Yesterday, the SEC announced that it had charged two options traders and their broker-dealers with violating the locate and close-out requirements of Regulation SHO, the first such action by the SEC. This enforcement action follows recent regulatory efforts and proposals by the SEC to curtail abusive short-sales.
In the complaints filed in an administrative proceeding, the SEC alleges that from July 2005 through October of 2007 Hazan Capital Management LLC (HCM) and TJM Proprietary Trading LLC (TJM) violated Regulation SHO by engaging in reverse conversions with Regulation SHO threshold securities. As alleged in the complaints, the reverse conversions were carried out by effecting short shares, while simultaneously creating a synthetic long position in those same securities by purchasing call options from, and selling put options to, the same counterparty to whom HCM was selling short the shares of the threshold securities. While executing the reverse conversions, according to the complaints, HCM claimed to be eligible for the market-maker exception to the short selling rule’s locate requirement, which has since been repealed, and in fact did not locate, arrange to borrow, or borrow shares of the security in question prior to effecting the short sale. The SEC alleges, however, that this failure to locate, arrange to borrow, or borrow shares was improper, however, because HCM was not engaged in bona fide market making activity in connection with effecting the short sale transactions.
In connection with the alleged activities the SEC charged HCM, HCM’s principal trader and majority owner, Steven M. Hazan, with Regulation SHO violations. The SEC also charged TJM, and one of TJM’s traders, Michael R. Benson, with Regulation SHO violations and his supervisor John T. Burke for failing to supervise Benson.
In administrative proceedings, HCM, TJM, Hazan, Benson, and was ordered to cease and desist from violations of certain federal securities laws. In addition, HCM and TJM were censured. Hazan was barred from any association with any broker or dealer for five years. Benson was suspended from associating with any broker or dealer for three months. Burke was suspended from acting in any supervisory capacity with a broker or dealer for nine months.
HCM was ordered to pay disgorgement of $3 million, in addition to fines totaling $1 million in the related SRO action.
TJM was ordered pay disgorgement of $541,000, in addition to Benson’s and Burke’s previous undertaking to pay, jointly and severally, a $250,000 fine in a related SRO action.