Articles By Topic
By Topic: Regulation M
-
From Vol. 4 No.46 (Dec. 21, 2011)
Touradji Capital Settlement Suggests That Having Employee Training on Rule 105 under Regulation M Without Policies to Prevent Violations Will Not Insulate a Firm From SEC Enforcement
On December 9, 2011, hedge fund manager Touradji Capital Management, L.P. (Touradji) and the SEC entered into a settlement whereby Touradji consented to an SEC order finding that it violated Rule 105 under Regulation M and imposing remedial sanctions, including disgorgement and civil monetary penalties. Rule 105 under Regulation M generally prohibits a person from purchasing an issuer’s equity securities in a public offering from an underwriter or broker-dealer participating in the offering if the person has sold short the securities that are the subject of the offering during the five-day period preceding the offering. The Touradji settlement is the latest in a line of settlements involving hedge fund managers that were found by the SEC to have violated Rule 105 under Regulation M. For a discussion of other such actions, see “Brookside Settlement Suggests That in Calculating Disgorgement Based on a Rule 105 Violation, the SEC Will Look to the Number of Shares Purchased in a Secondary Offering Rather Than the Number of Shares Sold Short Prior to the Offering,” The Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011); “Terms of Gartmore Settlement with SEC Suggest that in Calculating Disgorgement for Reg M Violations, SEC Will Use a First-In, First-Out Approach,” The Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010).
Read Full Article … -
From Vol. 4 No.25 (Jul. 27, 2011)
Fontana Capital Settlement Serves as a Reminder That Hedge Fund Managers May Violate Rule 105 of Regulation M by Purchasing Securities of an Issuer in a Secondary Offering Following a Short Sale of Securities of the Same Issuer, Even If the Purchased Securities Are Not Used to Cover the Short Sale
A recent SEC Order making findings and imposing remedial sanctions against hedge fund manager Fontana Capital, LLC and its principal serves as a timely reminder that a hedge fund manager may be found to have violated Rule 105 of Regulation M when, on behalf of a fund, it engages in a short sale of securities of an issuer in the five business days prior to the pricing of a secondary offering by an issuer, then purchases shares of the issuer in the offering – even if the shares purchased in the offering are not used to cover the short sale.
Read Full Article … -
From Vol. 4 No.22 (Jul. 1, 2011)
Brookside Settlement Suggests That in Calculating Disgorgement Based on a Rule 105 Violation, the SEC Will Look to the Number of Shares Purchased in a Secondary Offering Rather Than the Number of Shares Sold Short Prior to the Offering
In an order dated June 28, 2011 (Order), Brookside Capital, LLC (Brookside) settled SEC allegations that it violated Rule 105 of Regulation M of the Securities Exchange Act of 1934. The SEC adopted Regulation M to foster secondary and follow-on offering prices that are determined by independent market dynamics. For more on secondary offerings, see “Registered Direct Offerings Enable Hedge Funds to Make Advantageously-Structured Investments in Public Equity While Avoiding the Illiquidity and Other Downsides of PIPEs,” The Hedge Fund Law Report, Vol. 3, No. 25 (Jun. 25, 2010). For hedge fund managers, the Order is noteworthy for two primary reasons.
Read Full Article … -
From Vol. 3 No.50 (Dec. 29, 2010)
Terms of Gartmore Settlement with SEC Suggest that in Calculating Disgorgement for Reg M Violations, SEC Will Use a First-In, First-Out Approach
On December 8, 2010, Gartmore Investment Limited (Gartmore), an SEC-registered, U.K.-based hedge fund manager, settled SEC charges that it violated Rule 105 of Regulation M of the Securities Exchange Act of 1934. The SEC's Order in the matter is brief, but contains at least three important insights for hedge fund managers that, as part of their investment strategy, engage in short sales of public equity and invest in secondary stock offerings. For background on Rule 105 of Reg M, see "SEC Settlement with Carlson Capital Suggests that Most Hedge Fund Managers with Multiple Strategies or Funds Will Not Be Able to Rely on the 'Separate Accounts' Exception to Rule 105 Under Regulation M," The Hedge Fund Law Report, Vol. 3, No. 38 (Oct. 1, 2010); "Appaloosa Management L.P. Settles SEC Allegations of Reg M Violations in Connection with Short Sales," The Hedge Fund Law Report, Vol. 3, No. 28 (Jul. 15, 2010); "SEC Obtains Permanent Injunction Against Hedge Fund Colonial Fund LLC for Illegal Short Sales; Opinion Addresses Fund Manager's Faulty Internal Compliance and Accounting Systems," The Hedge Fund Law Report, Vol. 2, No. 29 (Jul. 23, 2009).
Read Full Article … -
From Vol. 3 No.38 (Oct. 1, 2010)
SEC Settlement with Carlson Capital Suggests that Most Hedge Fund Managers with Multiple Strategies or Funds Will Not Be Able to Rely on the “Separate Accounts” Exception to Rule 105 Under Regulation M
Rule 105 of Regulation M under the Securities Exchange Act of 1934 generally prohibits a person from purchasing securities of an issuer in a public offering from an underwriter, broker or dealer if the person sold short securities of the same issuer within five days prior to the pricing of the public offering. However, Rule 105 generally does not prohibit a person from purchasing securities of an issuer in a public offering, even if the person sold short securities of the same issuer within five days prior to the pricing of the public offering, if the short sale and subsequent purchase are made in “separate accounts.” According to the SEC’s October 9, 2007 Adopting Release for Rule 105, the intent of Rule 105 is to prevent manipulative short selling prior to a public offering, and therefore “to foster secondary and follow-on offering prices that are determined by independent market dynamics.” A September 23, 2010 SEC Order involving hedge fund manager Carlson Capital, L.P. (Carlson) illustrates the limits of the “separate accounts” exception to Rule 105 in the hedge fund context. As explained more fully below, in one of the four transactions at issue, the short sale and purchase occurred in different “strategies.” However, in the SEC’s view, these strategies did not have sufficient indicia of “separateness” to fall outside of the purview of Rule 105. This finding is of note to the hedge fund community because the portfolio management structure employed by Carlson is not atypical. The Order also highlights the ironic proposition that a hedge fund manager can “willfully” violate Rule 105 without having any “intent” to do so. This is because: (1) as the Adopting Release confirms, Rule 105 applies “irrespective of a short seller’s intent”; and (2) the definition of “willful” for securities law purposes departs from the common understanding of the term. Under D.C. Circuit precedent, to “willfully” violate securities laws or rules, a person need only know “what he is doing” – he need not know that such conduct violates any securities law or rule. And this appears to have been the case here. The Order does not allege that Carlson or any of its personnel intended to violate any securities law or rule. Rather, the Order suggests that the relevant investment personnel at Carlson either misunderstood or were unaware of Rule 105’s requirements during the relevant period, and that Carlson had inadequate compliance policies and procedures in place. Notably, the Order also indicates that Carlson promptly remedied its alleged compliance shortcomings during the SEC staff’s investigation, and the SEC took this remedial action into consideration in determining to accept Carlson’s offer of settlement of the SEC’s proceedings. This article explains the facts alleged in the Order (which Carlson neither admitted nor denied), and the SEC’s legal analysis.
Read Full Article … -
From Vol. 3 No.28 (Jul. 15, 2010)
Appaloosa Management L.P. Settles SEC Allegations of Reg M Violations in Connection with Short Sales
In a Settlement Order (Order) dated July 2, 2010, hedge fund management firm Appaloosa Management L.P. agreed to pay approximately $1.3 million to settle SEC charges that the firm violated rules barring the purchase of shares in a public offering following a short sale of shares of the same issuer. The case involved Appaloosa’s participation in a follow-on offering by Wells Fargo & Co. after Appaloosa had sold short more than one million Wells Fargo shares. The SEC found that the firm violated Rule 105 of Regulation M of the Securities Exchange Act of 1934 (Rule 105) by making short sales during the Rule 105 restricted period preceding its participation in a public offering by Wells Fargo & Co. According to the Order, Appaloosa made disgorgeable profits of $842,500 through the purchase of shares in the offering and the short sales. Without admitting or denying the SEC’s findings, Appaloosa agreed to adopt, implement and maintain written compliance policies and procedures to prevent future violations of Rule 105. In addition, it agreed to disgorge $842,500 in profits and pay a civil penalty of $421,250 plus prejudgment interest of $40,773. This article summarizes the case background and the SEC’s findings and details agreed-upon remedial action as set forth in the Order.
Read Full Article … -
From Vol. 2 No.29 (Jul. 23, 2009)
SEC Obtains Permanent Injunction Against Hedge Fund Colonial Fund LLC for Illegal Short Sales; Opinion Addresses Fund Manager's Faulty Internal Compliance and Accounting Systems
On July 7, 2009, the United States District Court for the Southern District of New York, after a bench trial, entered a permanent injunction against Cary G. Brody and two entities he controlled, the hedge fund Colonial Fund LLC and its adviser, Colonial Investment Management LLC. The court found that the defendants engaged in illegal trading in violation of Rule 105 of Regulation M under the Securities Exchange Act of 1934, which prohibits manipulative trading by short sellers prior to registered offerings, with regard to 18 registered public offerings. The defendants violated the rule by purchasing shares in the offerings to cover short sales they made during the restricted periods, thereby making over $1.4 million in profits. The court also imposed a fine of $450,000. We outline the various problems presented, including the Fund’s faulty internal compliance and accounting practices and its attempts to claim that it relied on the advice of counsel.
Read Full Article …