SEC Fines Proprietary Trading Firm for Short Selling Violations
Commentary by Steven Lofchie
A proprietary trading firm settled SEC charges for purchasing interests in a security via a public offering, after short selling the same security during a Regulation M ("Trading in Connection with Offering") restricted period.
According to the Order, the firm purchased equity securities in 23 covered offerings, after the firm had sold short the same securities during the restricted period proscribed by SEC Regulation M, Rule 242.105 ("Short Selling in Connection with a Public Offering"). The SEC stated that Rule 105 was designed to prevent potentially manipulative short selling just before the pricing of follow-on and secondary offerings. The SEC found that the firm failed to meet the conditions for any exception under the rule. The SEC found that the firm's violation of Rule 105 resulted in gains to the firm of $593,375.
To settle the charges, the firm agreed to (i) cease and desist from committing or causing any violations and any future violations of Rule 105, (ii) pay disgorgement of its gains, (iii) pay a prejudgment interest of $94,268 and (iv) pay a civil money penalty of $812,355.
Commentary
Ongoing systematic violations of Rule 105 are simply foolish. The regulators have good technology, and this is a violation they are generally on the look-out for. For its foolishness, the firm lost all of its gains and paid a penalty of about 1.5x more.