Among recent enforcement actions by the SEC were charges against 23 firms for short selling prior to stock offerings; against the operator of a Florida hospital for misleading investors about the hospital’s finances; against a self-styled money manager for defrauding investors; and against a hedge fund advisor for breach of fiduciary duty.
23 Firms Charged for Short Selling Stocks Prior to Offerings
The SEC has charged 23 firms with short selling stocks prior to a public offering of those stocks in which they subsequently participated. All but one of the 23 firms is settling the enforcement actions; the 22 will pay a total of $14.4 million in fines.
Rule 105 of Regulation M, which seeks to prevent anyone with an interest in the outcome of an equity offering from manipulating the price, has become a focus of SEC enforcement actions as the agency has sought to prevent the artificial depression of stock prices prior to an offering—most often a secondary offering.
Numerous hedge funds have run afoul of the rule in recent years, particularly since the SEC need not prove an intent to manipulate the market. Earlier enforcement actions have wrung settlements from such leaders in the hedge fund field as UBS’s O’Connor, Bain Capital’s Brookside Capital and Appaloosa Management.
The SEC’s Division of Enforcement is pursuing a litigated administrative proceeding against G-2 Trading LLC, and seeks full disgorgement of the trading profits, prejudgment interest, penalties, and other relief.
See the SEC statement for the 22 firms that have settled.
Fake Money Manager Charged With Bilking Investors
Frederick Scott, owner of New York-based investment advisory firm ACI Capital Group, was charged by the SEC with defrauding investors and grossly exaggerating the amount of assets he had under management.
Scott registered ACI Capital, apparently for the express purpose of stealing investor money. He then set out to woo small businesses and individual investors with too-good-to-be-true opportunities while boasting about that registration and the nonexistent $3.7 billion he supposedly had under management.
Scott took their money and ran—to pay for personal expenses that included private school tuition for his kids, department store purchases, air travel and hotels and thousands in dental bills. He never paid returns to his investors and never intended to, according to the SEC.
He was creative in how he got the money from investors. In an “advance fee” scheme, he promised investors that ACI would provide multimillion-dollar loans to people seeking bank financing. First, he told them, they’d have to provide an advance percentage of the loan amount to ACI; after they did that, he claimed, they’d get the remaining balance of the amount he’d promised to pay. But again, he never had any intention of making loans or payments of any kind, except on his own behalf and for his own benefit. So the investors got nothing.
He also offered investors the “opportunity” to make a bridge loan to a third-party entity. According to his version of the deal, investors would pay one portion of the loan to the nonexistent borrower and ACI would provide the rest, and then later investors would get a good return on the money they’d “loaned.” But Scott stole this money, too.
Scott was also charged in a parallel criminal action by the U.S. Attorney’s Office for the Eastern District of New York, which announced that he had pleaded guilty. Among other things, he was charged with lying to SEC examiners.