U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19851 / September 28, 2006
Securities and Exchange Commission v. Graycort Financial, LLC, United States District Court for the Northern District of California, Civil Action No. C 06-6033 SBA
FOR IMMEDIATE RELEASE
SEC Files Charges Against San Francisco-Based Investment Fund for Unlawful Short Selling Practices
San Francisco, September 28, 2006 - The Securities and Exchange Commission today filed charges against a San Francisco-based private investment fund for engaging in short selling practices that netted over $100,000 in unlawful trading profits. Graycort Financial, LLC (Graycort) agreed to settle the charges by disgorging its improper trading profits and paying a $100,000 penalty.
The Commission's complaint alleges that Graycort violated Rule 105 of Regulation M, a Commission rule that prohibits covering certain short sales with shares obtained in a public offering. Such practices are prohibited because they distort the market, potentially allowing traders to lock in profits while driving down the price of the security.
According to the complaint, Graycort violated Rule 105 on two separate occasions in 2005. Graycort sold short the stock of public companies Nutrisystem, Inc. and Perini Corporation, and then purchased shares in the companies' public offerings at prices below its previous short stock sales. Graycort next entered into a series of offsetting stock purchase and sale transactions in the open market. The Commission alleges that these transactions had no legitimate economic purpose or substance and served merely to disguise the fact that Graycort used offering stock to cover its short sales in violation of Rule 105. Graycort's violative trading strategy netted illicit profits of $105,465.
The Commission's complaint, filed in federal court in San Francisco, charges that Graycort violated 17 C.F.R. § 242.105(a)(1). Without admitting or denying the allegations, Graycort has agreed to settle the matter by disgorging $105,465 in unlawful profits plus prejudgment interest, paying a $100,000 civil penalty, and consenting to an injunction against future violations.
For more information on Rule 105 of Regulation M, see Anti-Manipulation Rules Concerning Securities Offerings (Commission adoption of Rule 105 of Regulation M) on the Internet at http://www.sec.gov/rules/final/34-38067.txt and Final Rule: Short Sales (Commission adoption of Regulation SHO) on the Internet at http://www.sec.gov/rules/final/34-50103.htm.
Michael S. Dicke
San Francisco District Office