Five independent traders were charged for committing short selling violations and agreed to pay a fine well in excess of the profits they generated on the trade, a punishment standard that has different meaning depending on who is being punished.

short selling

Worldwide Capital and Jeffrey Lynn settled SEC charges on short selling

Worldwide Capital and its owner Jeffrey W. Lynn agreed to pay $7.2 million to settle SEC charges in March for violating Rule 105, prohibiting the short sale of stocks during a restricted period – generally five business days before a public offering – and the subsequent purchase of that same stock through the public offering.

The SEC slapped administrative proceedings against traders hired by Lynn, including Derek W. Bakarich, Carmela Brocco, Tina Lizzio, Steven J. Niemis, and William W. Vowell They are accuesed of violating Rule 105 on behalf of Lynn and Worldwide.

Because the traders did not comply with the law “now they must forfeit the profits they earned on their respective trades plus additional penalties,” said Amelia A. Cottrell, associate director of the SEC’s New York Regional Office. Fines for large banks have, until recently, amounted to a fraction of the profits generated.  A fine of all profits generated plus a penalty fine is something rarely levied against large US banks. Each of the five traders agreed to settle the SEC’s charges and pay a collective total of nearly $750,000.

“These individuals shared in profits generated by transactions that violated important short selling regulations in place to protect the markets from manipulative trading activity,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

Short selling in advanced offering

Bakarich, Brocco, Lizzio, Niemis, and Vowell were selected by Lynn to conduct trades for Worldwide Capital, which he created for the purpose of investing and trading his own money, the SEC charges state.  The traders Lynn selected to trade his capital pursued an investment strategy focused primarily on obtaining allocations of new shares of public issuers coming to market through secondary and follow-on public offerings at a discount to the market price of the company’s shares that were already trading publicly, an SEC statement said.  They sold short the shares in those issuers in advance of the offerings, hoping to profit by the difference between the price they paid to acquire the offered shares and the market price on the date of the offering.  All told the group received ill-gotten gains ranging from approximately $16,000 to more than $200,000.

Each of the targeted traders agreed to discontinue violating Rule 105 but didn’t admit guilt, while all agreed to “disgorge all of their ill-gotten gains plus prejudgment interest and pay an additional penalty equal to 60 percent of the disgorgement amount,” the SEC noted.