SEC Issues Largest Monetary Sanction for Rule 105 Short Selling Violations Ever

On March 5, 2014, the Securities and Exchange Commission (SEC) announced the largest monetary sanction for Rule 105 short selling violations. A Long Island-based proprietary trading firm, Worldwide Capital, and its owner, Jeffrey W. Lynn, agreed to pay $7.2 million to settle the charges against them.

According to the SEC, Rule 105 prohibits short selling of an equity security during a restricted period – generally five business days before a public offering – and the subsequent purchase of that same security through the offering. The rule applies, to all equity trades, regardless of the trader’s intent. The rule is designed to promote offering prices that are set naturally by market driven supply and demand.

According to the SEC’s order instituting settled administrative proceedings, Mr. Lynn created Worldwide Capital for the purpose of investing and trading in a strategy focused primarily on new shares of public issuers coming to market through secondary offerings.  Mr. Lynn had traders execute trades on his behalf, seeking allocations of additional shares soon to be publicly offered, usually at a discount to the market price.  He and his traders would then sell those shares short in advance of the public offerings.  Lynn and Worldwide Capital improperly profited from the difference between the price paid to acquire the offered shares, and the market price on the date of the offering.

According to Andrew M. Calamari, director of the SEC’s New York Regional Office, “Rule 105 is an important safeguard designed to protect the market against manipulative trading, and we will continue to aggressively pursue violators.”

According to the SEC’s order Lynn and Worldwide participated in 60 public stock offerings covered by Rule 105 after selling short those same securities during the pre-offering restricted period.  The violations occurred from October 2007 to February 2012.

To settle the SEC’s charges, Worldwide Capital and Lynn agreed to jointly pay disgorgement of $4,212,797, prejudgment interest of $526,358, and a penalty of $2,514,571.  Lynn and his firm agreed to cease and desist from violating Rule 105 without admitting or denying the findings in the SEC’s order.

Gana LLP is investigating broker-dealers who engage in short selling on or around the equity offering periods. If you believe you have been a victim of broker misconduct, you should contact us immediately. Our attorneys are trained to understand and analyze brokerage account statements to determine if you have been a victim of broker misconduct.