LAWFUEL – Law News, Law Jobs Network – On December 28, 2006, the Securities and Exchange Commission (Commission) filed a complaint against John F. Mangan, Jr. (Mangan) in the United States District Court for the Western District of North Carolina alleging that Mangan committed unlawful insider trading by short selling securities of CompuDyne Corporation prior to the public announcement of a private investment in public equity (PIPE) offering. The complaint also alleges that Mangan engaged in unregistered sales of securities. At the time of the relevant conduct, Mangan was a registered representative of Friedman, Billings, Ramsey & Co., Inc. (FBR), a registered broker-dealer and the placement agent for the PIPE offering. Mangan executed his alleged illegal trades through the account of HLM Securities, LLC (HLM), which was an account of his business partner, Hugh L. McColl, III (McColl III).
The Commission’s complaint alleges that in the fall of 2001, Mangan, on the basis of material, nonpublic information concerning the PIPE offering, and in breach of duties of trust and confidence, traded in CompuDyne stock in advance of the public announcement of the CompuDyne PIPE offering and its terms. As a result of his unlawful insider trading, Mangan reaped $56,937 in ill-gotten gains.
The complaint further alleges that after the public announcement of the PIPE offering, Mangan continued short selling CompuDyne stock. After the resale registration statement became effective, Mangan used the shares that HLM obtained in the PIPE offering to cover all of the short sales. By short selling CompuDyne securities before the effective date of the resale registration statement for the CompuDyne PIPE shares, and covering the short sales with the shares HLM received from the PIPE offering, Mangan effectively sold HLM’s PIPE shares prior to their registration. As a result of Mangan’s unregistered sales of CompuDyne stock, he obtained an additional $121,933 in ill-gotten gains. Mangan split the profits he earned from his improper trading with McColl III.
The Commission’s complaint alleges that Mangan’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 (Exchange Act) and Rule 10b-5 thereunder. The complaint further alleges that Mangan violated Sections 5(a) and 5(c) of the Securities Act by short selling CompuDyne shares prior to the effective date of the resale registration statement for the PIPE shares and covering those short sales with the shares HLM purchased in the PIPE offering. The complaint also alleges that the Commission has named McColl III solely as a relief defendant in that action, in connection with his receipt of trading profits from Mangan.
Without admitting or denying the allegations in the complaint, McColl III has consented to the entry of a final order, subject to the court’s approval, requiring McColl III, solely as a relief defendant, to pay a total of $115,643.
The Commission acknowledges the assistance of the NASD with respect to this matter.