SEC Charges Trader, Firm With Naked Short Selling
In many of the enforcement actions filed by the Commission the investor is the ultimate loser – his or her funds are misappropriated by the author of the fraudulent scheme. For example, in the typical offering fraud case the investor is usually lured into some “too good to be true” scheme that promises virtually guaranteed returns with no risk. While these schemes do in fact have guaranteed returns, they go to the schemer, not the investor. At times it can be tempting to second guess the decision to invest in these schemes by the investor – and with hindsight that is often not difficult. That typically does not help the investor unfortunately or in many instances prevent variations of the scheme from being used to defraud others.
In other types of fraudulent schemes depicted in the cases filed by the agency those deceived have no real chance to protect themselves. This can happen in trading cases where the schemer disregards the rule of the road – the regulations designed to create a level playing field. This is what happened in one of the Commission’s most recent cases involving a market professional and recidivist who was a short seller, SEC v. Mintz, Civil Action No. 2:23-cv-03201 (D. N.J. Filed June 12, 2023).
Named as defendants in the action are Hal Mintz and Sabby Management LLC, a registered investment adviser where Mr. Mintz was employed. The firm has been sanctioned by the Commission previously for violating for violating Regulation 105 of Regulation M which governs improper trading in connection with an offering.
In Minrtz, which focuses on a two year period beginning March 2017, Defendants used their knowledge of the Commission’s rules governing tradin primarily short selling, to game the system with improper transactions facilitated by false statements to obtain illicit trading profits. The scheme had two main facets. The first centered on what the market-place was told were long trades made by private funds. In fact, those funds did not have actual net long positions. As a result, the positions should have been marked as short. Defendants, however, did not locate cover for the positions as required by the rules governing short sales because the positions had been mismarked. Defendants thus violated Regulation SHO.
The second facet of the scheme is similar. Here Defendants actually put on short positions. Yet Defendants again failed to locate cover for their positions by acquiring or borrowing the securities necessary. The transactions again violated Regulation SHO.
Over the course of the scheme Defendants to steps to conceal their activities. This was to some extent done by making false statements about their trades and positions when dealing with other market professionals. At the same time Defendants were, at times, unable to deliver the securities necessary to cover their positions. When this occurred Defendants’ actually had a naked short position.
Defendants ignored the dictates of Regulation SHO because it was profitable. By ignoring the locate requirements Defendants avoided the expense associated with the locate rule. Defendants increased their illicit gains, at times by converting their positions in stock at a cheaper price than would have otherwise been available by artificially deflating the price. Overall Defendants profited by about $2 million.
This conducted is alleged to have violated Exchange Act Section 10(b) and Advisers Act Sections 204 and 204(6). The case is in litigation.
SEC Charges Trader, Firm With Naked Short Selling
In many of the enforcement actions filed by the Commission the investor is the ultimate loser – his or her funds are misappropriated by the author of the fraudulent scheme. For example, in the typical offering fraud case the investor is usually lured into some “too good to be true” scheme that promises virtually guaranteed returns with no risk. While these schemes do in fact have guaranteed returns, they go to the schemer, not the investor. At times it can be tempting to second guess the decision to invest in these schemes by the investor – and with hindsight that is often not difficult. That typically does not help the investor unfortunately or in many instances prevent variations of the scheme from being used to defraud others.
In other types of fraudulent schemes depicted in the cases filed by the agency those deceived have no real chance to protect themselves. This can happen in trading cases where the schemer disregards the rule of the road – the regulations designed to create a level playing field. This is what happened in one of the Commission’s most recent cases involving a market professional and recidivist who was a short seller, SEC v. Mintz, Civil Action No. 2:23-cv-03201 (D. N.J. Filed June 12, 2023).
Named as defendants in the action are Hal Mintz and Sabby Management LLC, a registered investment adviser where Mr. Mintz was employed. The firm has been sanctioned by the Commission previously for violating for violating Regulation 105 of Regulation M which governs improper trading in connection with an offering.
In Minrtz, which focuses on a two year period beginning March 2017, Defendants used their knowledge of the Commission’s rules governing tradin primarily short selling, to game the system with improper transactions facilitated by false statements to obtain illicit trading profits. The scheme had two main facets. The first centered on what the market-place was told were long trades made by private funds. In fact, those funds did not have actual net long positions. As a result, the positions should have been marked as short. Defendants, however, did not locate cover for the positions as required by the rules governing short sales because the positions had been mismarked. Defendants thus violated Regulation SHO.
The second facet of the scheme is similar. Here Defendants actually put on short positions. Yet Defendants again failed to locate cover for their positions by acquiring or borrowing the securities necessary. The transactions again violated Regulation SHO.
Over the course of the scheme Defendants to steps to conceal their activities. This was to some extent done by making false statements about their trades and positions when dealing with other market professionals. At the same time Defendants were, at times, unable to deliver the securities necessary to cover their positions. When this occurred Defendants’ actually had a naked short position.
Defendants ignored the dictates of Regulation SHO because it was profitable. By ignoring the locate requirements Defendants avoided the expense associated with the locate rule. Defendants increased their illicit gains, at times by converting their positions in stock at a cheaper price than would have otherwise been available by artificially deflating the price. Overall Defendants profited by about $2 million.
This conducted is alleged to have violated Exchange Act Section 10(b) and Advisers Act Sections 204 and 204(6). The case is in litigation.