Growth Companies

Six Firms Fined $2.5M for Illicit Short Sales

The firms participated in secondary stock offerings within days of selling those same stocks short.
Matthew HellerOctober 15, 2015

The U.S. Securities and Exchange Commission has announced monetary sanctions totaling more than $2.5 million against JPMorgan Chase, Omega Advisors, and four other firms for participating in secondary stock offerings after selling those same stocks short.

The enforcement actions are part of an SEC crackdown on violations of a rule intended to protect stock pricing mechanisms and prevent manipulation. The so-called Rule 105 Initiative, which was launched in 2013, previously resulted in more than $20 million in penalties from 42 firms.

The six firms cited Wednesday include a repeat offender War Chest Capital Partners was part of the SEC’s first sweep in 2013.

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“This highly successful program of streamlined investigations and resolutions of Rule 105 violations has clearly had an important deterrent impact on the market while expending a fraction of the resources that we have dedicated in the past,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a news release. “We will continue to target important violations that we see repeatedly with multiple actions that send important messages of deterrence.”

In the first fiscal year after the crackdown was announced, Rule 105 violations decreased by approximately 90% over the previous six years, according to the SEC.

The rule typically prohibits short selling a stock within five business days of participating in an offering for that same stock. “Such 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,” the SEC noted.

In one example, the SEC alleged in an administrative order, JPMorgan Investment Management sold short American International Group shares at $34.22 and then, four days later, bought shares in a secondary offering at $32.50, resulting in total profits of $27,003.56.

The largest sanctions announced Wednesday were against JPMorgan, which agreed to pay more than $1 million including disgorgement of $662,763 in profits. Omega will pay about $134,000. Also sanctioned were Auriga Global Investors ($618,402), Harvest Capital Strategies ($84,454), Sabby Management ($278,748), and War Chest Capital ($351,818).