SEC Charges Options Traders and Broker-Dealers for "Naked" Short Sale Rule Violations
FOR IMMEDIATE RELEASE
Washington, D.C., Aug. 5, 2009 — The Securities and Exchange Commission today took its first enforcement actions for violations of the Commission's rules to prevent abusive "naked" short selling, charging two options traders and their broker-dealers with violating the locate and close-out requirements of Regulation SHO. The Commission also charged a supervisor at one of the firms.
Regulation SHO requires broker-dealers to locate a source of borrowable shares prior to selling short, and to deliver securities sold short by a specified date. The SEC alleges that the traders and their firms improperly claimed that they were entitled to an exception to the locate requirement, and engaged in transactions that created the appearance that they were complying with the close-out requirement. In fact, they were not entitled to the exception and were not complying with the close-out requirement.
The SEC charged New York City-based Hazan Capital Management LLC (HCM) and its principal trader and majority owner, Steven M. Hazan, with Regulation SHO violations, and separately charged Chicago-based TJM Proprietary Trading LLC and one of its traders, Michael R. Benson, with Regulation SHO violations while also charging TJM's chief operating officer John T. Burke for failing to supervise Benson. The firms and individuals agreed to settle the SEC's charges without admitting or denying the findings.
"These traders and their firms engaged in short selling tactics that circumvented regulatory requirements through complex options transactions," said Scott W. Friestad, Associate Director of the SEC's Division of Enforcement and Special Advisor to the Director.
"Not only did these traders violate short selling rules, but the type of transactions they engaged in caused other market participants to effectively 'naked' short," added Andrew M. Calamari, Associate Director of the SEC's New York Regional Office. "HCM essentially loaned large amounts of hard-to-borrow stock to broker-dealers, who then provided locates on those shares to their institutional customers for short selling, which they otherwise might not have been able to do."
In the HCM proceeding, the Commission found that HCM engaged in misconduct from January 2005 to October 2007 and received ill-gotten gains of at least $3 million. The Commission ordered HCM to cease and desist from committing or causing, and Hazan to cease and desist from causing, any violations and future violations of Rules 203(b)(1) and 203(b)(3), censured HCM, and barred Hazan from association with any broker-dealer, with the right to reapply for association after five years. The Commission also ordered HCM and Hazan to pay disgorgement in the amount of $3 million, but provided that the payment obligation shall be deemed satisfied by orders of NYSE Amex, LLC and NYSE Arca, Inc. in their related actions directing Hazan and HCM to pay disgorgement in that amount. The Commission acknowledged HCM's and Hazan's undertakings to pay fines totaling $1 million in the related SRO actions.
In the TJM proceeding, the Commission found that TJM engaged in misconduct from January 2007 to July 2007 and ordered TJM to cease and desist from committing or causing, and Benson to cease and desist from causing, any violations and any future violations of Rules 203(b)(1) and 203(b)(3). The Commission also censured TJM, suspended Benson from associating with any broker or dealer for a period of three months, and suspended Burke from acting in a supervisory capacity with a broker or dealer for a period of nine months. The Commission ordered TJM to pay disgorgement in the amount of $541,000, but provided that the payment obligation shall be deemed satisfied by an order of the Chicago Board Options Exchange Inc.'s (CBOE) Business Conduct Committee (BCC) in a related action directing TJM to pay disgorgement in that amount. The Commission acknowledged TJM's, Benson's, and Burke's undertaking to pay, jointly and severally, a $250,000 fine to the CBOE's BCC in its related action.
In its continuing effort to address short selling abuses, the SEC last week announced several regulatory actions to further protect investors and the markets from the negative effects of abusive "naked" short sales. The Commission made permanent a temporary rule implemented in 2008 to address concerns about "fails to deliver," and the SEC's Office of Economic Analysis has since determined that the number of fails to deliver has declined significantly under the rule. Fails to deliver in all equity securities has decreased by approximately 57 percent since the fall of 2008, and the average daily number of threshold list securities has declined from a high of approximately 582 securities in July 2008 to 63 in March 2009.
The SEC also is considering other proposed short selling restrictions.
The Commission acknowledges the assistance of NYSE Regulation, Inc., the Chicago Board Options Exchange, Inc. and the Financial Industry Regulatory Authority in these matters.
The Commission's investigation into violations of Regulation SHO continues.
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For more information (HCM case), contact:
Andrew M. Calamari
Associate Director, SEC's New York Regional Office
Assistant Director, SEC's New York Regional Office
For more information (TJM case), contact:
Scott W. Friestad
Associate Director and Special Advisor to the Director, SEC's Division of Enforcement
Robert B. Kaplan
Assistant Director, SEC's Division of Enforcement