SEC Sanctions 19 Firms and Individual Trader for Short Selling Violations in Advance of Stock Offerings

The Securities and Exchange Commission today announced the latest sanctions in a continuing enforcement initiative uncovering certain hedge fund advisers and private equity firms that have illegally participated in an offering of a stock after short selling it during a restricted period.

The SEC last year announced the initiative to enhance enforcement of Rule 105 of Regulation M, which is designed to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation.  Rule 105 typically prohibits firms or individuals from short selling a stock within five business days of participating in an offering for that same stock.  Such dual activity typically results in illicit profits for the firms or individuals while reducing the offering proceeds for a company by artificially depressing the market price shortly before the company prices the stock.

The SEC’s investigations found that 19 firms and one individual trader charged in these latest cases engaged in short selling of particular stocks shortly before they bought shares from an underwriter, broker, or dealer participating in a follow-on public offering.  Each firm and the individual trader have agreed to settle the SEC’s charges and pay a combined total of more than $9 million in disgorgement, interest, and penalties.

“Rule 105 is an important preventive measure designed to protect issuers from downward pressure on their stock price in advance of offerings,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “These charges should remind investment advisers and others of the need for robust and comprehensive compliance programs covering Rule 105 compliance.”

In its ongoing Rule 105 initiative, the Enforcement Division is able to quickly identify potential violations through close coordination with the Financial Industry Regulatory Authority (FINRA) and the SEC’s National Exam Program.  Enforcement staff then seeks trading data and certain other relevant information from the traders.  The Enforcement Division expedites these cases by using uniform methodologies for determining trading profits and deciding appropriate penalties.  This streamlined effort ensures consistency across all cases while expending a modest amount of agency resources.

The SEC today issued the following orders instituting settled administrative proceedings for Rule 105 violations during the last few years.  The orders identify the following monetary sanctions:

• Advent Capital Management – The New York-based firm agreed to pay disgorgement of $75,292, prejudgment interest of $3,836.36, and a penalty of $65,000.
• Antipodean Advisors – The New York-based firm agreed to pay disgorgement of $27,970, prejudgment interest of $702.83, and a penalty of $65,000.
• BlackRock Institutional Trust Company – The California-based firm agreed to pay disgorgement of $1,122,400, prejudgment interest of $22,471.13, and a penalty of $530,479.
• East Side Holdings II – The New Jersey-based firm agreed to pay disgorgement of $26,613, prejudgment interest of $397.38, and a penalty of $130,000.
• Explorador Capital Management – The Brazil-based firm agreed to pay disgorgement of $83,722, prejudgment interest of $6,936.65, and a penalty of $65,000.
• Formula Growth – The Canada-based firm agreed to pay disgorgement of $42,488, prejudgment interest of $4,255.15, and a penalty of $65,000.
• Great Point Partners – The Connecticut-based firm agreed to pay disgorgement of $43,068, prejudgment interest of $1,529.13, and a penalty of $65,000.
• Indaba Capital Management – The California-based firm agreed to pay disgorgement of $194,797, prejudgment interest of $11,990.79, and a penalty of $97,398.59.
• Ironman Capital Management – The Texas-based firm agreed to pay disgorgement of $21,844, prejudgment interest of $382.66, and a penalty of $65,000.
• James C. Parsons – An individual trader who lives in New York City agreed to pay disgorgement of $135,531, prejudgment interest of $3,063.90, and a penalty of $67,765.72.
• Midwood Capital Management – The Massachusetts-based firm agreed to pay disgorgement of $72,699, prejudgment interest of $5,248.19, and a penalty of $65,000.
• Nob Hill Capital Management – The California-based firm made sworn statements to the Commission attesting to a financial condition that makes it unable to pay any penalty.
• RA Capital Management – The Massachusetts-based firm agreed to pay disgorgement of $2,646,395.21, prejudgment interest of $73,394.16, and a penalty of $904,570.84.
• Rockwood Investment Management (also known as Rockwood Partners LP) – The Connecticut-based firm agreed to pay disgorgement of $156,631, prejudgment interest of $9,222.16, and a penalty of $72,135.23.
• Seawolf Capital – The New York-based firm agreed to pay disgorgement of $192,730, prejudgment interest of $7,842.28, and a penalty of $96,365.
• Solus Alternative Asset Management – The New York-based firm agreed to pay disgorgement of $39,600, prejudgment interest of $895.22, and a penalty of $65,000.
• SuttonBrook Capital Management – The New York-based firm agreed to pay disgorgement of $70,000.
• Troubh Partners – The New York-based firm agreed to pay disgorgement of $262,744, prejudgment interest of $39,315.13, and a penalty of $106,651.15.
• Vinci Partners Investimentos – The Brazil-based firm agreed to pay disgorgement of $283,480, prejudgment interest of $23,487.08, and a penalty of $141,740.
• Whitebox Advisors – The Minnesota-based firm agreed to pay disgorgement of $788,779, prejudgment interest of $48,553.49, and a penalty of $365,592.83.

The SEC’s investigations were conducted by Allen A. Flood, Heidi M. Mitza, Lauren B. Poper, Kevin J. Gershfeld, and Wendy Kong and jointly supervised by Anita B. Bandy and Conway T. Dodge.  The SEC appreciates the assistance of FINRA.