held-responsible-regulators

The Securities and Exchange Commission has announced enforcement actions against six firms, including more than $2.5 million in monetary sanctions and, in the case of one previously sanctioned firm, an order barring the firm from participating in stock offerings for a period of one year as part of its ongoing enforcement initiative focused on violations of Rule 105 of Regulation M.

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Intended to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation, Rule 105 prohibits firms from participating in public stock offerings after selling short those same stocks.

Through its Rule 105 Initiative, which was first announced in 2013 as an effort to address violations of the rule in an expedited and streamlined way, the Division of Enforcement has taken action on every Rule 105 violation over a de minimis amount that has come to its attention—promoting a message of zero tolerance for these offenses.

As a result, based on available information, the SEC has seen a dramatic decrease in Rule 105 violations since the Initiative began. In the first fiscal year after the Initiative was announced, Rule 105 violations, detected through various means available to the SEC, decreased by approximately 90 percent over the previous six years. Rule 105 violations in fiscal year 2015 were similarly lower than before the Initiative.

“This highly successful program of streamlined investigations and resolutions of Rule 105 violations has clearly had an important deterrent impact on the market while expending a fraction of the resources that we have dedicated in the past,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “We will continue to target important violations that we see repeatedly with multiple actions that send important messages of deterrence.”

Rule 105 typically prohibits short selling a stock within five business days of participating in an offering for that same stock. Such dual activity typically results in illicit profits for the trader while reducing the offering proceeds for a company by artificially depressing the market price shortly before the company prices the stock.

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The SEC’s investigations in the current round found that 6 firms engaged in short selling of particular stocks shortly before they bought shares from an underwriter, broker, or dealer participating in a follow-on public offering. Each firm has agreed to settle the SEC’s charges and pay a combined total of more than $2.5 million in disgorgement, interest, and penalties.

The six settlements announced today involved the following entities:

  • Auriga Global Investors, Sociedad de Valores, S.A. – The Spain-based firm agreed to pay disgorgement of $436,940.52, prejudgment interest of $2,184.70, and a penalty of $179,277.28.
  • Harvest Capital Strategies LLC – The California-based firm agreed to pay disgorgement of $18,835, prejudgment interest of $619.28, and a penalty of $65,000.
  • J.P. Morgan Investment Management Inc. – The New York-based firm agreed to pay disgorgement of $662,763, prejudgment interest of $56,758.40, and a penalty of $364,689.
  • Omega Advisors, Inc. – The New York-based firm agreed to pay disgorgement of $68,340, prejudgment interest of $686.58, and a penalty of $65,000.
  • Sabby Management LLC – New Jersey-based firm agreed to pay disgorgement of $184,747.10, prejudgment interest of $2,331.51, and a penalty of $91,669.95.
  • War Chest Capital Partners LLC – The New York-based firm agreed to pay disgorgement of $179,516, prejudgment interest of $22,302.02, and a penalty of $150,000.

In the initiative’s initial round in 2013, enforcement actions were brought against 23 firms and resulted in more than $14.4 million in monetary sanctions. In a second round of sanctions announced in 2014, enforcement actions were brought against 19 firms and one individual trader and resulted in more than $9 million in monetary sanctions.

This third round of the initiative also demonstrates the benefits of cooperation. In contrast to nearly every other firm subject to the Initiative, War Chest Capital Partners LLC, a respondent in the SEC’s first sweep in 2013, refused at that time to review its past trading to determine whether additional violations not identified by the Division of Enforcement had occurred.

The division subsequently found seven additional Rule 105 violations by War Chest, and, as a result, has today brought a second action against War Chest with increased sanctions. Under today’s order against War Chest, the firm is now subject to a censure, a significant penalty, and conduct-based order prohibiting it from participating in secondary offerings for a period of one year.

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Originally published on Advisor.ca

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