SEC Fines Sandell Asset Management For Naked Short Sales

Oct 10 2007 | 4:56pm ET

The Securities and Exchange Commission today said it has settled an enforcement action against New York hedge fund adviser Sandell Asset Management for engaging in improper short sales. The allegations are in connection with trading in the securities of Hibernia Corporation in the immediate aftermath of Hurricane Katrina.

Hibernia was a New Orleans-based bank holding company and the subject of an acquisition agreement with Capital One Financial Corporation at the time Katrina occurred. As part of its merger arbitrage investment strategy, Sandell held approximately 9.3 million shares of Hibernia stock for one of the firm's hedge fund clients. According to the Commission, Sandell’s traders believed that Capital One would lower its offering price for Hibernia shares in the wake of Katrina, and began to sell short as many shares of Hibernia stock as possible, improperly marking certain sales orders as "long" or misrepresenting them to the broker-dealers executing some of the trades.

"By mismarking certain trades and falsely claiming that firm personnel had located stock to borrow, Sandell Asset Management gained an unfair trading advantage over other market participants,” said Scott Friestad, associate director of the SEC's Division of Enforcement. “This settlement deprives the firm of the profits made from the improper trading, and includes penalties and other sanctions designed to deter others from engaging in similar misconduct."

Without admitting or denying the Commission's allegations, Sandell agreed to pay more than $8 million to settle the charges, including $6.7 million in disgorgement, $730,811 in prejudgment interest, and a $650,000 civil penalty. Also, CEO Thomas Sandell, senior managing director Patrick Burke, and head trader Richard Ecklord were ordered to pay civil penalties of $100,000, $50,000 and $40,000, respectively.

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