The Securities and Exchange Commission recently charged two California investment advisery firms, AGB Partners LLC and Palmyra Capital Advisors LLC, with engaging in improper short selling of securities in advance of their participation in a company’s secondary offering, in violation of Rule 105 of Regulation M. In October 2007, the SEC amended Rule 105, which is designed to prohibit manipulative short selling ahead of follow-on securities offerings. The revised rule generally prohibits the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.
The SEC found that AGB Partners LLC and its principals, Gregory Bied and Andrew Goldberger, netted thousands of dollars in improper profits by shorting in advance of their purchase of stock in a secondary offering. According to the SEC’s order, AGB Partners used two accounts: one for short selling funded with Bied’s and Goldberger’s personal assets, and the other a private investment fund managed for outside clients for participating in follow-on offerings. Although the amended Rule 105 created an exception to allow otherwise prohibited trades if the trades occur in separate accounts, the SEC’s order found that these accounts fell outside the separate accounts exception because of Goldberger’s and Bied’s especially close collaboration with the accounts.
The SEC charged Palmyra Capital Advisors LLC with violating short selling rules and improperly profiting in three of its managed hedge funds. The SEC found that the firm violated Rule 105 in connection with short sales made in advance of a public offering by Capital One Financial Corp., resulting in improper profits of $225,500. Palmyra sold short a total of 50,000 shares of Capital One stock on September 18, 2008, and then received 50,000 shares from Capital One’s secondary offering on September 24, 2008.
Both firms have agreed to settle the SEC’s charges, consenting to be censured, disgorge profits and pay monetary penalties.