Investment Adviser Fined for Short Selling Restricted Period Violation

An investment adviser settled SEC charges for purchasing interests in a security via a public offering after short selling the same security during the Regulation M restricted period.

Such purchases are prohibited under SEC Regulation M Rule 242.105 ("Short Selling in Connection with a Public Offering"), which is designed to prevent potentially manipulative short selling just before the pricing of follow-on and secondary offerings. The restricted period for securities with a low average trading volume generally begins five business days before the pricing of the offered securities.

In a Complaint filed in the District Court of Connecticut, the SEC said that the short sale and subsequent purchase of the security did not meet the criteria for an exemption under Rule 105 of Regulation M. Further, the SEC said that the adviser neither reported the violation to the SEC nor documented the violation in its records. The SEC recognized, however, that since initiating its investigation the adviser has undergone remediation efforts to revise its policies relating to Rule 105.

Without admitting or denying the allegations, the adviser agreed to (i) cease and desist and (ii) pay a civil monetary penalty of $810,000. The two funds also each agreed to disgorge (i) $1,565,305 with interest of $89,439 and (ii) $55,092 with interest of $3,147.