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FINRA AND SEC GO AFTER SHORT SALES HARD

Yesterday FINRA and the SEC both issued news releases regarding separate actions against entities and individuals who allegedly consummated short sales in violation of regulatory rules. The timing of the releases and similarity in subject matter suggests there is more going on than just serendipitous timing.

According to the FINRA release, a hearing panel expelled Legacy Trading Company, and barred the firm's CEO, Mark Uselton, from the securities industry. The misconduct at issue appears to be wide ranging and included "violations of short selling rules, failure to maintain required books and records, and for providing false information and refusing to provide testimony to FINRA." The hearing panel also fined Legacy and Uselton more than $1 million, finding that they made almost $900,000 in profits from the illegal short sales, which FINRA defines as being "the sale of a security that the seller does not own, or any sale that is consummated by the delivery of a security borrowed by the seller." Not all short sales are prohibited though, but "FINRA and [the] Securities and Exchange Commission (SEC) rules require that short sellers make an affirmative determination that they can borrow the securities for delivery by settlement date, unless the seller is a broker-dealer engaged in bona fide market making activities." A copy of the FINRA release can be found at www.finra.org/Newsroom/NewsReleases/2009/P119725

The same day, the SEC issued its news release noting that it "took its first enforcement actions for violations of the Commission's rules to prevent abusive "naked" short selling, charging two options traders and their broker-dealers with violating the locate and close-out requirements of Regulation SHO." As summarized by the SEC, "Regulation SHO requires broker-dealers to locate a source of borrowable shares prior to selling short, and to deliver securities sold short by a specified date," and the allegations in the two enforcement actions were that the "traders and their firms improperly claimed that they were entitled to an exception to the locate requirement, and engaged in transactions that created the appearance that they were complying with the close-out requirement." Both SEC enforcement actions were settled, with the firms and individuals neither admitting nor denying the allegations. Copies of the enforcement actions against Hazan Capital Management LLC and its principal trader and majority owner, Steven M. Hazan, and the separate action against TJM Proprietary Trading LLC, Michael R. Benson, and John T. Burke can be found at sec.gov/litigation/admin/2009/34-60441.pdf and sec.gov/litigation/admin/2009/34-60440.pdf

Short sellers better watch out; the SEC and FINRA appear poised to aggressively curb non-compliant practices and now have the rules to do it.

 

 

Full post as published by OverRegd - Securities Regulation and Litigation Blog on August 06, 2009 (boomark / email).