On January 26, 2010, the SEC settled charges against two investment advisory firms for engaging in improper short selling of securities in advance of their participation in a company's secondary offering. The cases mark the first filed under the SEC's amended Rule 105 of Regulation M, which is designed to prohibit manipulative short selling ahead of follow-on securities offerings.
In one case, the SEC charged AGB Partners LLC and its principals, Gregory A. Bied and Andrew J. Goldberger, finding that they netted thousands of dollars in improper profits by shorting in advance of their purchase of stock in a secondary offering. In the other case, the SEC charged Palmyra Capital Advisors LLC, finding that the firm violated short selling rules and improperly profited in three of its hedge funds.
The SEC alleged that AGB Partners violated both the pre- and post-amendment Rule 105 to gain illicit profits. According to the SEC's order, AGB Partners used secondary offering shares in April 2007 to cover a portion of a short position in Boots & Coots International Well Control, Inc. In June 2008, under the amended rule, AGB Partners sold short shares of BGC Partners, Inc. and then purchased BGC shares in the company's secondary offering. AGB Partners, Mr. Bied and Mr. Goldberger agreed to pay more than $50,000 in disgorgement and penalties.
The SEC alleged that Palmyra 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 six days before receiving 50,000 shares from Capital One's secondary offering. Palmyra agreed to pay more than $330,000 in disgorgement and penalties.