The Securities and Exchange Commission has launched enforcement actions against 23 firms for short selling violations.
The agency is increasing its focus on preventing firms from improperly participating in public stock offerings after selling short those same stocks. Such violations typically result in illicit profits for the firms.
The enforcement actions are being settled by 22 of the 23 firms charged, resulting in more than USD14.4 million in monetary sanctions.
The SEC’s Rule 105 of Regulation M prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering. The rule applies regardless of the trader’s intent, and promotes offering prices that are set by natural forces of supply and demand rather than manipulative activity. The rule therefore helps prevent short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.
The firms charged in these cases allegedly bought offered shares from an underwriter, broker, or dealer participating in a follow-on public offering after having sold short the same security during the restricted period.
“The benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent,” says Andrew J Ceresney, Co-Director of the SEC’s Division of Enforcement. “Through this new program of streamlined investigations and resolutions of Rule 105 violations, we are sending the clear message that firms must pay the price for violations while also conserving agency resources.”
The SEC’s National Examination Program simultaneously has issued a risk alert to highlight risks to firms from non-compliance with Rule 105. The risk alert highlights observations by SEC examiners focusing on Rule 105 compliance issues as well as corrective actions that some firms proactively have taken to remedy Rule 105 concerns.
“This coordination between the enforcement and examination programs reaffirms that market participants must be in compliance with Rule 105 to preserve and protect the independent pricing mechanisms of the securities markets,” says Andrew Bowden, Director of the SEC’s National Exam Program.
In a litigated administrative proceeding against G-2 Trading LLC, the SEC’s Division of Enforcement is alleging that the firm violated Rule 105 in connection with transactions in the securities of three companies, resulting in profits of more than USD13,000. The Enforcement Division is seeking full disgorgement of the trading profits, prejudgment interest, penalties, and other relief as appropriate and in the public interest.
The SEC charged the following firms in this series of settled enforcement actions:
• Blackthorn Investment Group – Agreed to pay disgorgement of USD244,378.24, prejudgment interest of USD15,829.74, and a penalty of USD260,000.00.
• Claritas Investments Ltd. – Agreed to pay disgorgement of USD73,883.00, prejudgment interest of USD5,936.67, and a penalty of USD65,000.00.
• Credentia Group – Agreed to pay disgorgement of USD4,091.00, prejudgment interest of USD113.38, and a penalty of USD65,000.00.
• D.E. Shaw & Co. – Agreed to pay disgorgement of USD447,794.00, prejudgment interest of USD18,192.37, and a penalty of USD201,506.00.
• Deerfield Management Company – Agreed to pay disgorgement of USD1,273,707.00, prejudgment interest of USD19,035.00, and a penalty of USD609,482.00.
• Hudson Bay Capital Management – Agreed to pay disgorgement of USD665,674.96, prejudgment interest of USD11,661.31, and a penalty of USD272,118.00.
• JGP Global Gestão de Recursos – Agreed to pay disgorgement of USD2,537,114.00, prejudgment interest of USD129,310.00, and a penalty of USD514,000.00.
• M.S. Junior, Swiss Capital Holdings, and Michael A. Stango – Agreed to collectively pay disgorgement of USD247,039.00, prejudgment interest of USD15,565.77, and a penalty of USD165,332.00.
• Manikay Partners – Agreed to pay disgorgement of USD1,657,000.00, prejudgment interest of USD214,841.31, and a penalty of USD679,950.00.
• Meru Capital Group – Agreed to pay disgorgement of USD262,616.00, prejudgment interest of USD4,600.51, and a penalty of USD131,296.98.00.
• Merus Capital Partners – Agreed to pay disgorgement of USD8,402.00, prejudgment interest of USD63.65, and a penalty of USD65,000.00.
• Ontario Teachers’ Pension Plan Board – Agreed to pay disgorgement of USD144,898.00, prejudgment interest of USD11,642.90, and a penalty of USD68,295.
• Pan Capital AB – Agreed to pay disgorgement of USD424,593.00, prejudgment interest of USD17,249.80, and a penalty of USD220,655.00.
• PEAK6 Capital Management – Agreed to pay disgorgement of USD58,321.00, prejudgment interest of USD8,896.89, and a penalty of USD65,000.00.
• Philadelphia Financial Management of San Francisco – Agreed to pay disgorgement of USD137,524.38, prejudgment interest of USD16,919.26, and a penalty of USD65,000.00.
• Polo Capital International Gestão de Recursos a/k/a Polo Capital Management – Agreed to pay disgorgement of USD191,833.00, prejudgment interest of USD14,887.51, and a penalty of USD76,000.00.
• Soundpost Partners – Agreed to pay disgorgement of USD45,135.00, prejudgment interest of USD3,180.85, and a penalty of USD65,000.00.
• Southpoint Capital Advisors – Agreed to pay disgorgement of USD346,568.00, prejudgment interest of USD17,695.76, and a penalty of USD170,494.00.
• Talkot Capital – Agreed to pay disgorgement of USD17,640.00, prejudgment interest of USD1,897.68, and a penalty of USD65,000.00.
• Vollero Beach Capital Partners – Agreed to pay disgorgement of USD594,292, prejudgment interest of USD55.171, and a penalty of USD214,964..
• War Chest Capital Partners – Agreed to pay disgorgement of USD187,036.17, prejudgment interest of USD10,533.18, and a penalty of USD130,000.00.
• Western Standard – Agreed to pay disgorgement of USD44,980.30, prejudgment interest of USD1,827.40, and a penalty of USD65,000.00.
The SEC’s investigations were conducted by Conway T Dodge, Anita B Bandy, Lauren B Poper, Christina M Adams, Allen A Flood, Kevin J Gershfeld, Wendy Kong, Mary S Brady, Ian S Karpel, Kimberly L Frederick, and J Lee Robinson. The SEC’s litigation will be led by James A Kidney. The SEC appreciates the ongoing assistance of the Financial Industry Regulatory Authority.