Former hedge fund manager Hilary Shane can avoid prison if she stays on the straight and narrow for the next six months.

Federal prosecutors in New York struck a deferred-prosecution deal with Shane yesterday. Under the terms of the agreement, Shane must pay a $50,000 fine and obey the law for six months. If she does so, the government will move to dismiss her 2006 indictment on insider trading charges. Shane, who had pleaded not guilty, had faced as much as 100 years in prison if convicted of the five counts.

In addition to not breaking the law, Shane is also barred from associating with any investment adviser, and must notify the government if she plans to travel abroad. Three years ago, Shane settled NASD and Securities and Exchange Commission charges over the same alleged insider trading, paying $1.45 million and agreeing to be permanently barred from associating with any NASD-registered firm.

“After a thorough investigation it has been determined that the interest of the United States and your own interest will be best served by deferring prosecution,” the agreement, signed by Shane, U.S. Attorney Michael Garcia and U.S. District Judge Naomi Reice Buchwald, states.

Shane was caught up in a probe of hedge fund short-selling in advance of the issuance of private investment in public equity shares. According to the government and regulators, she shorted shares of security systems company CompuDyne Corp. before it publicly announced a 2001 PIPE offering.

Shane still faces a civil lawsuit filed by CompuDyne.