John Mangan Jr. fought the SEC and won.
A U.S. District Court judge on Wednesday dismissed the remaining charge against the former Charlotte hedge fund manager in a long-running securities case.
U.S. District Court Judge Graham Mullen threw out the Securities and Exchange Commission's allegation of insider trading in a summary judgment ruling. The case related to a trade Mangan made in 2001 when he worked for the Charlotte office of investment bank Friedman Billings Ramsey.
In October, Mullen dismissed an SEC claim that Mangan had committed a violation in a transaction involving a Maryland-based security company called CompuDyne Corp. At the time, the judge said he was “very close” to dismissing the related insider trading charge.
“I feel vindicated,” Mangan, 48, said in an interview Thursday. “I had done nothing wrong. I was not going to stand to have my good name smeared.”
The two SEC charges were initially filed in December 2006 after a regulatory investigation that started in 2002. SEC spokesman John Nester said the agency was disappointed with the ruling. “We're reviewing the decision and considering whether to appeal,” Nester said.
Mangan, who was represented by attorneys James Wyatt and George Covington, said it had been a burden fighting the government charges and that he was thankful for the support he and his wife, Francie, received from friends in the Charlotte community.
Now a private investor, he said he is considering “a variety of opportunities,” including ones in the investment arena, but declined to give details. His hedge fund, Mangan & McColl Partners, closed in 2006.
Mangan first faced public scrutiny in the case in December of 2005 when he agreed to pay the National Association of Securities Dealers $125,000 to settle allegations related to the CompuDyne trade. He also agreed to be barred from working at a registered securities firm. He neither admitted nor denied wrongdoing at the time.
On Thursday, Mangan's spokeswoman issued a statement saying Mangan entered the NASD agreement after a Friedman Billings Ramsey attorney advised him to settle to put the issue behind him.
“Mr. Mangan never agreed to the terms of the NASD claim and did not pay the fine,” the statement said. “Now that Mr. Mangan has been fully vindicated on this matter and there was clearly no infraction, he plans to revisit the matter because of the circumstances of which it was entered into. There are absolutely no grounds for it to stand.”
Herb Perone, a spokesman for the NASD (now part of the Financial Industry Regulatory Authority), said there is no procedure for appealing a voluntarily entered into agreement. He said the enforcement action did not charge insider trading but instead “enumerated findings of misconduct by NASD investigators.”
Perone said Mangan voluntarily signed the NASD agreement and was represented by an attorney. The agreement includes a provision that says he will not “make or permit to be made any public statement … denying, directly or indirectly, any allegation” in the agreement. The NASD spokesman declined to comment further on the case.
Sensitive PIPE deal
Mangan's marathon legal battle stems from Friedman Billings Ramsey's work for CompuDyne in the fall of 2001.
According to the SEC complaint, CompuDyne hired FBR in September of that year to underwrite a so-called “private investment in public equity,” or PIPE. In these investments, accredited investors agree to privately purchase securities issued by a company, which they later can sell to public investors with permission of regulators.
PIPE deals are sensitive because when they are publicly announced they can lead to a drop in a company's share price because the offering dilutes the holdings of existing shareholders.
The SEC complaint alleged Mangan, while working for FBR, made an illegal trade in CompuDyne stock through HLM Securities, an account owned by former hedge fund partner Hugh McColl III. The SEC said Mangan reaped a total of $178,870 from the trading, which he split with McColl.
Mangan sold CompuDyne shares short, a technique in which investors can profit from an anticipated decline in a stock's value. As part of this transaction, the SEC argued Mangan “effectively” sold securities that had not yet been registered. Judge Mullen disagreed in dismissing the so-called “Section 5” charge last year.
The claim thrown out Wednesday revolved around the timing of the trade, which occurred on Oct. 9, 2001. According to Wednesday's ruling, Mangan placed an order to sell short 25,000 CompuDyne shares that morning before the market opened.
The trade was made starting at 9:36 a.m. but the CompuDyne PIPE wasn't publicly disclosed until 11:45 a.m. According to the ruling, Mangan, who was on a flight to Boston that morning, claimed he was unaware of the unexpected delay in the PIPE announcement. Typically, the announcement would have been made before the market opened at 9:30.
The SEC claimed that Mangan made the trade prior to the public announcement “in an effort to fraudulently take advantage of his knowledge of the PIPE,” according to the ruling. The SEC contended there was a “significant risk” that the PIPE would be viewed negatively by investors, lowering the share price and benefiting Mangan, who knew of the impending announcement.
But in his ruling, Mullen sided with Mangan, calling one of the SEC's arguments “woefully inadequate.” Mullen also noted that Mangan made his trade at an average price of $14.16 – less than the Oct. 9 closing price of $14.25.
As part of the case, McColl III, agreed in 2006 to pay the SEC $115,643 – proceeds the SEC alleged he received from Mangan's transactions, plus interest.
McColl, the son of retired Bank of America Corp. chief executive Hugh McColl Jr., consented to the payment without admitting or denying the allegations in the complaint. He was named as only a “relief defendant,” meaning he did not engage in any wrongdoing but had possession of funds obtained from someone else.
McColl spokesman Steve Luquire on Thursday said the money had been placed in an escrow account as part of that agreement pending the outcome of Mangan's case. With the dismissal of charges against Mangan, the money should now be returned to McColl, Luquire said.
Over the years, the CompuDyne case has also led to problems for others involved in the offering. In 2006, Virginia-based FBR and three former executives, including co-founder and chairman Emanuel Friedman, agreed to pay regulators more than $9 million to settle insider-trading allegations involving CompuDyne.