SEC Sanctions Individual Trader and 19 Firms for Short-Selling Violations in Advance of Stock Offerings (with Lofchie Comment)

The SEC announced the latest sanctions in a continuing enforcement initiative against certain hedge fund advisers and private equity firms that participated illegally in an offering of a stock after short selling it during a restricted period.

The SEC found that 19 firms and one individual trader engaged in the short selling of particular stocks shortly before they bought shares from an underwriter, broker or dealer participating in a follow-on public offering. The individual trader and each of the firms agreed to settle the SEC's charges and pay a combined total of more than $9 million in disgorgement, interest and penalties.

Lofchie Comment: By now, it should be reasonably obvious that (i) Reg. M violations are a target for SEC enforcement and (ii) the SEC has the technology to catch Reg. M violations. Therefore, it behooves market participants to step up their Reg. M compliance by breaking profitable trades where an inadvertent violation is discovered before settlement. Separately in its press release, the SEC states that it is attempting to standardize settlements for Reg. M violations. As described in the press release, all of the 19 violators were required to pay back their improper profits, with interest, and also pay a penalty (except for one insolvent firm). However, there was no obvious relationship between the improper profit and the penalty. While a good number of firms were penalized with amounts that looked to be about half of their improper gains, one firm paid a penalty of five times its gains and another, which actually had higher improper gains, paid no penalty at all. No reason is given for this disparity.

See: SEC Press Release.