The Securities and Exchange Commission (SEC) announced today that it has settled with 22 out of 23 firms on charges of short selling violations for $14.4 million in total sanctions.


SEC rules on shorting stocks

According to SEC Rule 105, companies are not allowed to short a stock and then immediately buy it again through a public offering, because such moves manipulate prices and generally result in ‘illicit profits’. A five day restriction on shorts before the public offering is typical.

“The benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement.

These cases are part of the SEC’s renewed “focus on preventing firms from improperly participating in public stock offerings after selling short those same stocks,” and an attempt to streamline enforcement actions so that even relatively minor violations (many of the cases are for thousands or tens of thousands of dollars) without creating an undue strain on SEC resources.

The 23rd firm, G-2 Trading LLC, did not settle and the SEC has alleged that the company violated Rule 105 in three separate instances, resulting in $13,000 in profits. The SEC Enforcement Division is seeking all trading profits, interest, and penalties from the company.

Three biggest settlements

The three biggest settlements are with JGP Global Gestao de Recursos for disgorgement of $2.5 million, prejudgment interest of $129,000, and a $514,000 penalty; Manikay Partners for disgorgement of $1.7 million, prejudgment interest of $215,000, and a penalty of $680,000; Deerfield Management for disgorgement of $1.3 million, prejudgment interest of $19,000, and a penalty of $609,000.

The following companies also agreed to settle: Blackthorn Investment Group; Claritas Investments Ltd.; Credentia Group; D.E. Shaw & Co; Hudson Bay Capital Management; M.S. Junior, Swiss Capital Holdings, and Michael A. Stango; Meru Capital Group; Merus Capital Group; Ontario Teachers’ Pension Plan Board; Pan Capital AB; PEAK6 Capital Management; Philadelphia Financial Management of San Francisco; Polo Capital International Gestao de Recursos aka Polo Capital Management; Soundpost Partners; Southpoint Capital Advisors; Talkot Capital; Vollero Beach Capital Partners; War Chest Capital Partners; and Western Standard.