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U.S. Securities and Exchange Commission

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20332 / October 15, 2007

SEC v. Colonial Investment Management LLC, Colonial Fund LLC and Cary G. Brody, 07 Civ. 8849 (PKC) (SDNY)

SEC Charges New York Hedge Fund For Illegal Trading in Connection With Public Offerings

Defendants Improperly Covered Short Sales and Used Sham Trades to Conceal Violations

The Securities and Exchange Commission today charged a New York hedge fund, its adviser, and its Managing Director with illegal trading in connection with at least eighteen public offerings. The Commission's Complaint, filed in federal court in Manhattan, alleges that Colonial Fund LLC, Colonial Investment Management LLC, and Cary G. Brody violated Rule 105 of Regulation M under the Securities Exchange Act of 1934 when they used shares purchased in at least eighteen registered public offerings to cover short sales that they made during a restricted period. The Defendants realized profits in excess of $1.48 million from the illegal trades.

In general, Rule 105 seeks to prevent manipulative trading by short sellers prior to registered public offerings and to promote offering prices that are based upon open market prices, determined by supply and demand, rather than by artificial forces. At the time of the alleged violations, Rule 105 generally prohibited short sellers, regardless of intent, from using securities purchased in registered public offerings to cover short sales that occurred during the five business days before the pricing of the offerings (the restricted period). The Defendants realized profits from their illegal trading because Colonial Fund typically sold shares short during the restricted period at prices that were higher than what it would pay a short time later when it purchased shares in the registered public offerings.

The Complaint also alleges that, in an effort to conceal their illegal trading, the Defendants often engaged in sham market trades after covering Colonial Fund's restricted period short positions. For example, Colonial Fund, after covering, entered riskless cross trades to buy and sell the same quantity of shares, at the same price, and from the same broker. Defendant Brody, acting through Colonial Investment, directed, authorized, supervised, and profited from the illegal trading alleged in the Complaint.

The Commission seeks an injunction prohibiting each Defendant from further violating Rule 105 of Regulation M. The Complaint also seeks full disgorgement and prejudgment interest from all Defendants, on a joint and several basis, and a civil penalty from Brody.

SEC Complaint in this matter

 

http://www.sec.gov/litigation/litreleases/2007/lr20332.htm

Modified: 10/15/2007