Wednesday, September 18, 2013

SEC Cracks Down on Firms for Short Selling Violations

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

Yesterday, the Securities and Exchange Commission (SEC) announced "enforcement actions against 23 firms for short selling violations" stemming from their investigation of improper participation in initial public offerings (IPOs).  Firms are prohibited from selling short stocks in the five business days immediately preceeding an IPO.   The restriction is meant to prevent firms from artificially lowering the price just prior to the IPO.

The SEC alleges that the 23 firms "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." All but one of the firms have reached a settlement with the SEC over the alleged rule violations.  The table below sorts the settlements according to total monetary penalty from largest to smallest and includes links to each settlement document (PDF).
Firm   Disgorgement     Prejudgment
JGP Global Gestão de Recursos$2,537,114.00 $129,310.00 $514,000.00
Manikay Partners$1,657,000.00 $214,841.31 $679,950.00
Deerfield Management Company$1,273,707.00 $19,035.00 $609,482.00
Hudson Bay Capital Management$665,674.96 $11,661.31 $272,118.00
Vollero Beach Capital Partners$594,292.00 $55,171.00$214,964.00
D.E. Shaw & Co. $447,794.00 $18,192.37 $201,506.00
Pan Capital AB$424,593.00 $17,249.80 $220,655.00
Southpoint Capital Advisors$346,568.00 $17,695.76 $170,494.00
Blackthorn Investment Group$244,378.24 $15,829.74 $260,000.00
M.S. Junior, Swiss Capital Holdings, et al. $247,039.00 $15,565.77 $165,332.00
Meru Capital Group$262,616.00 $4,600.51 $131,296.98
War Chest Capital Partners$187,036.17 $10,533.18 $130,000.00
Polo Capital Management$191,833.00 $14,887.51 $76,000.00
Ontario Teachers’ Pension Plan Board$144,898.00 $11,642.90 $68,295.00
Philadelphia Financial Management of San Francisco$137,524.38 $16,919.26 $65,000.00
Claritas Investments Ltd.$73,883.00 $5,936.67 $65,000.00
PEAK6 Capital Management$58,321.00 $8,896.89 $65,000.00
Soundpost Partners$45,135.00 $3,180.85 $65,000.00
Western Standard$44,980.30 $1,827.40 $65,000.00
Talkot Capital$17,640.00 $1,897.68 $65,000.00
Merus Capital Partners$8,402.00 $63.65 $65,000.00
Credentia Group $4,091.00 $113.38 $65,000.00
$9,614,520.05 $595,051.94 $4,234,092.98

The settlements have produced over $9.6 million in disgorgement, nearly $600,000 of prejudgment interest, and over $4.2 million in penalties.  The only firm that has not agreed to a settlement with the SEC, G-2 Trading LLC, is still dealing with their administrative proceeding (PDF).  

According to the SEC, "this new program of streamlined investigations and resolutions of Rule 105 violations, [the agency is] sending the clear message that firms must pay the price for violations while also conserving agency resources."  

By reining in this type of behavior, the SEC is helping to ensure investors who purchase shares in stock offerings are not subjected to market manipulation of the prices they pay and/or receive for such securities. We applaud the SEC's efforts with respect to the enforcement of short selling violations.  For more information, see the SEC's risk alert on short selling prior to public offerings (PDF).

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