UNITED STATES DISTRICT COURT
COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF
Plaintiff, Securities and Exchange Commission ("SEC" or "Commission"), alleges as follows:
1. The SEC brings this action to restrain and enjoin Defendants Ethan H.
Weitz and Robert R. Altman (collectively, "Defendants") from continuing to violate the federal securities laws that prohibit certain short sales and transactions in advance of repeat or follow-on stock offerings and secondary stock offerings. Between August 1999 and June 2002, Defendants employed a stock trading strategy whereby they sold short the securities of companies that were about to launch repeat or follow-on stock offerings or assisting in the launch of secondary stock offerings. Defendants then covered their short sales with securities that they purchased in the offerings and profited if the prices at which they sold short exceeded the price of the offering securities. In at least 15 instances, however, Defendants used stock that they purchased in the offerings to cover short sales that they made within five days of the pricing of the securities offered. Defendants also sold securities short at prices that were below the price of the immediate preceding last sale (i.e., executed on minus ticks). Both practices are expressly prohibited by the federal securities laws. By trading in contravention of these laws, Defendants received more than $500,000 in illegal profits. The Commission brings this action to recover Defendants' profits and to enjoin them from continuing to violate the federal securities laws.
2. Ethan H. Weitz ("Weitz"), age 31, is a resident of Manalapan, Florida. Weitz was a stockbroker for over 10 years until he was barred by the New York Stock Exchange ("NYSE") in March 2000 from associating with any NYSE member firm for violating the antifraud provisions of the federal securities laws.
3. Robert R. Altman ("Altman"), age 33, is a resident of New York City, New York. Altman was a stockbroker for over 7 years until he was barred by the NYSE in March 2000 from associating with any NYSE member firm for violating the antifraud provisions of the federal securities laws.
JURISDICTION AND VENUE
4. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§78u(d), 78u(e) and 78aa.
5. Venue is appropriate in the Southern District of Florida. Certain of the acts and transactions constituting violations of the Exchange Act occurred in the Southern District of Florida. Defendants conducted their trading from an office in the Southern District of Florida. In addition, during the relevant period, Defendants resided in the Southern District of Florida and Defendant Weitz continues to live in the district.
6. Defendants, directly and indirectly, made use of the means and instrumentalities of interstate commerce, the means and instruments of transportation and communication in interstate commerce, and the mails, in connection with the acts, practices and courses of business complained of herein.
Defendants Participated in Secondary Offerings
7. Between August 1999 and June 2002, Defendants purchased securities, individually and through their partnership, Orinoco Partners LLC, in at least 66 repeat, follow-on and secondary stock offerings (the "Offerings").
8. All but one of the companies that issued securities in these Offerings (the ("Offering Companies") listed their securities on the NYSE or NASDAQ.
Defendants Sold Short in Advance of the Secondary Offerings
9. Between August 1999 and June 2002, Defendants engaged in a stock trading strategy whereby they sold securities in the Offering Companies in advance of the Offerings.
10. Defendants did not typically own the securities that they sold in advance of the Offerings and therefore were engaged in "short sales" as defined in Rule 3b-3 under the Exchange Act, 17 C.F.R. § 240.3b-3.
Defendants Improperly Covered Their Short Sales With Offering Stock
11. Rule 105 of Regulation M under the Exchange Act ("Rule 105"), 17 C.F.R. §242.105, among other things, prohibits certain short selling activity in advance of repeat, follow-on and secondary stock offerings. Rule 105 bars a person from covering a short sale with stock purchased in an offering from an underwriter or broker or dealer participating in the offering, if the person entered into the short sale less than five days before the pricing of the securities being offered (the "Restricted Period").
12. The Rule 105 prohibition applies to repeat, follow-on and secondary stock offerings that are conducted on a firm commitment basis, except for stock offerings conducted on a continuous or delayed basis (i.e., "shelf offerings") pursuant to Rule 415 under the Securities Act of 1933 ("Securities Act"), 17 C.F.R. §230.415.
13. Defendants, in advance of 15 of the Offerings, sold securities short during the Restricted Periods and covered their short sales with stock that they purchased in the Offerings (the "Covering Stock").
14. Defendants purchased all of the Covering Stock from underwriters or brokers or dealers participating in the Offerings.
15. Defendants purchased all of the Covering Stock in offerings that were conducted on a firm commitment basis, and none of the 15 Offerings were conducted on a continuous or delayed basis pursuant to Rule 415 under the Securities Act, 17 C.F.R. §230.415.
16. Defendants profited from their trading strategy when they sold securities in the Offering Companies short at prices that were higher than the prices they had to pay to buy the securities in the Offerings.
Defendants Improperly Sold Securities Short on Minus Ticks
17. Section 10(a) of the Exchange Act, 15 U.S.C. §78j(a), and Rule 10a-1 thereunder, 17 C.F.R. 240.10a-1, prohibit a person from executing a short sale in a security registered on a national securities exchange such as the NYSE at a price below the price at which the security was last sold (i.e., a minus tick), or at the same price as the last sale if that price is lower than the price of the next preceding sale executed at a different price (i.e., a zero-minus tick).
18. Defendants, on numerous occasions when selling short in advance of the Offerings, effected short sales in securities registered on the NYSE on minus and zero-minus ticks.
19. Defendants sold securities in the Offering Companies by, among other ways, entering their sales orders directly to the floor of the NYSE using an electronic trading system leased to them by a broker-dealer registered with the Commission.
20. Defendants effected their short sales on minus and zero-minus ticks by, among other ways, falsely marking the orders that they entered through the electronic trading system that they leased from the broker-dealer as "long" when, in reality, the Defendants were short.
Defendants Profited From Their Illegal Short Sales
21. Defendants profited by approximately $511,367.39 by selling securities short in contravention of Rule 105 under Regulation M, 17 C.F.R. §242.105, and Section 10(a) of the Exchange Act, 15 U.S.C. 78j(a), and Rule 10a-1 thereunder, 17 C.F.R. §240.10a-1.
DEFENDANTS COVERED SHORT SALES IN VIOLATION OF
22. The SEC repeats and realleges paragraphs 1 through 21 of this Complaint.
23. Between August 1999 and June 2002, Defendants Weitz and Altman, in connection with an offering of securities for cash pursuant to a registration statement or a notification on Form 1-A filed under the Securities Act, covered short sales which took place during the five business days before the pricing of offered securities or the period beginning with the initial filing of a registration statement or notification on Form 1-A, with offered securities from an underwriter or broker or dealer participating in the offering.
24. By reason of the foregoing, Defendants Weitz and Altman violated, and unless enjoined, will continue to violate Rule 105(a) of Regulation M, 17 C.F.R. §242.105, under the Exchange Act, 15 U.S.C. §78a et seq.
DEFENDANTS SOLD SECURITIES SHORT ON MINUS AND
25. The SEC repeats and realleges paragraphs 1 through 21 of this Complaint.
26. From at least August 1999 to June 2002, Defendants Weitz and Altman, directly and indirectly, by use of the means and instrumentalities of interstate commerce, and of the mails, and of any facility of any national securities exchange, for their own account, effected on a national securities exchange short sales of securities (1) below the price at which the last sale thereof, regular way, was effected on such exchange, or (2) at such price when such price was below the next preceding different price at which a sale of such security, regular way, was effected on such exchange.
27. By reason of the foregoing, Defendants Weitz and Altman, directly or indirectly, violated and, unless enjoined, will continue to violate Section 10(a) of the Exchange Act, 15 U.S.C. §78j(a), and Rule 10a-1, 17 C.F.R. §240.10a-1.
WHEREFORE, the SEC respectfully requests that the Court:
Declare, determine and find that Defendants committed the violations of the federal securities laws alleged herein.
Permanent Injunctive Relief
Issue an Order of Permanent Injunction, restraining and enjoining Defendants Weitz and Altman, their officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them, and each of them, from violating Section 10(a) of the Exchange Act, 15 U.S.C. §78j(a), and Rule 10a-1, 17 C.F.R. §240.10a-1, thereunder, and Rule 105 of Regulation M, 17 C.F.R. §242.105.
Issue an Order requiring Defendants to disgorge all ill-gotten profits or proceeds that they received as a result of the acts and/or courses of conduct complained of herein, with prejudgment interest.
Issue an Order directing Defendants to pay civil money penalties pursuant to Section 21(d) of the Exchange Act, 15 U.S.C. §78(d)(3).
Grant such other and further relief as may be necessary and appropriate.
Retention of Jurisdiction
Further, the SEC respectfully requests that the Court retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that may hereby be entered, or to entertain any suitable application or motion by the SEC for additional relief within the jurisdiction of this Court.