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February 04, 2005 at 07:00 PM
NEW YORK (HedgeWorld.com)–The NASD has brought a formal disciplinary action against Hilary Shane, a former hedge fund manager, for unlawful insider trading.
The complaint, signed by Cameron K. Funkhouser, the NASD’s senior vice president, department of market regulation, asks the NASD disciplinary panel to order Ms. Shane to disgorge all profits realized from the trades in question, as well as the costs of the proceedings.
Ms. Shane could not be reached for comment.
This dispute arose out of a private placement in the public equity (PIPE) of Compudyne Corp., in October 2001. Compudyne sells security-related products and services to jails, prisons, courthouses and other government buildings.
On Sept. 28, 2001, a representative of Compudyne’s placement agent informed Ms. Shane of the anticipated PIPE in a telephone conversation. That representative asked for, and received, her assurance that his communications were confidential. On the same date, the agent, Friedman Billings Ramsey & Co. Inc., Arlington, Va., sent a copy of the purchase agreement and the private placement memorandum to Ms. Shane by courier. Also beginning that date, after the telephone conversation, Ms. Shane began to sell CDCY short on two accounts of her own and in the accounts of two hedge funds whose trading she controlled. By the end of trading on Oct. 1, her total short position for the four accounts was 17,200 shares, according to the complaint. A spokeswoman for FBR said that firm wouldn’t comment on the complaint or the underlying transaction.
A short position on a stock just before a large PIPE is a safe bet on supply/demand equilibrium grounds.
On Oct. 2, Ms. Shane attended a road show conducted by Compudyne’s chief executive and chief financial officers, at the offices of her employer, First New York Securities LLC. At that road show, Compudyne reiterated that the private placement was confidential. Later that day and the following day, Ms. Shane increased her total short position in the four accounts to approximately 88,100 shares.
She covered these short positions by purchases on Oct. 4 and 5. The profits from her trading in CDCY between Sept. 28 and Oct. 5 were approximately US$56,151.
