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September 16, 2014 at 11:08 AM
A sweeping Securities and Exchange Commission dragnet of short selling violators has hauled in 19 firms and one individual trader. The sanctioned parties will pay $9 million in disgorgement, interest and penalties.
The move comes one day shy of the anniversary of a similar enforcement action against 23 firms deemed to have illegally participated in an offering of a stock after selling it short during a restricted period.
That previous crackdown resulted in a settlement of over $14 million, and taken together, the actions appear to signal the SEC means business in its avowed efforts to enforce Rule 105 of Regulation M, which prohibits short selling a stock within five days of participating in an offering of that same stock.
“Such dual activity typically results in illicit profits for the firms or individuals while reducting the offering proceeds for a company by artificially depressesing the market price shortly before the company prices the stock,” says the SEC in a news release made public Tuesday.
The SEC notes that the short sales occurred “during the last few years” and lists the hedge fund advisors, private equity firms and individual trader involved, noting each party’s disgorgement amount, interest payment and penalty.
Of note, the disgorgement amounts vary widely — from as little as $21,844 for Texas-based Ironman Capital Management and $26,613 for New Jersey-based East Side Holdings II to as much as $2,646,395 for Massachusetts-based RA Capital Management and $1,122,400 for BlackRock Institutional Trust Co.
Yet, while the larger violators appear to pay proportionally large penalties (almost $1 million and over $500,000 for RA Capital and BlackRock Institutional, respectively), it appears that smaller violators paid a minimum penalty of $65,000 whether their disgorgement amount was under $22,000 (Ironman) or as much as $83,722 for Brazil-based Explorador Capital Management.
Steve Insel of Los Angeles-based securities law firm Elkins Kalt Weintraub Reuben Gartside says the SEC crackdown points to the need for financial services firms to increase their compliance efforts.
“Over time people see there is easy money to be made, they see many others doing it, and do not feel there is a significant risk of being caught, and maybe they do not see the likelihood of overwhelming penalties even if they are caught,” Insel tells ThinkAdvisor.
