7.7.2009 Judge P. Kevin Castel, U.S. District Judge for the Southern District of New York, found after a bench trial that Cary G. Brody and two entities he controlled, New York hedge fund Colonial Fund LLC and its adviser, Colonial Investment Management LLC, were liable for illegal trading relating to 18 registered public offerings. The court permanently enjoined the defendants from violating Rule 105 of Regulation M under the Securities Exchange Act of 1934. Judge Castel also ordered defendants to pay disgorgement totaling more than $1.4 million in ill-gotten gains, plus prejudgment interest, and required Brody to pay a civil penalty of $450,000.
In general, Rule 105 seeks to prevent manipulative trading by short sellers prior to registered public offerings and to promote offering prices that are based upon open market prices, determined by supply and demand, rather than by artificial forces. At the time of the violations, Rule 105 generally prohibited short sellers, regardless of intent, from using securities purchased in registered public offerings to cover short sales that occurred during the five business days before the pricing of the offerings (the restricted period).
The SEC alleges that the defendants violated Rule 105 when they used shares purchased in at least 18 registered public offerings to cover short sales that they made during the rule’s restricted period. The defendants allegedly realized profits in excess of $1.4 million from the illegal trades because Colonial Fund typically sold shares short during the restricted period at prices that were higher than the offering prices and then covered the restricted period short positions with shares purchased at lower prices in the offerings. The SEC also alleges that the defendants often structured post-offering trades in an effort to conceal their Rule 105 violations.
Click http://www.sec.gov/litigation/litreleases/2009/lr21123.htm to access the SEC litigation release.