The Securities and Exchange Commission announced Wednesday that a Long Island-based proprietary trading firm and its owner have agreed to pay $7.2 million to settle the largest-ever monetary sanctions for Rule 105 short selling violations.
According to the SEC’s order instituting settled administrative proceedings, Jeffery W. Lynn created Worldwide Capital for the purpose of investing and trading his own money. Lynn’s principal investment strategy focused primarily on new shares of public issuers coming to market through secondary and follow-on public offerings.
Through traders he engaged to trade on his behalf, Lynn sought allocations of additional shares soon to be publicly offered, usually at a discount to the market price of the company’s already publicly trading shares. He and his traders would then sell those shares short in advance of the offerings. Lynn and Worldwide Capital improperly profited from the difference between the price paid to acquire the offered shares and the market price on the date of the offering.
To settle the SEC’s charges, Worldwide Capital and Lynn agreed to jointly pay disgorgement of $4,212,797, prejudgment interest of $526,358, and a penalty of $2,514,571. Lynn and his firm agreed to cease and desist from violating Rule 105 without admitting or denying the findings in the SEC’s order.
As the SEC explains, Rule 105 prohibits short selling of an equity security during a restricted period, generally five business days before a public offering, and the subsequent 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 SEC states. The rule therefore prevents short selling from interfering with offering prices.