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He’s Banned by FINRA. And He’s Chair of a University Endowment.

When board members find themselves in trouble with regulators, institutions often don’t react as one might expect.

The investment committee chair for the University of Georgia’s $1.2 billion endowment is permanently banned from the securities industry. 

John Mangan Jr. agreed to the ban and a $125,000 fine in 2005, when the industry’s self-regulatory organization found he had traded against his firm’s wishes on nonpublic information in September 2001. At the time, Mangan ran a group of hedge funds and worked as a broker at investment bank Friedman, Billings, Ramsey & Co. (now Arlington Asset Investment Corp.). FBR treated the hedge funds — Mangan & McColl Partners — as proprietary accounts, according to regulators. Mangan and his partner owned the holding company, but all trades had to be cleared with FBR compliance. The Virginia-based investment bank lost several executives over the scandal. 

Enter “John Mangan” in BrokerCheck, the public database run by the Financial Industry Regulatory Authority (FINRA), and up pops his profile with “BARRED” stamped on top.

Sanctions and news reports on the charges dominate his Google search results. 

Industry experts expressed surprise at Mangan’s position and background, which have not been tied together in the press until now. 

“In the Georgia case, if in fact he was censured and barred from the industry, he should not be allowed to serve on the committee,” says one executive recruiter, a sector specialist who declined to give his name, citing fears of retribution. “And shame on the University of Georgia for letting that happen. If we were recruiting for an investment board member, which we do on occasion, we would never propose a candidate that had faced professional charges.”

Mangan has been able to bounce back professionally due to a couple of factors, experts suggest. First, institutions often don’t respond as firmly as one might imagine when their board members are in legal or ethical hot water. 

Second, Mangan’s situation is especially nuanced. 

The industry’s self-regulator — then the National Association of Securities Dealers, a FINRA predecessor — investigated the 2001 trades and found rule violations, which resulted in the permanent ban. But so did the Securities and Exchange Commission, which in late 2006 charged Mangan with insider trading and selling unregistered securities. He fought those charges in court. And he won.  

“John Mangan became a trustee of the University of Georgia Foundation in 2014. All potential trustees are vetted prior to an invitation to join the board,” spokesperson Rebecca Fuller Beeler said in an emailed statement to Institutional Investor. “The trustees of the foundation were aware of the SEC’s investigation of Mr. Mangan in 2006 as well as the dismissal of the SEC’s case by a federal court in August of 2008. John is a trusted adviser to the foundation, a fervent supporter of the University of Georgia, and a valued member of the foundation’s board of trustees.”

Mangan declined to comment when reached through ArunA Biomedical, an Athens, Georgia-based biotech firm whose board he sits on. 

“What a fact-rich case — it could be used for a law school exam,” says an attorney with expertise in the area. He reviewed the details and legal documents associated with Mangan’s cases and assessed them on background at II’s request. 

For the UGA Foundation, he suggested, “quite possibly, exoneration on the SEC charges blots out visibility of the FINRA sanctions that went before, particularly since the two proceedings were overlapping in part.” 

But they were only overlapping in part. Mangan’s exoneration on the SEC charges doesn’t clear the FINRA violations. Those were different. While the SEC’s failed case centered on insider trading, FINRA banned him for trading without FBR’s authorization and by means of “deceptive device or contrivance.” Those aren’t necessarily against the law, but they are against industry rules. 

Regulators’ basic account of what happened is as follows. In September 2001, Mangan’s employer, FBR, was facilitating a private securities offering for Compudyne, a client of the investment banking division. FBR’s employees were told of this private-investment-in-a-public-equity (PIPE) transaction so its brokers could market the security to accredited investors. Mangan wanted to invest through one of the hedge funds that he managed with a partner and that FBR oversaw. He asked FBR’s compliance department for the necessary go-ahead. 

But, according to FINRA, senior FBR 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.” Mangan bought 80,000 shares anyway, via his partner’s investment vehicle, and paid the PIPE’s set price of $12 per share — below the market value of Compudyne’s common stock. The two partners agreed to split any profits. He then shorted Compudyne’s common stock using the same vehicle, covered with the PIPE shares, and made money on the spread. 

It was a classic arbitrage play, the attorney pointed out in his assessment. 

“Mangan got the SEC charges dismissed on a basis that likely had the SEC pulling its hair out. On the basis of actual market price information, the judge ruled that the nonpublic information that Mangan had when he shorted the PIPE (the fact that Compudyne was making an as-yet-unannounced ‘confidential’ PIPE offering) was not in fact material. Sputtering in response, the SEC would probably want to say, ‘But he was doing his level best to profit from MNPI [material nonpublic information]; it had simply started to leak and others with the same MNPI were also shorting,’” the lawyer wrote.    

“FINRA could have in all likelihood sanctioned Mangan for simply failing to follow the instruction of Friedman Billings compliance not to purchase the PIPE for an affiliated account. The court opinion recites this very fact, but whereas it is a FINRA violation, it does not relate to the offenses that the SEC was seeking to punish (insider trading and sale of unregistered securities),” he explained.

“The bottom line would seem to be that the FINRA sanctions can be reconciled with the fact that the SEC insider trading case was subsequently dismissed,” he concluded. 

How UGA Foundation officials reconcile the FINRA sanctions — which Mangan signed but didn’t require him to admit guilt — with Mangan’s role as chair and a fiduciary is an open question. When asked, the organization did not address it. 

These situations are rare. But when they do happen, leaders have the uncomfortable burden of weighing the right to due process with reputational risk. 

To further complicate matters, investment board members at nonprofits are typically major donors. Mangan and his wife, for example, belong to the highest tier of UGA’s Presidents Club, meaning they give at least $10,000 a year. 

Institutions should set policies for handling accusations in advance, rather than reacting on the fly, says Rick Funston, the former head of Deloitte & Touche’s governance and risk oversight practice. 

“In the environment of #MeToo, it’s not just legal and regulatory matters that can cause problems,” Funston says. “Reputational risk is severe for any of these kinds of cases. Reputations are gained by inches a year and lost in feet per second. Charges or allegations can affect the ability of an organization to operate.” 

Just as important as knowing what to do is having the power to do it. “Generally speaking, we see that it’s very difficult for boards to sanction board members who have committed transgressions,” Funston says, speaking of U.S. public pension funds in particular. At the UGA Foundation, for example, the mechanism to remove trustees is laid out in its bylaws. With the support of two thirds of the voting trustees, anyone can be ejected “with or without cause.” 

Institutions have been getting less tolerant of reputational risk, according to Funston and Christopher Klem, a retired attorney. Klem spent more than 25 years as chief outside legal adviser to Harvard Management Company, which invests the world’s largest university endowment. Told briefly of Mangan and UGA, Klem says he has never personally encountered such a situation. 

“I’ve seen others go by; I’ve wondered, honestly, what the right response is,” he says. “When I started practicing law, the prevailing view was that if charges were made, people were entitled to their day in court. The director of some outside board — who had served well without outside incident — would be given that right to due process as well.” Now, Klem says, “certainly there is a greater acceleration on accusations from a reputational point of view.”

Oberlin College’s handling of regulatory charges against its investment chair may be more typical than UGA’s in the current environment. In 2015 the SEC charged Thomas Kutzen with two counts of aiding, abetting, and causing certain violations of anti-fraud law at his hedge fund AlphaBridge Capital Management. He declined to comment for this article. 

Kutzen was at the time head of Oberlin’s endowment board and a member of the executive, debt, and audit committees. AlphaBridge’s head of compliance, Michael Carino, was banned from the industry for three years, and AlphaBridge shut down, reimbursing clients more than $4 million in fees. Kutzen settled the charges without admitting guilt, but Oberlin remained silent in the days following the news. 

Finally, when a reporter began emailing other endowment board members for comment on the charges at the time, Oberlin said in an announcement that Kutzen had resigned. But the announcement lauded him for serving “with distinction for five years as investment committee chair” and “improving Oberlin’s endowment performance and risk profile.” The college said he would remain involved as a volunteer. 

Even when trustees face grave accusations of misconduct, institutions tend to treat them with dignity and — up to a point — loyalty. For all that the culture has swung away from “innocent until proven guilty” to brand protection, a black mark isn’t a life sentence. Exhibit A: Michael Milken, the so-called junk bond king who went to prison in the early ’90s in connection with the scandal that took down Drexel Burnham Lambert. Milken has since reinvented himself, founding the Milken Institute and hosting its annual star-studded conference.

Likewise, former Goldman Sachs partner and famed hedge fund manager Leon Cooperman fought — and eventually settled — insider trading charges against him and his firm, Omega Advisors. Throughout all that, Cooperman served on Columbia Business School’s board of overseers, and still does. 

“It’s such a gray area,” reflects the executive recruiter. “I think if somebody is charged with a DUI, and it’s a one-off? Yes, we can get past that. If someone is found guilty and barred from the industry, that should in fact disqualify someone from serving on an investment committee for an endowment or foundation. They have breached their fiduciary duty. And if they’ve done that for their own firm, what’s to say they won’t do that at another organization?”