U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20537 / April 24, 2008
SEC v. Paul S. Berliner, Civil Action No. 08-CV-3859 (JES) (S.D.N.Y.)
SEC Charges Wall Street Trader With Fraud For Spreading False Rumor
The U.S. Securities and Exchange Commission today filed a settled civil action in the United States District Court for the Southern District of New York, charging Paul S. Berliner, a Wall Street trader formerly associated with Schottenfeld Group, LLC, with securities fraud and market manipulation for intentionally disseminating a false rumor concerning The Blackstone Group's acquisition of Alliance Data Systems Corp. The Commission's complaint alleges that on November 29, 2007 — approximately six months after Blackstone entered into an agreement to acquire ADS at $81.75 per share — Berliner drafted and disseminated a false rumor that ADS's board of directors was meeting to consider a revised proposal from Blackstone to acquire ADS at a significantly lower price of $70 per share. The Commission alleges that this false rumor caused the price of ADS stock to plummet, and that Berliner profited by short selling ADS stock and covering those sales as the false rumor caused the price of ADS stock to fall.
According to the complaint, Berliner disseminated the false rumor through instant messages to traders at brokerage firms and hedge funds. Shortly thereafter, the news media picked up the "story." As alleged in the complaint, heavy trading in ADS stock ensued, and within thirty minutes the false rumor had caused the price of ADS stock, which had been trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share — a 17% decline in the share price. According to the complaint, the false rumor had such a significant impact on trading in the securities of ADS that day that the New York Stock Exchange temporarily halted trading in ADS stock. Later in the day, ADS issued a press release announcing that the rumor was false and by the close of trading, the price of ADS stock had recovered. Over 33,000,000 shares of ADS were traded that day — more than twenty times the previous day's trading volume.
By engaging in the foregoing conduct, the complaint alleges, Berliner violated Section 17(a) of the Securities Act of 1933, Sections 9(a)(4) and 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Without admitting or denying the allegations in the Commission's complaint, Berliner agreed to settle the charges against him by consenting to entry of a final judgment that (i) enjoins him from future violations of the antifraud and antimanipulation provisions of the federal securities laws, (ii) orders him to disgorge $26,129 in illicit trading profits and prejudgment interest, and (iii) orders him to pay a third-tier civil penalty of $130,000. Berliner also consented to entry of a Commission Order barring him from association with any broker or dealer.