The Securities and Exchange Commission has charged two California investment advisory firms for engaging in improper short selling of securities in advance of their participation in a company’s secondary offering.
These mark the first cases filed under the SEC’s amended Rule 105 of Regulation M, which is designed to prohibit manipulative short selling ahead of follow-on securities offerings.
In one case, the SEC charged Los Angeles-based AGB Partners and its principals Gregory A. Bied of Boise, Idaho, and Andrew J. Goldberger of Santa Monica, California, finding that they netted thousands of dollars in improper profits by shorting in advance of their purchase of stock in a secondary offering.
In the other case, the SEC charged Los Angeles-based Palmyra Capital Advisors, finding that the firm violated short selling rules and improperly profited in three of its managed hedge funds.
Both firms have agreed to settle the SEC’s charges.
Rule 105 is intended to prevent abusive short selling and market manipulation by ensuring that offering prices are set by the market forces of supply and demand for the securities in an offering rather than by manipulative activity.
The SEC is concerned that short selling ahead of offerings may reduce the proceeds received by public companies and their shareholders by artificially depressing the market price shortly before the company prices its offering.
The SEC amended Rule 105 effective October 2007 to prevent this trading practice known as "shorting into the deal." The revised rule generally prohibits the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.
The SEC found that AGB Partners violated both the pre- and post-amended Rule 105 to gain illicit profits. According to the SEC’s order, AGB Partners used secondary offering shares in April 2007 to cover a portion of a short position in Boots & Coots International Well Control. In June 2008, under the amended rule, AGB Partners sold short shares of BGC Partners and then purchased BGC Partners shares in the company’s secondary offering.
According to the SEC’s order, AGB Partners used two accounts. The account that was used for short selling consisted solely of Bied’s and Goldberger’s personal funds. The other account, a private investment fund they managed for outside clients, was used for participating in the follow-on offerings.
Although amended Rule 105 created an exception to allow otherwise prohibited trades if the trades occur in separate accounts, the SEC’s order found that Goldberger’s and Bied’s close collaboration with the accounts fell outside the separate accounts exception.
In its order against Palmyra, the SEC found that the firm violated Rule 105 in connection with short sales made in advance of a public offering by Capital One Financial, resulting in improper profits of USD225,500. Palmyra sold short a total of 50,000 shares of Capital One stock on 18 September 2008, and then received 50,000 shares from Capital One’s secondary offering on 24 September 2008.
In settling the SEC’s charges without admitting or denying the commission’s findings, AGB Partners, Bied and Goldberger consented to be censured and pay more than USD50,000 in disgorgement and penalties. Palmyra Capital consented to be censured and pay more than USD330,000 in disgorgement and penalties.