On March 5, the Securities and Exchange Commission announced that it had levied its largest-ever monetary sanction for Rule 105 short-selling violations by reaching a agreement [ PDF] under which a Long Island trading firm and its owner will pay $7.2 million in penalties to settle the charges against them, Courthouse News Service’s Securities Law Review reports.
The Exchange Act provision at issue in the case bans the short-selling of an equity security during a restricted period that is generally understood to be five business days before a public offering, and the subsequent purchase of that same security through the offering, the SEC explained in a statement.
The rule aims to bar short-selling from interfering with offering prices.
According to the SEC, Jeffrey Lynn created his company, Worldwide Capital, in order to invest and trade his own money. Lynn’s investment strategy focused on new shares of public issuers coming to market through secondary and follow-on public offerings. Lynn engaged traders to act on his behalf, and through them sought allocations of additional shares that would soon be publicly offered—usually at a discount to the market price of company shares that were already publicly trading. Lynn would then sell those shares short in advance of the offerings, improperly profiting from the difference between the discounted price paid to acquire the shares and the market price on the date of offering.
According to the SEC, Lynn and Worldwide committed 60 such Rule 105 violations between October 2007 and February 2012, resulting in ill-gotten gains totaling almost $8.5 million. After paying off the individual traders who handled the short sales, Lynn and Worldwide were left with $4,212,797.
In addition to disgorging those profits, Lynn and Worldwide have also agreed to pay prejudgment interest of $526,358 and a penalty of $2,514,571, the SEC said in a statement. They have also agreed to refrain from violating Rule 105, without admitting or denying that they were at fault.