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SEC sanctions 19 firms and one individual trader for short selling violations

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The Securities and Exchange Commission (SEC) has imposed a further 20 sanctions in its continuing enforcement initiative against hedge fund advisers and private equity firms illegally participating in stock offers short selling the stock during a restricted period.

The SEC last year announced the initiative to enhance enforcement of Rule 105 of Regulation M, which is designed to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation. 
 
Rule 105 typically prohibits firms or individuals from short selling a stock within five business days of participating in an offering for that same stock.  Such dual activity typically results in illicit profits for the firms or individuals while reducing the offering proceeds for a company by artificially depressing the market price shortly before the company prices the stock.
 
The SEC’s investigations found that 19 firms and one individual trader charged in these latest cases engaged in short selling of particular stocks shortly before they bought shares from an underwriter, broker, or dealer participating in a follow-on public offering.  Each firm and the individual trader have agreed to settle the SEC’s charges and pay a combined total of more than USD9 million in disgorgement, interest, and penalties.
 
“Rule 105 is an important preventive measure designed to protect issuers from downward pressure on their stock price in advance of offerings,” says Andrew J. Ceresney, director of the SEC’s division of enforcement.  “These charges should remind investment advisers and others of the need for robust and comprehensive compliance programs covering Rule 105 compliance.”
 
In its ongoing Rule 105 initiative, the enforcement division is able to quickly identify potential violations through close coordination with the Financial Industry Regulatory Authority (FINRA) and the SEC’s National Exam Program.  Enforcement staff then seeks trading data and certain other relevant information from the traders.  The enforcement division expedites these cases by using uniform methodologies for determining trading profits and deciding appropriate penalties. 
 
The SEC has issued the following orders instituting settled administrative proceedings for Rule 105 violations during the last few years:
 
• Advent Capital Management – The New York-based firm agreed to pay disgorgement of USD75,292, prejudgment interest of USD3,836.36, and a penalty of USD65,000.
 
• Antipodean Advisors – The New York-based firm agreed to pay disgorgement of USD27,970, prejudgment interest of USD702.83, and a penalty of USD65,000.
 
• BlackRock Institutional Trust Company – The California-based firm agreed to pay disgorgement of USD1,122,400, prejudgment interest of USD22,471.13, and a penalty of USD530,479.
 
• East Side Holdings II – The New Jersey-based firm agreed to pay disgorgement of USD26,613, prejudgment interest of USD397.38, and a penalty of USD130,000.
 
• Explorador Capital Management – The Brazil-based firm agreed to pay disgorgement of USD83,722, prejudgment interest of USD6,936.65, and a penalty of USD65,000.
 
• Formula Growth – The Canada-based firm agreed to pay disgorgement of USD42,488, prejudgment interest of USD4,255.15, and a penalty of USD65,000.
 
• Great Point Partners – The Connecticut-based firm agreed to pay disgorgement of USD43,068, prejudgment interest of USD1,529.13, and a penalty of USD65,000.
 
• Indaba Capital Management – The California-based firm agreed to pay disgorgement of USD194,797, prejudgment interest of USD11,990.79, and a penalty of USD97,398.59.
 
• Ironman Capital Management – The Texas-based firm agreed to pay disgorgement of USD21,844, prejudgment interest of USD382.66, and a penalty of USD65,000.
 
• James C. Parsons – An individual trader who lives in New York City agreed to pay disgorgement of USD135,531, prejudgment interest of USD3,063.90, and a penalty of USD67,765.72.
 
• Midwood Capital Management – The Massachusetts-based firm agreed to pay disgorgement of USD72,699, prejudgment interest of USD5,248.19, and a penalty of USD65,000.
 
• Nob Hill Capital Management – The California-based firm made sworn statements to the Commission attesting to a financial condition that makes it unable to pay any penalty.
 
• RA Capital Management – The Massachusetts-based firm agreed to pay disgorgement of USD2,646,395.21, prejudgment interest of USD73,394.16, and a penalty of USD904,570.84.
 
• Rockwood Investment Management (also known as Rockwood Partners LP) – The Connecticut-based firm agreed to pay disgorgement of USD156,631, prejudgment interest of USD9,222.16, and a penalty of USD72,135.23.
 
• Seawolf Capital – The New York-based firm agreed to pay disgorgement of USD192,730, prejudgment interest of USD7,842.28, and a penalty of USD96,365.
 
• Solus Alternative Asset Management – The New York-based firm agreed to pay disgorgement of USD39,600, prejudgment interest of USD895.22, and a penalty of USD65,000.
 
• SuttonBrook Capital Management – The New York-based firm agreed to pay disgorgement of USD70,000.
 
• Troubh Partners – The New York-based firm agreed to pay disgorgement of USD262,744, prejudgment interest of USD39,315.13, and a penalty of USD106,651.15.
 
• Vinci Partners Investimentos – The Brazil-based firm agreed to pay disgorgement of USD283,480, prejudgment interest of USD23,487.08, and a penalty of USD141,740.
 
• Whitebox Advisors – The Minnesota-based firm agreed to pay disgorgement of USD788,779, prejudgment interest of USD48,553.49, and a penalty of USD365,592.83.

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