SEC Settles Administrative Action for Transactions Affecting the Price of Secondary and Follow On Offerings

On May 11, 2010, the Securities and Exchange Commission agreed to administrative settlements with two traders who covered short sales with stocks purchased during follow on or secondary offerings. The settlement states that Peter Grabler and Leonard Adams affected the pricing mechanism of numerous offerings by engaging in riskless transactions matching short sales with purchases of follow on or secondary offerings during restricted periods. Grabler has agreed to a cease and desist order and the payment of $636,123 and interest. Adams has also agreed to an identical order and the payment of $331,387 and interest.

Rule 105 of Regulation M protects the independent pricing mechanism of the securities markets shortly before follow on and secondary offerings. During part of the period of time that the orders cover, Rule 105 prohibited, in connection with a registered offering, anyone from covering “a short sale with offered securities purchased from . . . [a] broker . . . participating in the offering, if such a short sale occurred during the . . . five business days before the pricing of the offered securities. . . .” On October 9, 2007, the SEC amended Rule 105 refining the computation of the restricted trading period while maintaining the intent of the Rule. In both iterations the design of Rule 105 is to prevent riskless trades that would influence the market price of securities shortly before securities offerings.

The settlement agreement states that Grabler and Adams repeatedly sold short securities in companies within five days of the pricing of secondary offerings and then covered those short positions by purchasing securities in the offering. The respondents had numerous securities accounts at various brokerage houses so that they could participate in the secondary and follow on offerings. In essence the agreement states that Grabler and Adams sold short at a higher price than the offering price. By covering the short sales with stock purchased in the offering, they were able to engage in riskless transactions and realize the spread between the short sale price and the offering purchase price. These riskless transactions affected the market pricing mechanisms for the securities.

There is no scienter requirement under Rule 105. Thus, the intent of the trader is not relevant in determining liability.

The SEC claims that these actions are the first use of Rule 105 against individual traders, not associated with an underwriter or broker/dealer involved in an offering that is the focus of the inquiry.

About Richard Serafini

Welcome to my blog. I am an attorney and practice in the area of corporate trial work. Areas of particular emphasis are white collar defense, securities litigation, health care litigation, internal investigations, RICO, and financial litigation. I will be posting interesting developments in my areas of interest. I hope that you find this blog helpful and informative.