U.S., Canadian Regulators Charge trio of Hedge Fund Managers

The Globe and Mail

By Michael Flaherty
February 5, 2005

U.S. and Canadian regulators have charged three hedge fund managers with insider stock trading violations as part of an investigation launched last spring into a string of alleged short-selling abuses.

Maryland-based CompuDyne Corp. said this week it recently learned that former investor Hilary Shane faces National Association of Securities Dealers charges of violating securities laws in a financing deal the security company did in October of 2001.

Ms. Shane, a former hedge fund manager at First New York Securities LLC, made $1.1-million (U.S.) from inside information of the deal, according to an NASD complaint filed in late December.

Michael Finkelstein and Elizabeth Leonard of Toronto-based Stonestreet LP face similar charges by the Investment Dealers Association, a Canadian self-regulatory group.

The charges come less than a year after the U.S. Securities and Exchange Commission and brokerages watchdog NASD pursued allegations of hedge funds profiting from inside knowledge of private investments in public equity, a transaction known as a PIPE.

PIPEs help cash-strapped companies raise money quickly by selling discount-priced shares to a group of investors. The stock of a company conducting a PIPE usually falls in the short-term because the transaction floods the market with additional shares.

Regulators are investigating whether individuals who helped finance a PIPE profited from selling short the company's shares before the deal closed, knowing its stock was about to fall.

Ms. Shane, who left First New York in 2002, is accused of doing exactly that.

Short sellers borrow shares of a company and then sell them in anticipation of a decline. They profit when the stock falls since they can buy back the shares at a lower price and pocket the difference.

In September, 2001, a representative at investment bank Friedman Billings Ramsey Group Inc. contacted Ms. Shane about doing a PIPE with CompuDyne, according to the NASD complaint.

The complaint says Ms. Shane made false representations about her investment intent, obtained the right to acquire 475,000 shares of CompuDyne and then engaged in unlawful insider trading by selling the company's stock short while in possession of material, non-public information.

First New York has not been charged in relation to the case. Ms. Shane could not be reached for comment.

The complaint does not list charges against FBR Group and a FBR Group spokesman declined to comment further.

Mr. Finkelstein and Ms. Leonard face similar charges stemming from a PIPE involving Novatel Wireless Inc. in 2001, and another with Trikon Technologies Inc. a year later.

Stonestreet LP's website lists Mr. Finkelstein and Ms. Leonard as officers of the investment firm. The IDA complaint says Stonestreet maintains a non-client account at Canaccord Capital Corp.'s Toronto office that operates as a hedge fund, which Mr. Finkelstein and Ms. Leonard co-manage.

The fund would hedge against its anticipated investment in a PIPE by “shorting the issuer's underlying stock,” according to the complaint that was filed on Jan. 7.

Reached by telephone at Stonestreet, Mr. Finkelstein said he would not comment. Ms. Leonard could not be reached.

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