The SEC filed a settled, insider trading and Rule 105 short selling action against a seasoned trader and his two trading vehicles. SEC v. Langston, Civil Action No. 1:13-cv-324360 (S.D. Fla. Filed Dec. 3, 2013).
Defendant Charles Langston is a long time securities trader. He actively trades through two controlled entities, defendants CRL Management, LLC and Guarantee Reinsurance, LTD. In March 2010 Mr. Langston opened an account for CRL Management at Chardan Capital Markets, LLC, a New York City based registered broker dealer and investment bank. Previously, AutoChina International Ltd. retained Chardan and another broker, Rodman & Renshaw, LLC, to locate potential investors for a follow-on offering. AutoChina is a PRC based company involved in the commercial vehicle and sales business. Shares of the company are registered for trading in the U.S.
In late March 2013 Chardan contacted a Langston associate about a deal involving AutoChina. The e-mail message noted that Mr. Langston would have to be approved to receive the transaction information and agree to keep it confidential. The morning day, March 23, 2010, there was a series of communications between Chardan and Mr. Langston’s representative. The communications stated that the next day there would be an offering for which the pricing would be determined. Also included was a Confidentiality and Non-Disclosure Agreement which provided that the information must remain confidential and could not be used “in connection with any investment outside the nature and scope of the proposed investment opportunity.” A subsequent e-mail stated that AutoChina was selling $100 million worth of its shares.
Later the same morning, Chardan provided Mr. Langston’s representative with confidential investor presentation on the AutoChina deal. It included an overview of the company’s business, growth projections, information about the current target market and other financial data. Within less than two hours Mr. Langston placed an order for the Guarantee Reinsurance account to sell short AutoChina’s shares.
That afternoon Rodman sent Langston’s associate the final transaction materials which included the $35 per share offering price. The deal announcement was expected pre-market opening the next day. Mr. Langston continued to sell AutoChina’s shares short. By the end of the day he had sold 29,000 shares short at an average price of $41.75. That same afternoon Langston’s associate sent Chardan a securities purchase agreement executed by Mr. Langston on behalf of CRL Management, subscribing for 40,000 shares at $35 per share.
The next day Mr. Langston purchased 29,000 shares of AutoChina stock for Guarantee Reinsurance’s account at an average price of $35.094, a 17% discount to the prior day closing price. By the end of the day the shares of AutoChina closed down about 15% on news of the offering. Overall Mr. Langston had trading profits of $193, 108.
In the two years prior to the AutoChina deal, the defendants engaged in manipulative short selling on three occasions, according to the complaint. Rule 105 prohibits any person from selling an equity security short during a pre-offering restrictive period that begins “five business days before the pricing of the offered securities and ending with such pricing.” Defendants engaged in prohibited activity once in 2009 and twice in 2008:
Alcoa trades: In March 2009 during the restricted period Mr. Langston, through the account of Guaranteed Reinsurance, sold short 500,000 shares of Alcoa. He then purchased 1 million shares in the offering. These transactions resulted in profits of over $500,000.
Mitsubishi trades: In December 2008 during the restricted period Mr. Langston sold short 200,000 shares and later purchased 500,000 shares in the offering. The transactions yielded gains of over $190,000.
Wells Fargo trades: Over four days during the restricted period in November 2008 Mr. Langston, in accounts held in the names of his two entities, sold short 489,000 shares of Wells Fargo. Later the defendants purchase a total of 258,000 shares of Wells Fargo from three different underwriters. Overall the defendants had a gain of over $600,000.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 105 of Regulation M.
Mr. Langston agreed to settle the insider trading charges, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement of $193,108 along with prejudgment interest and a civil penalty equal to the amount of the disgorgement. The three defendants also consented to the entry of permanent injunctions base on Rule 105. Monetary sanctions will be determined by the Court at a later date. See Lit. Rel. No. 22882 (Dec. 3, 2013).