SEC Charges New York Investment Adviser with Rule 105 Short Selling Violations

ADMINISTRATIVE PROCEEDING File No.
3-22132

SEC Charges New York Investment Adviser with Rule 105 Short Selling Violations

The Securities and Exchange Commission today announced settled charges against a New York City-based registered investment adviser for violating Rule 105 short selling restrictions when it purchased stock in a public offering of securities for fund clients after shorting the same stock for fund clients.

The SEC’s order finds that Gates Capital Management, Inc. violated Rule 105 of Regulation M under the Securities Exchange Act of 1934, which prohibits short selling an equity security during a restricted period (generally five business days before a covered public offering) and then purchasing the same security in the offering, absent an exception.  Rule 105 applies regardless of the trader’s intent and is designed to prevent potentially manipulative short selling before the pricing of covered secondary offerings.  The SEC’s order finds that Gates Capital violated Rule 105 by participating in a covered offering of securities in September 2023, after effecting short sales of the same security during the applicable restricted period.

Without admitting or denying the findings in the SEC’s order, Gates Capital agreed to cease and desist from committing or causing violations of Rule 105, and to pay disgorgement of $432,564, prejudgment interest of $5,445, and a civil penalty of $57,615.  The SEC’s order credits Gates Capital with promptly self-reporting the violation and undertaking remedial measures, which the SEC considered in determining the amount of the penalty and the calculation of prejudgment interest.

The SEC’s investigation was conducted by Kiran Patel and George N. Stepaniuk, and was supervised by Thomas P. Smith, Jr., all of the New York Regional Office.