Stockgate - Naked Shorting Scandal: Manager Fined $125,000 to Resolve Charges in PIPE Deal

» Kirk - Manager Fined $125,000 to Resolve Charges in PIPE Deal

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I'd not be surprised if they only catch a few token illegal PIPE traders. I think this is much more common than they want you to believe.

Hedge Fund Manager, Former Broker John F. Mangan, Jr. Barred, Fined $125,000 to Resolve Charges in PIPE Shares Deal

http://www.prnewswire.com/cgi-bin/storie...

NASD Investigation into Other Individuals, Entities Continuing

WASHINGTON, Dec. 20 /PRNewswire/ -- NASD announced today that John F.
Mangan, Jr., a hedge fund manager formerly registered as a broker with
Friedman, Billings, Ramsey & Co. (FBR) of Arlington, VA, has been permanently
barred from associating with any NASD-registered firm and will pay a $125,000
fine to settle charges that he deceptively obtained shares in a PIPE
transaction, improperly sold the shares short, and shared in profits from the
shares without obtaining permission from FBR.

A PIPE ("Private Investment in a Public Equity") is a private offering in
which accredited investors agree to purchase restricted, unregistered
securities of public companies. Only after the SEC approves the PIPE shares'
registration are investors free to sell them on the open market. PIPE shares
can only be offered to "accredited" investors -- for example, investors with
assets of $1 million or more. NASD found that in September 2001, Maryland-
based Compudyne Corporation and its placement agent, FBR, offered accredited
investors -- on a confidential basis -- a PIPE deal proposing to sell
2,450,000 shares of common stock, which raised more than $29 million.

Not later than Sept. 28, 2001, Mangan learned through a firm-wide research
call that FBR had an investment banking relationship with Compudyne. Within a
few days, Mangan received copies of the Compudyne Private Placement Memo, a
Purchase Agreement and a sales script that FBR brokers were to use to market
the PIPE transaction to potential investors.

NASD found that Mangan wanted to invest in the PIPE through one of a group
of hedge funds he managed with a partner. Mangan contacted senior FBR
officials to inquire whether the hedge fund could invest in the PIPE. These
officials told Mangan in substance that a person associated with FBR should
not invest in the Compudyne PIPE and refused Mangan permission to buy shares
in the PIPE. Nevertheless, Mangan arranged for HLM Securities LLC ("HLM"), an
investment advisor owned by Mangan's partner, to buy 80,000 shares in the
PIPE. The restricted stock was sold at the below-market price of $12 per
share. In fact, FBR paid Mangan a commission of about $6,880 as the broker
responsible for HLM's purchase of the Compudyne PIPE.

Mangan and his partner agreed that Mangan would personally provide all the
funds necessary to buy the PIPE shares and that Mangan and his partner would
share equally in all profits from the PIPE. Mangan's partner was the only
signatory for HLM on the Purchase Agreement. Mangan failed to seek and obtain
written permission from FBR to purchase an interest in the Compudyne PIPE and
failed to disclose that he had arranged to acquire an interest in the
Compudyne PIPE through HLM, or that he had agreed to share profits from the
PIPE transaction with his partner.

On Oct. 9 and Oct. 12, 2001, Mangan caused HLM to place orders to sell
80,000 shares of Compudyne, and based on those orders, the executing broker
and prime broker treated the sales as "long" sales. In fact, HLM was naked
short selling the shares, and no affirmative determinations were made that HLM
could locate shares to borrow in order to make delivery by settlement date.
Mangan intended for HLM to profit by covering the naked short position in
Compudyne with shares acquired in the PIPE once they became registered.

On Oct. 31, 2001, after the PIPE shares were registered, HLM covered its
80,000-share short position using the 80,000 shares of Compudyne that HLM had
bought in the PIPE. As they had agreed, Mangan and his partner shared equally
in HLM's profits from the sale and purchase of Compudyne shares. Mangan
received a total profit of approximately $87,000.

In settling this matter with NASD, Mangan neither admitted nor denied the
charges, but consented to the entry of NASD's findings. NASD's investigation
into other individuals and entities involved in the Compudyne PIPE is
continuing. In May, Hilary Shane, a hedge fund manager formerly registered
with First New York Securities, was barred and ordered to pay more than $1.45
million in fines and restitution by NASD and the Securities and Exchange
Commission, to settle fraud and insider trading charges arising from her
purchase and sale of Compudyne PIPE shares.

Investors can obtain more information about, and the disciplinary record
of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck.
NASD makes BrokerCheck available at no charge to the public. In 2004, members
of the public used this service to conduct more than 3.8 million searches and
request almost 190,000 reports for existing brokers or firms. Investors can
link directly to BrokerCheck at http://www.nasdbrokercheck.com. Investors can
also access this service by calling 1-800-289-9999.

NASD is the leading private-sector provider of financial regulatory
services, dedicated to investor protection and market integrity through
effective and efficient regulation and complementary compliance and
technology-based services. NASD touches virtually every aspect of the
securities business -- from registering and educating all industry
participants, to examining securities firms, enforcing both NASD rules and the
federal securities laws, and administering the largest dispute resolution
forum for investors and member firms. For more information, please visit our
Web Site at http://www.nasd.com.

-- posted by Kirk