SEC sues and fines 3 hedge funds
Agency claims illegal short sales before share offerings
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) - The Securities and Exchange Commission sued
and fined three hedge funds for illegally short-selling shares of several
companies before secondary offerings.
Galleon Management LP, Oaktree Capital Management LLC and DB Investment
Managers Inc., a unit of Deutsche Bank, were sued for breaking an
anti-manipulation rule and agreed to pay a total of almost $2.4 million in
disgorged profits, penalties and interest, the SEC said in a statement
Thursday.
Deutsche Bank (DB: news, chart, profile) shares declined 2.5% to $77.60 in
late morning trading Thursday.
In a short sale traders sell borrowed securities, hoping to buy them back
later at a lower price. They then return the securities to the lender at the
original price, pocketing the difference.
Short-selling is a legal and important part of securities markets. However,
when short sales undermine the integrity of capital-raising efforts such as
secondary, or follow-on, share offerings, they can be illegal.
A short sale is illegal when it's covered with securities obtained in a
follow-on share sale if the short trade occurred five days before the
pricing of that offering, the SEC said.
Enforcing this "is an important way to protect the integrity of the public
offering process and to discourage activities that could unfairly influence
the market for an offered security," Peter Bresnan, an associate director in
the SEC's Division of Enforcement, said.
Shareholders of the company issuing more shares suffer from this type of
illegal short-selling because it can artificially depress prices before an
offering, Bersnan added.
Companies are also short-changed by the practice because it may cut the
valuation of a follow-on offering, ultimately reducing "an issuer's proceeds
from the deal by millions of dollars," the SEC said.
Galleon, Oaktree and DB Investment Managers illegally sold stock short
before secondary share sales by 22 companies, the SEC alleged.
The three hedge funds made $1,040,882, $169,773 and $15,585 respectively
from the trades, the agency added.
Galleon and Oaktree also created "sham" transactions to make it look like
they were trading within the rules, the SEC claimed.
The funds built up large short positions within the restricted period,
purchased shares in a follow-on offering and then "engaged in further
transactions or trading practices" to make it look like the deal complied
with the rules, the agency explained.
The three funds didn't admit or deny the allegations.
Alistair Barr is a reporter for MarketWatch in San Francisco.
