On October 14, 2015, the Securities and Exchange Commission announced enforcement actions against several firms, including more than $2.5 million in monetary sanctions and, in the case of one previously sanctioned firm, an order barring the firm from participating in stock offerings for a period of one year as part of its ongoing enforcement initiative focused on violations of Rule 105 of Regulation M. 

On October 14, 2015, the Securities and Exchange Commission announced enforcement actions against several firms, including more than $2.5 million in monetary sanctions and, in the case of one previously sanctioned firm, an order barring the firm from participating in stock offerings for a period of one year as part of its ongoing enforcement initiative focused on violations of Rule 105 of Regulation M. 

Rule 105 prohibits firms from participating in public stock offerings after selling short those same stocks. The rule is intended to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation. Rule 105 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’s investigations in the current round found that several 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 and pay a combined total of more than $2.5 million in disgorgement, interest, and penalties.

Through its Rule 105 Initiative, which was first announced in 2013 as an effort to address violations of the rule in an expedited and streamlined way, the Division of Enforcement claims that it has taken action on every Rule 105 violation over a de minimis amount that has come to its attention in an attempt to promote a message of zero tolerance for these offenses. In the initiative’s initial round in 2013, enforcement actions were brought against 23 firms and resulted in more than $14.4 million in monetary sanctions. As a result, based on information from the SEC, Rule 105 violations have dramatically decreased. In the first fiscal year after the Initiative was announced, Rule 105 violations decreased by approximately 90 percent compared to the previous six years. Rule 105 violations in fiscal year 2015 were also lower than before the Initiative.

In a second round of sanctions announced in 2014, enforcement actions were brought against 19 firms and one individual trader and resulted in more than $9 million in monetary sanctions.

Settlements announced on October 14, 2015, include:

  • Auriga Global Investors, Sociedad de Valores, S.A. – The Spain-based firm agreed to pay disgorgement of $436,940.52, prejudgment interest of $2,184.70, and a penalty of $179,277.28.
  • Harvest Capital Strategies LLC – The California-based firm agreed to pay disgorgement of $18,835, prejudgment interest of $619.28, and a penalty of $65,000.
  • Omega Advisors, Inc. – The New York-based firm agreed to pay disgorgement of $68,340, prejudgment interest of $686.58, and a penalty of $65,000.
  • Sabby Management LLC – New Jersey-based firm agreed to pay disgorgement of $184,747.10, prejudgment interest of $2,331.51, and a penalty of $91,669.95.
  • War Chest Capital Partners LLC – The New York-based firm agreed to pay disgorgement of $179,516, prejudgment interest of $22,302.02, and a penalty of $150,000.

Portfolio managers and Chief Compliance Officers should take particular note of the War Chest Capital Partners matter. This group was a respondent in the SEC’s first sweep in 2013 and, according to the SEC, refused at that time to review its past trading to determine whether additional violations not identified by the Division of Enforcement had occurred. Enforcement subsequently found seven additional Rule 105 violations by War Chest, and as a result, brought a second action against War Chest with increased sanctions. Pursuant to the SEC Order against War Chest, the firm is now subject to a censure, a significant penalty, and conduct-based order prohibiting it from participating in secondary offerings for a period of one year.