U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20814A / November 19, 2008
Securities and Exchange Commission v. Robert Todd Beardsley and George Lindenberg, United States District Court for the Southern District of New York, Civil Action No. 08-cv-10054 (LBS)
Securities and Exchange Commission v. Dennis K. McNell, United States District Court for the Southern District of New York, Civil Action No. 08-cv-10053 (BSJ)
SEC Charges Two Day-Traders and Former Chief Executive Officer of Brokerage Firm for Participating in Manipulative Short Selling Scheme
The Securities and Exchange Commission today filed a civil injunctive action against two day-traders, Robert Todd Beardsley and George Lindenberg, who perpetrated a manipulative short selling scheme through brokerage accounts at a now defunct broker-dealer, Redwood Trading LLC ("Redwood"). As alleged in the complaint, Beardsley and Lindenberg engaged in their manipulative short selling scheme by repeatedly selling short securities in violation of the then-existing short sale rule, commonly referred to as the "uptick rule," with the intent to artificially depress the price of shares that they had sold short in order to enable them to cover their short positions at favorable prices. In a related civil injunctive action, the Commission alleges that Dennis McNell, the former Chief Executive Officer and Chief Operations Officer of Redwood, aided and abetted the illegal short selling scheme. The complaint also alleges that McNell engaged in an unrelated fraudulent scheme to hide substantial trading losses that he had incurred in a Redwood proprietary account.
According to the allegations in the complaint, Beardsley devised a scheme by which he routinely executed short sales while the stock price was declining, in violation of the uptick rule, using trading software made available to Beardsley by Redwood. Subsequently, Beardsley recruited Lindenberg to the scheme to assist him in carrying out the violative trading. As part of the alleged scheme, Beardsley and Lindenberg also failed to mark their orders as short sales in order to create the false appearance that their orders were long. McNell enabled Beardsley's and Lindenberg's manipulative scheme by disabling a feature of the trading software that was programmed to prevent violations of the uptick rule. To conceal their involvement in the illegal scheme, Beardsley and Lindenberg traded through Redwood accounts in the name of two nominees. Beardsley and Lindenberg allegedly placed thousands of trades through these accounts to carry out their strategy of driving down the price of a stock by rapidly executing illegal short sales in a given stock. By successively selling shares of stock at lower prices, the complaint alleges that Beardsley and Lindenberg intended to induce others to sell in order to further depress the price of the stock. Beardsley and Lindenberg then took advantage of the downward price movement by buying shares to cover their illegal short sales. Beardsley's and Lindenberg's alleged scheme was highly profitable, yielding approximately $2,400,000 in illicit gains in less than a year.
In a separate complaint against McNell, the SEC also alleges that, from July 2004 through August 2004, McNell surreptitiously caused over ninety unprofitable trades, resulting in approximately $140,000 of losses, to be transferred into a Redwood error account from a day-trading account in which McNell had incurred these losses, which caused Redwood to violate its net capital requirements and maintain inaccurate books and records. McNell is also charged with aiding and abetting Redwood's violations of its net capital and books and records requirements.
The SEC's complaint, filed in the United States District Court for the Southern District of New York, charges Beardsley and Lindenberg with having violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5, and provisions relating to short sales of securities, Section 10(a)(1) of the Exchange Act and former Exchange Act Rule 10a-1. Without admitting or denying the allegations in the complaint, Lindenberg has consented to the entry of a final judgment that permanently enjoins him from committing future violations of the above-referenced provisions (except former Rule 10a-1, which no longer is in effect), and based on Lindenberg's financial condition, orders him to pay partial disgorgement of $65,000, and does not impose a civil penalty. The complaint seeks a permanent injunction, disgorgement (with pre-judgment interest), and civil monetary penalties against Beardsley.
In the complaint against McNell, also filed in the United States District Court for the Southern District of New York, the SEC charges McNell with having (i) violated the antifraud provisions, Sections 9(a)(2) and 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and provisions relating to short sales of securities, Section 10(a)(1) of the Exchange Act and former Exchange Act Rule 10a-1, and (ii) aided and abetted Redwood's violations of various broker-dealer net capital, and books and records provisions, Sections 15(c)(3) and 17(a) of the Exchange Act and Exchange Act Rules 15c3-1, 17a-3, and 17a-4(j). Without admitting or denying the allegations in the complaint, McNell has consented to the entry of a final judgment that permanently enjoins him from either committing or aiding and abetting future violations of the above-referenced provisions (except former Rule 10a-1), and based on McNell's financial condition, does not impose a civil penalty. As part of his settlement, McNell has also agreed to the issuance of an administrative order that bars him from association with any broker or dealer, with the right to reapply after five years in a non-supervisory capacity.
The proposed relief in the settled actions with Lindenberg and McNell is subject to court approval.
The Commission acknowledges the assistance and cooperation of NYSE Regulation, Inc.