A CONTINUED FOCUS ON SHORT SELLING
Since at least the beginning of the market crisis when it took emergency actions, short selling has been a key focus for the Commission. Last year, it passed new regulations on short selling. The agency also filed its first naked short selling case as well as others targeting the practice in certain instances. See, e.g., In the Matter of TJM Proprietary Trading, LLC, Adm. File No. 3-13569 (Aug. 5, 2009) (discussed here) and In the Matter of Hazan Capital Management, LLC, Adm. File No. 3-1570 (Filed Aug. 5, 2009), also discussed here. See also In the Matter of Rhino Trading, LLC, Adm. Proc. File No. 3-013677 (Filed Nov. 4, 2009) (Reg. SHO), discussed here; In the Matter of First New York Securities LLC, Adm. Proc. File No. 3-13656 (Filed Oct. 20, 2009) (same), discussed here.
The SEC continued this trend this week, filing two more short selling cases based on Regulation M as it existed prior to the 2007 amendments and after. In the Matter of Palmyra Capital Advisors LLC, Adm. Proc. File No. 3-13783 (Jan. 26, 2010); In the Matter of AGB Partners LLC, Adm. Proc. File No. 3-13764 (Jan. 26, 2010).
The first action is against Palmyra Capital Advisors, an LA-based hedge fund manager that advises three limited partnerships. According to the Order, the three funds advised by Palmyra sold short 50,000 shares of Capital One in mid-September 2008. About one week later, Capital One announced the pricing for a secondary offering at about $6 per share under the price at which the three funds had sold short. The three funds subsequently received 50,000 shares in the offering yielding a profit of $225,000.
This transaction violated Regulation M, according to the Commission. That Regulation prohibits selling short a security that is the subject of an offering and then purchasing the securities from the underwriter or an offering participant within specified time limits. The Commission implemented this restriction to prohibit what it called manipulative short selling or “shorting into the deal.” Typically, a secondary offering is priced below the market, meaning that the trader who shorts the stock shortly prior to the deal engages in a transaction with virtually no risk and has an unfair advantage. It can also result in reduced proceedings from the offering for the issuer. Here, the Commission found that Palmyra violated the Rule.
To settle the action, Palmyra consented to the entry of a censure. The firm also agreed to pay disgorgement of $225,000, prejudgment interest and a civil penalty of $105,000. In settling this matter, the SEC considered the prompt remedial actions of the Respondent and its cooperation.
The AGB Partners action is similar. There, AGB Partners, an investment adviser, advised two private funds. One account was AGB Partners’ own account which traded for its principals. A second belonged to Del Rey Management, which was funded by outside investors.
Respondents violated Regulation M in two transactions, according to the Order. In one regarding the shares of Boots and Coots, AGB Partners sold short 173,632 shares in mid- April 2007. Shortly thereafter, 35,000 shares acquired in a secondary offering by Del Rey were used to cover part of the short position. This transaction yielded a profit of $16,450.
The second set of transactions involved a follow-on offering of the shares of BGC Partners Inc. In June 2008 BCG priced its offering at $8 per share. Del Rey purchased 200,000 shares in the offering for its account. The prior month, AGB Partners sold short 16,200 shares of BGC Partners at an average price of $8.45 per share. By participating in the secondary offering, a virtually risk free profit of $14,704 was made.
Both transactions violated Regulation M, according to the order. The first violated the pre-amendment version of the Regulation, while the second is contrary to the post-amendment version. In addition, although the transaction regarding Boots and Coots involved two different accounts, it was still prohibited. Regulation M does contain an exception for transactions involving separate accounts. Here, however, since the accounts were under common control, the exception does not apply.
To settle the action, Respondents consented to the entry of a censure. In addition, they agreed to disgorge their trading profits of about $38,000 along with prejudgment interest and to pay a civil penalty of $20,000.