trading in the Compudyne deal. Prosecutors claim she profited from a series of improper short trades by using inside information about the upcoming transaction. Shane allegedly bet that Compudyne would slide once the public learned the stock was being sold at a steep discount to its then-market price of $17. Shane pleaded innocent.

The grand jury activity is a indication that prosecutors and securities regulators are ramping up a nearly three-year-old probe into allegations of manipulative trading in the $20-billion-a-year PIPE market. To date, the wide-ranging investigation has resulted in a half-dozen regulatory actions and at least two criminal prosecutions. Sources say the grand jury may be hearing testimony on other PIPE deals besides Compudyne.

Small, cash-strapped companies often turn to a PIPE as a quick way to raise money by selling discounted stock, or a bond that converts into discounted shares, to hedge funds and other institutional investors. But the PIPE market has been rife with abuse, especially by traders looking to take advantage of the usual decline in a company's share price immediately after the completion of a deal.

The Shane indictment struck some on Wall Street as odd because the criminal charges came nearly 16 months after she paid a $1.45 million penalty to settle civil insider trading charges filed against her by the

Securities and Exchange Commission

and the NASD. The allegations in the indictment were virtually identical to the ones leveled against the Wharton School doctorate graduate by the SEC and the NASD.

People familiar with the investigation say the filing of criminal charges against Shane is an indication that prosecutors are nearing an end to their inquiry. The five-year statute of limitations for filing insider trading charges against investors in the Compudyne deal expired Monday. But legal sources say prosecutors could always argue that the deadline for bringing charges is inapplicable because the investors took steps to conceal their allegedly illegal activity.

Still, it's not clear if any other investors are going to be charged with wrongdoing in the Compudyne deal. Assistant U.S. Attorney Marcia Isaacson, the prosecutor heading up the investigation, did not return a phone call.

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One investor drawing interest from prosecutors is Rhino Advisors, a now-defunct investment advisory firm that has long been the focus of investigators looking for wrongdoing in the PIPEs market, sources say. Rhino was the investment adviser in the Compudyne deal for Radyr Investments, a British Virgins Island-based hedge fund that invested in the deal.

In 2003, Rhino and its former president Thomas Badian paid a $1 million fine to the SEC to settle allegations arising from an illegal short-selling scheme involving a 2001 PIPE deal by

Sedona

(SDNA)

, a small Pennslyvania software company. Later that year, federal prosecutors in New York filed criminal charges against Badian and his brother Andreas, charging them with stock manipulation. But the charges against the Badian brothers were dropped after Thomas, an Austrian native, didn't return to the U.S. from Vienna to be arraigned.

Earlier this year,

Andreas Badian landed in hot water again over the Sedona deal. The SEC charged him and others with manipulating shares of Sedona on behalf of Amro International, a now-defunct hedge fund that invested in the controversial PIPE deal. Andreas Badian, who was not charged in the initial SEC case involving his brother, is contesting the charges.

Attorneys for the Badians either could not be reached for comment or declined to comment.

Investigators have spent many months poring over the Compudyne case, which has already led to a number of regulatory actions.

Friedman Billings Ramsey

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, the placement agent for the transaction, continues to be involved in settlement talks with the SEC and NASD over allegations that it too violated insider trading rules. The Virginia-based investment firm has proposed paying $7.5 million in fines for misusing confidential information about the Compudyne PIPE.

The scandal involving FBR reached the highest levels of the investment firm and led to last year's resignation of Emanuel Friedman as co-chief executive of the firm he co-founded. FBR has said that Friedman and two other former top executives are also involved in settlement talks with regulators.

Friedman did not return a phone call to his new investment firm, EJF Capital.

Last December, John Mangan, a former FBR broker, was charged by the NASD with improper trading in shares of Compudyne on behalf of a hedge fund he ran. In settling with regulators, Mangan paid a $125,000 fine and accepted a permanent ban from working in the brokerage business. Mangan's lawyer declined to comment on the grand jury investigation.