Hedge-fund operators must pay settlement for illegal stock trading

[JURIST] Three hedge-fund managers must pay $2.4M to settle charges that the companies used illegal stock trading tactics to profit off 22 other companies. Galleon Management LP, Oaktree Capital Management LLC and DB Investment Managers Inc. were alleged by the US Securities and Exchange Commission [official website] to have violated Rule 105 [text], an anti-manipulation rule that the SEC says

prohibits covering a short sale with securities obtained in a follow-on offering if the short sale occurred within five business days before the pricing of that offering. The rule is designed to prevent funds from improperly profiting by selling short with the expectation that they will cover that short position with lower priced shares obtained from the offering. Such short sales can play a major role in contributing to a decrease in a follow-on offering’s share price, and can ultimately reduce an issuer’s proceeds from the deal by millions of dollars
. According to an SEC press release [text] issued Thursday,
in total, the respondents had violated Rule 105 in connection with twenty-two follow-on offerings of seasoned issuers, resulting in ill-gotten gains in the amount of $1,040,882 for Galleon, $169,773 for Oaktree and $15,585 for DB Investment Managers. On some occasions, Galleon and Oaktree engaged in so-called “sham” transactions. In these situations, funds created large short positions within the Rule 105 restricted period, purchased shares in a follow-on offering and then engaged in further transactions or trading practices to make it appear that the trading complied with Rule 105, when in fact it did not.
The companies were ordered to pay back the money obtained illegally as well as pay civil penalty fines of up to $870,000. AP has more.

 

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