The SEC has charged a New York hedge fund adviser with short sale violations in connection with the Hibernia-Capital One merger. The SEC settled the enforcement action against Sandell Asset Management Corp. (SAM), its chief executive officer, and two other employees for engaging in improper short sales in connection with trading in the securities of Hibernia Corporation in the immediate aftermath of Hurricane Katrina.
Hibernia was a New Orleans-based bank holding company and the subject of an acquisition agreement with Capital One Financial Corporation at the time Katrina occurred. As part of its merger arbitrage investment strategy, SAM held a large long position in Hibernia. According to the SEC, SAM personnel believed that Capital One would lower its offering price for Hibernia shares in the wake of Katrina. In an attempt to offset an anticipated loss to a client, SAM personnel began to sell short as many shares of Hibernia stock as possible, improperly marking certain sales orders as "long" or misrepresenting to the broker-dealers executing some of the trades that they had located stock to borrow.
After the Hibernia-Capital One merger was announced on March 6, 2005, SAM according to the SEC purchased approximately 9.3 million shares of Hibernia stock for one of the firm's hedge fund clients. Thereafter, SAM sold the Hibernia shares to third parties and entered into "swap" transactions with them. The hedge fund managed by SAM no longer owned the Hibernia shares, but retained all of the economic risk of loss if the price of the shares declined.
On August 29, 2005, Hurricane Katrina struck New Orleans, where Hibernia was headquartered and maintained substantial assets. On August 31, 2005, in its effort to offset a potential loss to its client, SAM personnel improperly marked certain sales orders as "long" even though they were, in fact, short. On September 2, 2005, SAM personnel made some additional short sales by representing to the broker-dealers executing the trades that they had located stock to borrow, when in fact they had not. The SEC found that the August 31 trades violated Section 10(a) of the Securities Exchange Act of 1934 and Exchange Act Rule 10a-1 and that the September 2 trades violated Section 17(a)(2) of the Securities Act of 1933.
Please click http://www.sec.gov/litigation/admin/2007/33-8857.pdf for a copy of the administrative order.