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From Securities Regulation Daily, October 14, 2015

SEC’s zero tolerance approach to short selling nets six more firms

By John Filar Atwood

The SEC announced more than $2.5 million in sanctions against six firms for engaging in short sales in advance of securities offerings. The actions were brought under the Commission’s Rule 105 Initiative, which was begun in 2013 to address violations of the rule in an expedited way.

Rule 105 prohibits short selling a stock within five business days of participating in an offering for that same stock. According to the SEC, this dual activity typically results in illicit profits for the trader while reducing the offering proceeds for a company by artificially depressing the market price shortly before the company prices the stock.

Rule 105 Initiative. Through the Rule 105 Initiative, the staff of the Division of Enforcement has taken action on every Rule 105 violation over a de minimis amount that has come to its attention. The SEC believes the zero tolerance approach has resulted in a significant decrease in Rule 105 violations since the start of the initiative. The Commission said in a press release that in the first fiscal year after the initiative was announced, Rule 105 violations decreased by 90 percent over the previous six years.

The SEC’s recent investigations found that six firms engaged in short selling of particular stocks shortly before they bought shares from an underwriter, broker, or dealer participating in a follow-on public offering. Each firm has agreed to settle the SEC’s charges.

Penalties. According to the order against Auriga Global Investors, Sociedad de Valores, S.A., the Spain-based firm has agreed to pay disgorgement of $436,940, prejudgment interest of $2,184, and a penalty of $179,277. Harvest Capital Strategies LLC, which operates out of California, will pay disgorgement of $18,835, prejudgment interest of $619, and a penalty of $65,000. The order against J.P. Morgan Investment Management Inc. indicates that the firm agreed to pay disgorgement of $662,763, prejudgment interest of $56,758, and a penalty of $364,689.

New York-based Omega Advisors, Inc. will pay disgorgement of $68,340, prejudgment interest of $686, and a penalty of $65,000, and New Jersey’s Sabby Management LLC agreed to pay disgorgement of $184,747, prejudgment interest of $2,331, and a penalty of $91,669.

Lack of cooperation. The penalties against the sixth firm, War Chest Capital Partners LLC, were a little larger due a lack of cooperation. The New York firm agreed to pay disgorgement of $179,516, prejudgment interest of $22,302, and a penalty of $150,000.

The SEC noted that War Chest Capital was a respondent in the first Rule 105 Initiative sweep in 2013 and refused at that time to review its past trading to determine whether additional violations not identified by the enforcement staff had occurred. The Division subsequently found seven additional Rule 105 violations by the firm and brought a second action against War Chest Capital with increased sanctions. In addition to the monetary penalties, the firm is subject to a censure and a conduct-based order prohibiting it from participating in secondary offerings for a period of one year.

Companies: Auriga Global Investors, Sociedad de Valores, S.A.; Harvest Capital Strategies LLC; J.P. Morgan Investment Management Inc.; Omega Advisors, Inc.; Sabby Management LLC; War Chest Capital Partners LLC.

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