U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19227 / May 18, 2005
SECURITIES AND EXCHANGE COMMISSION v. HILARY L. SHANE, Civil Action No. 05 CIVIL 4772 (S.D.N.Y.)
SEC CHARGES HEDGE FUND MANAGER HILARY SHANE WITH INSIDER TRADING AND UNREGISTERED SALES OF SECURITIES IN CONNECTION WITH “PIPE” OFFERING
SHANE AGREES TO PAY OVER $1 MILLION TO SETTLE CHARGES
On May 18, 2005, the Securities and Exchange Commission (Commission) filed a complaint against Hilary L. Shane in the United States District Court for the Southern District of New York alleging that Shane committed insider trading and registration violations by short selling securities of CompuDyne Corporation prior to the public announcement of a private investment in public equity (PIPE) offering and prior to the effective date of the resale registration statement for the PIPE shares. Without admitting or denying the allegations in the complaint, Shane consented to the entry of a final judgment, subject to the court’s approval, in which she is permanently enjoined from further violations of the antifraud and registration provisions of the federal securities laws and agreed to pay disgorgement of the trading profits, plus prejudgment interest and a civil penalty totaling $1,075,015. Shane also has consented to be barred from the broker-dealer industry and suspended from the investment advisory industry.
The Commission’s complaint alleges that, in September of 2001, Shane was asked to participate in a PIPE offering by CompuDyne. In a PIPE offering, investors commit to purchase a certain number of restricted shares from a company at a specified price and the company agrees, in turn, to file a resale registration statement so that the investors can resell the shares to the public. The complaint alleges that the PIPE offering was likely to have a significant dilutive effect on the value of existing CompuDyne shares because the PIPE shares would increase the supply of stock in the market by more than 200% and the PIPE shares were offered at a price of $12 per share when the current market price was $17.38. In fact, the market reacted negatively when CompuDyne announced the PIPE offering, with the price dropping to a closing price of $14.25. The stock price continued to trend downward thereafter to close at $12.02 on the first trading day after the resale registration statement for the PIPE shares became effective.
The Commission’s complaint also alleges that on October 8, 2001, Shane agreed to purchase shares in the PIPE offering for her personal account and for one of the hedge fund accounts she managed. Shane agreed both orally and in writing to keep information about the PIPE offering confidential. The following morning, before the public announcement of the PIPE offering, Shane began short selling CompuDyne securities in both her personal account and the hedge fund’s account. Shane continued short selling CompuDyne shares until she had sold the same number of shares she had been allocated in the PIPE offering. Shane covered all of her short sales with the shares she obtained in the PIPE offering making substantial profits for both accounts.
The Commission’s complaint alleges that Shane’s short selling of CompuDyne shares prior to the public announcement of the PIPE offering violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleges that Shane’s short selling of CompuDyne shares prior to the effective date of the resale registration statement for the PIPE shares and covering those short sales with the shares she obtained in the PIPE offering violated Sections 5(a) and 5(c) of the Securities Act.
The staff coordinated its investigation with the NASD, which also announced today a separate settlement with Shane of its enforcement proceeding. The Commission’s investigation is continuing.