Broken Windows: SEC Files Six Settled Rule 105 Actions

Broken Windows – the SEC initiative cloned from the NYC Police Department which prosecutes every case large and small based on the a deterrence theory – is alive and well in the form of the Rule 105 Initiative. This week the Commission announced the filing of six settled actions based on alleged violations of the Rule. See, e.g. In the Matter of Auriga Global Investors Sociedad de Valores S.A., Adm. Proc. File No. 76145 (October 14, 2015)(action against a securities company registered with the Comision Nacional de Mercado de Valores of Spain based on violations of Rule 105 and settled as noted below).

Rule 105 of Regulation M precludes the purchase of equity securities in a secondary offering from an underwriter, broker, or dealer participating in the offering if the person sold shares of the issuer short generally within five days of the offering. The Rule is based on strict liability – scienter is not required.

Since the announcement of the initiative the number of violations has dropped significantly, according to the SEC’s press release. In the first fiscal year after the Initiative was announced detected violations dropped about 90%, according to the agency. Rule 105 violations in fiscal 2015 were “similarly lower” than before the Initiative, according to the release.

Each firm named in an administrative proceeding resolved the action by consenting to the entry of a cease and desist order based on Rule 105, Regulation M. In addition, each firm agreed to the following terms as part of the settlement:

Auriga Global Investors, Sociedad de Valores, S.A.: Payment of disgorgement in the amount of $436,940.52, prejudgment interest and a penalty of $179,277.28;

Harvest Capital Strategies LLC: Payment of disgorgement of $18,835, prejudgment interest and a penalty of $65,000;

J.P. Morgan Investment Management Inc.: Payment of disgorgement of $662,763, prejudgment interest and a penalty of $340,689;

Omega Advisors, Inc.: Payment of disgorgement of $68,340, prejudgment interest and a penalty of $65,000; and

Sabby Management LLC: Payment of disgorgement of $184,747.10, prejudgment interest and a penalty of $91,669.95.

Finally, War Chest Capital Partners LLC, a New York City based firm which provides advisory services and is not registered with the SEC also settled a Rule 105 proceeding. In the Matter of War Chest Capital Partners LLC, Adm. Proc. File No. 3-16894 (October 14, 2015). War Chest settled a Rule 105 proceeding with the Commission in 2013. In the Matter of War Chest Capital Partners LLC, Adm. Proc. File No. 3-15486 (September 16, 2013).

The conduct in the current action involves alleged violations of the Rule that occurred over a nine month period beginning in January 2011, that is, prior to the earlier action. War Chest, in “contrast to nearly every other firm subject to the Initiative . . . refused at that time [of the initial action] to review its past trading to determine whether additional violations not identified by the Division of Enforcement had occurred,” according to the SEC press release. The current action is thus based on conduct discovered by the Division which transpired prior to the 2013 proceeding.

To resolve this case War Chest agreed to certain undertaking which include limiting its functions and operations as an investment adviser for one year by refraining from participating in any secondary or follow-on offerings and certifying its compliance to the staff. In addition, the firm consented to the entry of a cease and desist order based on the Rule and to a censure. The firm will also pay disgorgement of $179,516, prejudgment interest and a civil penalty of $150,000. The increased sanctions reflect the lack of cooperation by the firm.