An investment adviser, its principal and a trader (the "Respondents") settled SEC charges "for causing the executing brokers of a hedge fund to violate the order-marking and locate requirements of Regulation SHO ["Short Sales"] of the Exchange Act, and . . . causing the hedge fund to act as a dealer without registering with the Commission. . . ."
According to the SEC Order, the Respondents caused the hedge fund to enter into securities purchase agreements with issuers listed on the Nasdaq Stock Market, and to concurrently sell such issuers' securities in the market. The fund kept a percentage of the proceeds from the sale of an issuer's securities and paid the balance over to the relevant issuer, thereby conducting an underwriting. Because such alleged underwriting activity involved the fund engaging in the "regular business of buying and selling securities for its own account," the SEC determined that the Respondents caused the fund to act as an unregistered dealer, in violation of the Exchange Act.
The SEC also found that the Respondents placed with the fund's executing brokers certain sale orders of multiple issuers' common stock that were inaccurately labeled "long." The SEC found that such orders were labeled "long" even though the fund did not have a net long position in the stocks and was, therefore, not "deemed to own" them at the time of the sales. The SEC concluded that the inaccurate labeling led to incorrect marking of the orders resulting in violations of Regulation SHO's order-marking and locate requirements.
As a result, the SEC determined that the Respondents caused the hedge fund to violate (i) Section 15(a)(1) ("Registration of all Persons Utilizing Exchange Facilities to Effect Transactions; Exemptions") of the Exchange Act, and (ii) Regulation SHO Rules 200(g) ("Definition of 'short sale' and marking requirements") and 203(b)(1) ("Short Sales").
To settle the charges, the Respondents agreed to (i) cease and desist from future violations, (ii) comply with the undertakings set forth in the Order and (iii) jointly and severally pay $7 million in disgorgement plus $1,078,183 in prejudgment interest. In addition, the adviser agreed to an $800,000 civil money penalty, the principal of the fund agreed to a $75,000 civil money penalty, and the trader agreed to a $25,000 civil money penalty.
Primary Sources
- SEC Press Release: SEC Charges Investment Adviser and Associated Individuals with Causing Violations of Regulation SHO
- SEC Order: Murchinson Ltd., Marc Bistricer and Paul Zogala
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