Securities regulators allege a former hedge fund manager generated up to $1.1 million in profits from unlawful trading in shares sold by a Maryland security company in a private placement. The NASD charged Hilary Shane, a former hedge fund manager at First New York Securities, with employing a "scheme or artifice to defraud," in a civil complaint filed on Dec. 21, 2004. Regulators contend Shane profited from a series of short trades she made using inside information about a $12 million private stock sale by Compudyne ( CDCY) in October 2001. The complaint alleges Shane improperly bet against shares of Compudyne in advance of the stock sale both for her own account and the hedge fund she formerly managed, First New York's FNY Millennium Partners fund. (The hedge fund is not affiliated with Israel Englander's better-known Millennium Partners.) The charges against Shane, which are still pending before an NASD disciplinary panel, are the first to be filed against a hedge fund manager in the investigation into manipulative trading in the market for private investments in public equity, known on Wall Street by the acronym PIPEs. A copy of the complaint against Shane, which the NASD has not sought to publicize, was obtained by TheStreet.com. Last spring, the Securities and Exchange Commission issued subpoenas and requests for documents to 20 brokerages that have arranged PIPE deals for cash-strapped companies. Regulators subsequently issued subpoenas to about 10 hedge funds. The SEC is working in tandem with a parallel inquiry by the NASD. This is not the first time the Compudyne PIPE deal has attracted regulatory scrutiny. In November, Friedman Billings Ramsey ( FBR), the Virginia-based investment firm that served as the placement agent for the stock sale, disclosed that the SEC and NASD both are investigating the firm's activities in the transaction. Sources say the regulators are looking into allegations of improper trading in Compudyne shares by Friedman Billings' proprietary hedge funds.