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
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.
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
( CDCYE). 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.
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."
Shane, who has a doctorate in finance from the Wharton School, declined to comment. Her attorney, Perrie Weiner, could not be reached for comment.
The regulatory action against Shane is just the first of several enforcement actions to arise from the Compudyne PIPE.
Friedman Billings Ramsey
, the placement agent for the transaction, is 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 and restitution for misusing confidential information about the Compudyne PIPE to make trades.
The scandal involving FBR reaches to the highest levels of the investment firm and led to the sudden resignation last month of Emanuel Friedman as co-chief executive officer 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.
The other two executives, Scott Dreyer, head of trading at the firm, and Nicholas Nichols, FBR's compliance officer, also have both left. Dreyer is the brother-in-law of Jonathan Billings, the firm's senior managing director for trading. Jonathan Billings is the brother of Eric Billings, the chairman of the firm.
The fallout from the regulatory investigation has contributed to a 31% slide in Friedman Billings' stock price this year and spawned a flood of class-action lawsuits.
The investigation of the Compudyne deal is part of a broader inquiry by securities regulators into manipulative trading in the PIPEs market. A year ago, the SEC issued subpoenas and requests for documents to 20 brokerages that arranged PIPE deals for cash-strapped companies. Regulators subsequently issued subpoenas to about 10 hedge funds.
The probe is focusing on allegations of stock manipulation by hedge funds, which tend to be the biggest investors in these shadowy stock sales, and allegations of wrongdoing by the Wall Street firms that round up buyers. PIPEs are popular with hedge funds because the buyers can get preferred stock or bonds that convert into common shares at a discount to market prices.