Hedge Funds Settle Short-Sale Violations For $14.1 Million

Sep 18 2013 | 12:47pm ET

A host of hedge funds, including D.E. Shaw Group, Deerfield Management and Hudson Bay Capital Management, have been fined in the largest-ever crackdown on "shorting into the deal."

Twenty-two of the 23 firms charged with violating Rule 105 have settled with the Securities and Exchange Commission for a total of $14.1 million. Only broker-dealer G-2 Trading is fighting the allegations.

Rule 105 of Regulation M bars investors who short a stock from participating in a public offering of the stock for five days afterwards. The rule, which does not consider intent, was adopted in 2007.

"The benchmark of an effective enforcement program is zero tolerance for any securities-law violations, including violations that do not require manipulative intent," SEC enforcement co-chief Andrew Ceresney said. None of the 22 firms settling admitted or denied wrongdoing.

In addition to D.E. Shaw, Deerfield and Hudson Bay, hedge funds such as PEAK6 Capital Management, Southpoint Capital Advisors and Vollero Beach Capital Partners were fined, as was major hedge-fund investor the Ontario Teachers' Pension Plan Board. Blackthorn Investment Group, Claritas Investments, Credentia Group, JGP Global Gestão de Recursos, M.S. Junior Swiss Capital Holdings, Manikay Partners, Meru Capital Group, Merus Capital Partners, Pan Capital, Philadelphia Financial Management of San Francisco, Polo Capital International Gestão de Recursos, Soundpost Partners, Talkot Capital, War Chest Capital Partners and Western Standard settled.

In addition to the fines, the SEC issued a warning to "highlight risks to firms" that fail to comply with Rule 105.

Deerfield agreed to pay more than $1.9 million, Hudson Pay nearly $1 million and D.E. Shaw $667,000. OTPPB agreed to pay about $225,000.

The fined firms join AGB Partners, Appaloosa Management, Carlson Capital, Fontana Capital, Gartmore Group, Level Global Advisors, Palmyra Capital Advisors and Touradji Capital, all of which have been fined for Rule 105 violations over the past several years.


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