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From Securities Regulation Daily, September 17, 2013

SEC brings short selling charges against 23 firms, issues related risk alert

By John Filar Atwood

In conjunction with its increased focus on short selling violations, the SEC announced that it has brought enforcement actions against 23 firms, 22 of which have agreed to settle. The SEC alleged that the firms violated Regulation M Rule 105 by improperly participating in public stock offerings after selling short those same stocks, resulting in illicit profits for the firms.

The 22 actions being settled will result in more than $14.4 million in monetary sanctions. The other action is administrative proceeding against G-2 Trading LLC, which has decided to litigate the matter. The Commission alleged that G-2 violated Rule 105 in connection with transactions in three companies’ securities, resulting in more than $13,000 in profits.

Regulation M Rule 105 of Regulation M prohibits the short sale of an equity security during a restricted period, which is generally five business days before a public offering, and the purchase of that same security through the offering. The rule applies regardless of the trader’s intent, and promotes offering prices that are set by supply and demand rather than by manipulation. The rule helps prevent short selling that can reduce offering proceeds by artificially depressing the market price shortly before the company prices its public offering.

Firms involved. The SEC alleges that the firms charged in these cases bought shares from an underwriter, broker, or dealer participating in a follow-on public offering after having sold short the same security during the restricted period. The firms that have agreed to settle are: Blackthorn Investment Group, Claritas Investments Ltd., Credentia Group, D.E. Shaw & Co., Deerfield Management Company, Hudson Bay Capital Management, JGP Global Gestão de Recursos, M.S. Junior, Swiss Capital Holdings, and Michael A. Stango, Manikay Partners, Meru Capital Group, Merus Capital Partners, Ontario Teachers’ Pension Plan Board, Pan Capital AB, PEAK6 Capital Management, Philadelphia Financial Management of San Francisco, Polo Capital International Gestão de Recursos a/k/a Polo Capital Management, Soundpost Partners, Southpoint Capital Advisors, Talkot Capital, Vollero Beach Capital Partners, War Chest Capital Partners, Western Standard.

Risk alert. Simultaneous with the enforcement actions, the Commission’s National Examination Program issued a risk alert to highlight risks to firms from non-compliance with Rule 105. The risk alert contains observations made by SEC examiners focusing on Rule 105 compliance issues and identifies some corrective steps certain firms have taken to remedy Rule 105 concerns.

The alert states that in order to be in compliance with Rule 105, a person that for any reason has sold short shares of a security that is the subject of an offering during the restricted period must either refrain from purchasing shares of that security in the offering, or rely on an exception. The alert reminds firms that they should provide training to their employees regarding the application of the rule, develop procedures reasonably designed to achieve compliance with the rule, and enforce those procedures.

Attorneys: Conway T. Dodge, Anita B. Bandy, Lauren B. Poper, Christina M. Adams, Allen A. Flood, Kevin J. Gershfeld, Wendy Kong, Mary S. Brady, Ian S. Karpel, Kimberly L. Frederick, J. Lee Robinson and James A. Kidney for the Securities and Exchange Commission.

Companies: G-2 Trading LLC, Blackthorn Investment Group, Claritas Investments Ltd., Credentia Group, D.E. Shaw & Co., Deerfield Management Company, Hudson Bay Capital Management, JGP Global Gestão de Recursos, M.S. Junior, Swiss Capital Holdings, and Michael A. Stango, Manikay Partners, Meru Capital Group, Merus Capital Partners, Ontario Teachers’ Pension Plan Board, Pan Capital AB, PEAK6 Capital Management, Philadelphia Financial Management of San Francisco, Polo Capital International Gestão de Recursos a/k/a Polo Capital Management, Soundpost Partners, Southpoint Capital Advisors, Talkot Capital, Vollero Beach Capital Partners, War Chest Capital Partners, Western Standard.

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