Recent decisions on short selling and pipes: Section 5 claims
Richards Kibbe & Orbe LLP Eva Marie Carney and Lucinda O. McConathy USA January 4 2008 Richards Kibbe & Orbe LLP logo
Two district court judges recently rejected SEC claims that using shares obtained in private investment in public equity transactions (PIPEs) to cover a short position taken in the PIPE issuer violates Section 5 of the Securities Act of 1933. SEC litigators fought the dismissals, arguing strenuously that a ruling against Section 5 liability would overturn some thirty-five years of clear and consistent Commission precedent. Market participants should expect to hear more from the SEC on this subject - whether the SEC's response is to identify friendly courts of appeal in which to argue its Section 5 analysis, or to undertake rulemaking. Both judges permitted the SEC to move forward with insider trading claims against the fund managers who put on the short positions on a misappropriation theory. In doing so, they accepted the SEC's theory that a fund manager that agrees to keep in confidence material nonpublic information it obtains when being solicited to invest in a PIPE and then shorts the PIPE issuer's stock can be sued under the antifraud provisions of the federal securities laws.
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