U.S. securities regulators have sanctioned 19 firms, including a Canadian company, with violating rules designed to prevent market manipulation by participating in a stock offering soon after short selling the same stock.
Last year, the U.S. Securities and Exchange Commission (SEC) announced its intention to step up enforcement of its rule, known as Rule 105, that prohibits short selling a stock within five business days of participating in an offering for that same stock. This sort of trading may produce illicit profits for the traders and reduce the offering proceeds for a company by artificially depressing the market price shortly before the company prices the stock, the SEC says.
On Tuesday, the commission announced the latest series of sanctions as part of this ongoing enforcement initiative. It says that its investigations found that 19 firms, and one individual trader, engaged in short selling in the days leading up to a follow-on public offering. Every firm, and the individual trader, have agreed to settle the SEC’s charges and pay a combined total of more than $9 million in disgorgement, interest, and penalties, it says.
Most of the firms sanctioned by the SEC are based in the U.S., but it also includes Montreal-based Formula Growth Ltd., which agreed to pay disgorgement of $42,488 (U.S. dollars), prejudgment interest of $4,255.15, and a penalty of $65,000.
According to the order settling the case, in 2011, Formula Growth sold short 59,132 shares of American International Group, Inc. (AIG) during the restricted period in the days leading up to a common stock offering. The order says that the firm received an allocation of 25,000 shares in that offering, and that it made a $42,488 profit on the short sales.
The SEC notes that its enforcement division is able to quickly identify potential violations of these rules through close coordination with the Financial Industry Regulatory Authority (FINRA) and the SEC’s National Exam Program. It also expedites these cases by using uniform methodologies for determining trading profits and deciding penalties.
“Rule 105 is an important preventive measure designed to protect issuers from downward pressure on their stock price in advance of offerings,” said Andrew Ceresney, director of the SEC’s division of enforcement. “These charges should remind investment advisers and others of the need for robust and comprehensive compliance programs covering Rule 105 compliance.”