SEC enforcement has been bringing an increasing number of cases involving short selling. In recent months, the Commission has focused on cases involving alleged violations of Rule 105 which is concerned with short selling in connection with a follow on offering. Previously, the SEC brought a series of cases involving short selling and PIPE offerings. To date, the cases have involved market professionals and, in a number of instances, hedge funds.

This week the Commission brought its first enforcement actions alleging violations of Rule 105 against individuals who are not market professionals. One is against Peter Grabler. In the Matter of Peter G. Grabler, Adm. Pro. File No. 3-13886 (Filed May 11, 2010); SEC v. Grabler, Civ. Action No. 1:10-cv-10798 (D. MA. Filed May 11, 2010). The second is against Leonard Adams. In the Matter of Leonard Adams, Adm. Proc. File No. 3-13885 (May 11, 2010); SEC v. Adams, Civ. Action No. 1: 10-cv-10799 (Filed May 11, 2010).

The action against each defendant is essentially the same. Each is based on Rule 105 of Regulation M, “Short Selling in Connection with a Public Offering” which was revised in October 2007. The pre-revision rule essentially prohibited covering a short sale with securities acquired in the offering if the short sale occurred during the period beginning five business days before the pricing of the offered securities and ended with the pricing. The revised rule is similar, but broader. It prohibits selling short securities which are the subject of a follow on offering and then purchasing securities in that offering if the short sale is made during the shorter of either of the following periods: (i) beginning five business days before pricing or (ii) beginning with the initial filing of the registration statement and ending with the pricing.

Mr. Grabler is alleged to have violated both the pre- and post- amendment rule. Between February 2006 and November 2008, the complaint claims he violated the rule 124 times as part of a strategy to participate in numerous secondary offerings. The purpose of the strategy is to improve his access to shares available in IPOs since the offerings are underwritten by the same broker-dealers. In these transactions, he obtained unlawful gains of $636,123. Mr. Adams is alleged to have violated Rule 105 in connection with at least 95 offerings from March 2006 through December 2008. Mr. Adams was attempting to implement the same strategy. He had unlawful gains of $331,387.

To settle the actions, Mr. Grabler consented to the entry of a cease and desist order in the administrative proceeding and an order requiring him to disgorge his profits of $636,123 along with prejudgment interest of $35,232. In the civil action he agreed to an order requiring him to pay a penalty of $318,061. See also Litig. Rel. 21522 (May 11, 2010). The settlement with Mr. Adams is similar. He agreed to the entry of a cease and desist order and which requires that he pay disgorgement equal to his trading profits along with prejudgment interest. In the district court action he consented to the entry of an order requiring that he pay a civil penalty of $165,693.00. The disgorgement and prejudgment interest will be paid in four quarterly installments. See also Litig. Rel. 21521 (May 11, 2010).