A broker-dealer settled SEC charges for violations of Regulation SHO ("Short Sales") related to the firm's merger arbitrage trading by mismarking short sales as long sales, and failing to obtain and document a locate prior to effecting short sales.
According to the Order, the SEC determined that the broker-dealer mismarked more than 1,000 short sales as long sales in its customers' accounts, and approximately 50 short sales as long sales in its principal accounts. The SEC concluded that the broker-dealer improperly treated the shares of the target company that were purchased as part of the broker-dealer's merger arbitrage trading strategy as exchangeable with shares of the acquiring company that were sold. The SEC found that as a consequence of the mismarking, the firm failed to obtain and document a locate for each of the short sales that it mismarked.
As a result, the SEC determined that the broker-dealer violated Rule 200(g)(1) ("Definition of 'Short Sale' and Marking Requirements") and Rules 203 (b) (1) and (b)(3) ("Borrowing and Delivery Requirements") of Regulation SHO.
To settle the charges, the broker-dealer agreed to (i) cease and desist from future violations of such Regulation SHO requirements, (ii) a censure, (iii) pay disgorgement of $841,627, as well as prejudgment interest of $104,205, and (iv) pay a $841,627 civil money penalty.
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