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SEC Sues Short-Seller for Spreading False Rumors

April 25, 2008

In one of the first actions of its kind, the Securities and Exchange Commission (SEC) yesterday brought suit against Paul S. Berliner, a former trader at Schottenfeld Group, LLC, for spreading false rumors about Alliance Data Systems Corporation (ADS) while short-selling ADS's stock. The SEC alleges that Berliner manipulated the price of ADS's stock by disseminating false information about merger negotiations between ADS and The Blackstone Group, and that Berliner sold ADS's stock short in order to profit from the false information. The SEC filed a complaint in federal court in New York charging Berliner with violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) of the Securities Exchange Act of 1934, which prohibit fraud in the offer or sale of securities, and Section 9(a)(4) of the 1934 Act, which prohibits securities manipulation. The SEC also seeks a court order enjoining Berliner from violating those provisions of the securities laws and requiring him to disgorge all trading profits and to pay appropriate civil penalties.

The SEC's decision to pursue Berliner, a trader who sought to profit by manipulating the price of a stock he was shorting, is nearly unprecedented and may signal an increased focus by the SEC on preventing market manipulation of all types and on exercising increased oversight over short-sellers.


Indeed, the SEC's action against Berliner reflects a growing effort by the SEC to crack down on abusive short-selling. The SEC in 2004 adopted Regulation SHO that generally sought to curb abusive uncovered, or "naked," short-selling, particularly where there was a failure to deliver the shares that were required to cover the short position. The SEC recently brought a settled enforcement proceeding against a hedge fund and its chief executive officer for improper short sales. The SEC also recently proposed adopting a new anti-fraud rule aimed at short-sellers who mislead others about their ability to deliver securities at the time of settlement and then fail to deliver.

The SEC's actions against Berliner and others signal increased focus by the SEC on market manipulation of all types, and may portend future enforcement actions against short-sellers who profit by spreading rumors of their own concoction.

For more information about the suit or any related issues, please contact a member of Wilson Sonsini Goodrich & Rosati's securities litigation practice