SEC Charges Investment Adviser with "Naked" Short Selling

The SEC charged an investment adviser and its principal trader for manipulative trading by mismarking orders and engaging in "naked" short selling.

In a Complaint filed with the District Court for the District of New Jersey, the SEC alleged that the adviser (i) "knowingly or recklessly mismarked sales of securities as long" when they should have been marked short; (ii) engaged in abusive trading when they "knew or were reckless in not knowing that they had not borrowed or located the shares"; and (iii) failed to make timely delivery of shares. The SEC alleged that the adviser's transactions constituted manipulative trading and "naked" short selling (in which "a seller does not borrow or arrange to borrow securities in time to make delivery to the buyer within the standard settlement period").

As a result, the SEC alleged that the adviser violated (i) Exchange Act Section 10(b) ("Regulation of the use of manipulative and deceptive devices") and Rules 10b-5 ("Employment of manipulative and deceptive devices") and 10b-21 ("Deception in connection with a seller's ability or intent to deliver securities on the date delivery is due") thereunder and (ii) Advisers Act Sections 204 ("Reports by investment advisers") and 206(4) ("Prohibited transactions by investment advisers") and Rules 204-2 ("Books and records to be maintained by investment advisers") and 206(4)-7 ("Compliance procedures and practices") thereunder.

To settle the charges, the SEC requested that the Court impose an order that (i) finds the adviser in violation of federal securities laws and regulations, (ii) permanently restrains and enjoins the adviser from further violating securities laws and regulations, (iii) enforces disgorgement of any ill-gotten gains and (iv) imposes a civil monetary penalty.