hedge fund & firm short OTCBB
Firm Is Accused of Aiding Violations of Short Sale Rules
By FLOYD NORRIS Published: June 14, 2005 NY Times
A stock market regulator said yesterday that a small Pennsylvania firm helped a hedge fund manager evade short sale rules for a decade, enabling the hedge fund to make large profits.
A complaint filed by the Department of Market Regulation of NASD, which regulates brokerage firms, said Scott W. Ryan and his brokerage firm, Ryan & Company in West Conshohocken, made it possible for the hedge fund to sell short the shares of a long list of over-the-counter stocks from 1993 through 2003.
Short sellers borrow shares and sell them, hoping to profit if the price falls. If that happens, the investor can buy shares at a lower price and return them to the lender. But in general, investors are not permitted to sell shares short if they are unable to borrow them.
There is, however, an exemption to that rule, allowing a market maker to sell short in the course of making a market in the security.
The NASD complaint, which will be heard by an agency hearing officer, asserted that Mr. Ryan wrongly claimed that exemption. It said he was not really a market maker in the securities, but registered as one to make it possible for the hedge fund manager, who was not identified, to sell shares short even though they could not be borrowed.
Reached by telephone, Mr. Ryan said he was innocent and would contest the accusations.
"I believe I acted within the rule," he said.
NASD previously barred Mr. Ryan from the brokerage business after concluding that he had not cooperated with its inquiry into short selling. Mr. Ryan said yesterday that he had cooperated and that he believed that he was being treated unfairly.
According to NASD, Mr. Ryan sold the stocks short, but with agreements that transferred all the risk and benefit of the trade to the hedge fund, in return for substantial fees.
NASD said that in the second half of 2002, Mr. Ryan sold 97 over-the-counter securities short at the request of the hedge fund. It gave figures for 16 of them, saying Mr. Ryan made profits of $235,000 on the transactions while the hedge firm cleared at least $1.3 million. The stocks involved were not listed on any market, but instead traded on the Nasdaq bulletin board.
The regulator asked the hearing officer to order that Mr. Ryan and his firm forfeit both the money they made and the profits of the hedge fund manager, which is not a broker and thus not subject to NASD regulation.
Pennies not a zero sum game as much as some zero game.
