At The SEC — A Focus on Short Selling

The SEC is focusing attention on trading illegal short selling, announcing twenty-three actions new actions centered on the prohibited trading practice. At the same time the Commission’s National Exam Program issued a Risk Alert on illegal short selling.

Each of the actions announced is based on Rule 105 of Regulation M. That Rule generally prohibits short selling an equity security during a restricted period. That period is five business days before a public offering. The strict liability Rule is designed to avoid depressing the offering price for a security.

Twenty-two of the actions announced were settled. A broad spectrum of entities were involved in the proceedings. They included Blackthorn Investment Group, D.E. Shaw & Co., Deerfield Management Company, Hudson Bay Capital Management, Southpoint Capital Advisors and the Ontario Teachers’ Pension Plan Board.

Each of the settling firms agreed to pay disgorgement, prejudgment interest and a penalty. The largest amount of disgorgement was paid by JGP Global Gestao de Recursos at $2,537,114.00. The smallest amount was paid by Credentia Group at $4,091.00.

Penalties ranged from a high of $679,950.00 paid by Manikay Partners on disgorgement of $1,657,000.00 to a low of $65,000 paid by eight firms: Claritas Investments Ltd, which disgorged $73,883; Credentia Group which paid the smallest amount of disgorgement; Merus Capital Partners which disgorged $8,402.00; PEAK6 Capital Management which disgorged $58,321.00; Philadelphia Financial Management of San Francisco which disgorged $137,524.38; Soundpoint Advisors which disgorged $346,568.00; Talkot Capital which disgorged $17,640 and Western Standard which disgorged $44,980.00.

When and when the actions were filed was not disclosed. The one case identified did not settle and was filed earlier this month. In the Matter of G-2 Trading LLC, Adm. Proc. File No. 3-15494 (Corrected Order Filed Sept. 16, 2013).

These actions are not the first brought by the Commission alleging violations of Regulation M, Rule 105. Since the adoption of the Rule the agency has brought a number of cases under it. Earlier this year, for example, the Commission filed proceedings based on the Rule. See, e.g, In the Matter of UBS O’Connor, LLC, Adm. Proc. File No. 3-15437 ( Filed June 13, 2013); In the Matter of Ardsley Advisory Partners, Adm. Proc. File No. 3-15199 (Filed February 5, 2013). This is the first time, however, that the Commission has announced a large group of Regulation M, Rule 105 actions together.

Program: Celesq and West Legal Ed present: Financial Fraud: Avoiding the Path of the New SEC Investigative Priority, online on September 25, 2013 at 12:00 p.m. EST (here).