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.