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OT: SEC sues shorty


SEC sues short seller
False rumors spread about Alliance Data LBO, complaint alleges
By Alistair Barr, MarketWatch
Last update: 2:41 p.m. EDT April 24, 2008
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SAN FRANCISCO (MarketWatch) -- The Securities and Exchange Commission on Thursday said that it sued a short seller for allegedly spreading false rumors about Blackstone Group LP's doomed leveraged buyout of Alliance Data Systems last year.
Paul Berliner, a Wall Street trader formerly associated with Schottenfeld Group LLC, was charged with securities fraud and market manipulation, the SEC said on its Web site.
Schottenfeld Chairman Rick Schottenfeld said the firm conducted its own investigation after being told about the allegations and then suspended Berliner in December.
"Compliance is a top priority. There is no place at our firm for individuals who violate the securities laws," he added in a statement that was emailed to MarketWatch. "We have cooperated with the SEC every step of the way."
Berliner agreed to settle the SEC's charges without admitting or denying the allegations in the suit, the SEC said. He also agreed to disgorge $26,129 in profits and interest and pay a penalty of $130,000. The SEC has also barred him from association with any broker or dealer.
MarketWatch wasn't able to contact Berliner or an attorney representing him immediately on Thursday.
"The story disseminated by Mr. Berliner was a figment of his imagination," said Scott Friestad, associate director of the SEC's Division of Enforcement. "Conduct like this is particularly insidious because it harms investors by distorting the information they use to make investment decisions."
Blackstone (BX:
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BX 18.65, +0.30, +1.6%) agreed to acquire Alliance Data Systems (ADS:
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ADS 55.56, +2.79, +5.3%) for $81.75 a share during the peak of the LBO boom in early 2007. The $6.4 billion deal ended up collapsing and now the two companies are locked in a legal battle. See full story.
In late November, the SEC alleges, Berliner made up a rumor that the LBO was being re-negotiated at $70 a share because of problems in Alliance Data's consumer-banking division.
He also said the Alliance Data board was meeting to discuss the revised proposal and began spreading the rumors through instant messages to traders at brokerage firms and hedge funds, the SEC claimed, noting that the rumors were picked up by the media.
At around the same time, the SEC said Berliner started shorting Alliance Data shares.
Shorting involves selling borrowed stock in the hopes that when it falls you can buy it back at a cheaper price and return it to the lender. The difference is kept as profit. The strategy is an important tool in a hedge fund manager's repertoire, but it's also controversial. See special MarketWatch report on short sellers.
Alliance Data shares slumped as much as 17% on the day Berliner spread the rumors, making his short positions profitable, the SEC said.
While Berliner's alleged rumors may have been false, Blackstone's LBO of Alliance Data ended up collapsing roughly two months later. See full story.
Alliance Data shares now trade at roughly $57, 30% below Blackstone's original offer price. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.

http://www.marketwatch.com/news/story/sec-sues-short-seller-alleges/story.aspx?guid=%7B74D270A5-5485-4742-9853-14D2200A7570%7D