Post by jcline on Oct 16, 2007 14:35:52 GMT -5
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
SEC's Short Interest in Meaningful Enforcement - October 16, 2007
David Patch
Buried in a complaint filed this week by the Securities and Exchange Commission against hedge fund Colonial Investment Management LLC and Cary G. Brody, a principal of CIM and a Managing Director is an interesting read that for most will be overlooked.
The SEC charges brought forward against CIM stem from a series of 18 stock offerings between 2001 and 2004 in which the fund was in violation of SEC Rule 105. Rule 105 prohibits the covering of a short sale with securities purchased in a registered offering if the short sale occurred during the restricted period leading into the offering yet in each of the 18 offerings involved CIM short sold ahead of the offering to lock in profits.
What was the interesting read? Take a look for yourself.
"The Commission is informed and believes and on that basis alleges that during 2004 and 2005 Defendants may have committed further violations of Rule 105 in connection with additional registered offerings by covering restricted period short sales with shares purchased in the registered offerings."
Those additional violations the SEC alludes to in the complaint are not being considered in the penalties being sought.
While Colonial Investment LLC and Brody are denying the SEC allegations the evidence presented in the case will be hard to refute. An example of the evidence as detailed by the SEC includes the following:
"On October 31,2001, Colonial purchased 425,000 shares of ISIL at $31.50 per share in a registered offering and marked the transaction "CS," meaning "cover short." During the five business days before the pricing of this offering, Colonial sold short a net of 270,700 ISIL shares at prices averaging $33.46 per share. In violation of Rule 105, Colonial fully covered its restricted period short position with shares purchased in the offering. Colonial realized a profit of approximately $530,649 from the illicit trading."
Unless CIM can come up with some magic that can make those trade tickets disappear they will be hard to deny the short sales existed.
The SEC presented similar type detail for each of the 18 offerings listed in the complaint illustrating how greater than $1.4 Million in ill-gotten gains was achieved. In some cases the SEC also presented explanation of sham trades executed by CIM to conceal the fraud. CIM solicited an undisclosed and uncharged executing broker to cross trades representing both the buyer and a seller and at the same price to create the sham. The very nature of these sham trades put into evidence the awareness of the illegal trading activities and the intent to commit fraud.
The execution of the sham trades denies CIM and Brody the right to argue mere 'compliance lapses' as is typically the excuse accepted by the SEC.
What concerns me most about this complaint is the limited sanctions the SEC is seeking relative to this habitual violator. What message is the SEC sending here?
In the complaint filed the SEC is merely seeking disgorgement of ill-gotten gains relative to the limited 18 cases, prejudgment interest, and a nominal civil fine. The Commission is also seeking to permanently restrain the defendants from any further violations of Rule 105 of Regulation M.
Huh? Where's the beef? We have already seen how well the 'permanent refrain from future violations' works just by witnessing the monthly regulatory actions where the same firms are repeatedly called to task for the same violations.
The Commission's major lapse in judgment is that the staff never evaluated, when considering civil penalty, that the illegal short sales may have manipulated the market of the issuer. If the trade is illegal the impact it has on a market is manipulation.
If the short sales executed drove down these markets CIM would have benefited by creating lower pricing of the offering and in turn manipulated the market cap [investment] of all existing shareholders. If the manipulation created additional dilution due to a lowered offering price, the damage would become a permanent burden of shares carried by present and future shareholders.
Consider for example the trading in ISIL leading into the offering price.
The market in ISIL just prior to the offering had been trading near $36.00 per share. By October 31, 2001 the market had dropped to a closing price of $32.75. How much of this can be attributed to the shorting taking place by Colonial is unknown but certainly the sell side market created by the short sales would most likely have had some impact. The short sales traded represented 3% of the reported trade volume over the 5-day period leading into the offering.
In fact, based on the evidence provided by the SEC the average price of the short was above the offering price in 16 of the 18 offerings involved in this complaint.
All this leads to one simple question, why doesn't the SEC treat Brody and CIM with the same vigilance they impose upon a recidivist penny stock promoter or corporate officer? In cases such as those involving microcap issues the SEC has no remorse in banning the violators from future participation in penny stock markets.
For this particular case, with 18 known violations and with the evidence of intent before us, why hasn't the SEC decided to pull the ticket of Mr. Brody as they would a sham promoter? What is Brody still doing operating in this industry as a registered market representative when poor decision-making was repetitive over the course of many years? Certainly the actions of CIM and Brody had the potential to cost investors hundreds of millions in lost market capitalization.
It is also unknown how many other violations of this nature CIM engaged in over the years. For decades the Commission rarely investigated trading issues such as these and only began investigating such issues after investors begged for reforms in the short sale arena. Certainly with the profits that can be achieved by undertaking such activities, and the low risk of getting caught, the SEC's methods of deterrence are certainly lacking the teeth concerned investors would like to see.
Colonial Investment Management LLC is the second fund in two weeks that the SEC has filed a civil action against dealing in illegal shorting practices.
Last week it was Sandell Asset Management who had executed illegal shorts totaling nearly 9 Million shares in Hibernia in August 2005. The SEC engaged in a similar passive approach in fines and sanctions of Sandell despite the evidence that Sandell management was well aware that the actions they had undertaken were highly questionable. It could have been the $7 Billion in assets under management that persuaded the SEC to reconsider any type of stiff penalties.
With the prevalence of illegal short sales growing exponentially, the SEC must take the approach that examples must be made if culture is to change. Whether it be these small players or that of the larger more connected firms, examples must be made of those that want to ride on the risk v. reward train and get caught. While FINRA [formerly NASD] has grown into this method of thinking the SEC has yet to grasp the value it brings.
Ultimately the SEC is short on cultivating fraud deterrence wishing instead to continue working the token cases for good measure. Until the SEC goes through a cultural change of their own the agency will continue to put all investors at risk of being cheated by the industry insiders.
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007
An online newspaper reporting the issues of Securities Fraud
SEC's Short Interest in Meaningful Enforcement - October 16, 2007
David Patch
Buried in a complaint filed this week by the Securities and Exchange Commission against hedge fund Colonial Investment Management LLC and Cary G. Brody, a principal of CIM and a Managing Director is an interesting read that for most will be overlooked.
The SEC charges brought forward against CIM stem from a series of 18 stock offerings between 2001 and 2004 in which the fund was in violation of SEC Rule 105. Rule 105 prohibits the covering of a short sale with securities purchased in a registered offering if the short sale occurred during the restricted period leading into the offering yet in each of the 18 offerings involved CIM short sold ahead of the offering to lock in profits.
What was the interesting read? Take a look for yourself.
"The Commission is informed and believes and on that basis alleges that during 2004 and 2005 Defendants may have committed further violations of Rule 105 in connection with additional registered offerings by covering restricted period short sales with shares purchased in the registered offerings."
Those additional violations the SEC alludes to in the complaint are not being considered in the penalties being sought.
While Colonial Investment LLC and Brody are denying the SEC allegations the evidence presented in the case will be hard to refute. An example of the evidence as detailed by the SEC includes the following:
"On October 31,2001, Colonial purchased 425,000 shares of ISIL at $31.50 per share in a registered offering and marked the transaction "CS," meaning "cover short." During the five business days before the pricing of this offering, Colonial sold short a net of 270,700 ISIL shares at prices averaging $33.46 per share. In violation of Rule 105, Colonial fully covered its restricted period short position with shares purchased in the offering. Colonial realized a profit of approximately $530,649 from the illicit trading."
Unless CIM can come up with some magic that can make those trade tickets disappear they will be hard to deny the short sales existed.
The SEC presented similar type detail for each of the 18 offerings listed in the complaint illustrating how greater than $1.4 Million in ill-gotten gains was achieved. In some cases the SEC also presented explanation of sham trades executed by CIM to conceal the fraud. CIM solicited an undisclosed and uncharged executing broker to cross trades representing both the buyer and a seller and at the same price to create the sham. The very nature of these sham trades put into evidence the awareness of the illegal trading activities and the intent to commit fraud.
The execution of the sham trades denies CIM and Brody the right to argue mere 'compliance lapses' as is typically the excuse accepted by the SEC.
What concerns me most about this complaint is the limited sanctions the SEC is seeking relative to this habitual violator. What message is the SEC sending here?
In the complaint filed the SEC is merely seeking disgorgement of ill-gotten gains relative to the limited 18 cases, prejudgment interest, and a nominal civil fine. The Commission is also seeking to permanently restrain the defendants from any further violations of Rule 105 of Regulation M.
Huh? Where's the beef? We have already seen how well the 'permanent refrain from future violations' works just by witnessing the monthly regulatory actions where the same firms are repeatedly called to task for the same violations.
The Commission's major lapse in judgment is that the staff never evaluated, when considering civil penalty, that the illegal short sales may have manipulated the market of the issuer. If the trade is illegal the impact it has on a market is manipulation.
If the short sales executed drove down these markets CIM would have benefited by creating lower pricing of the offering and in turn manipulated the market cap [investment] of all existing shareholders. If the manipulation created additional dilution due to a lowered offering price, the damage would become a permanent burden of shares carried by present and future shareholders.
Consider for example the trading in ISIL leading into the offering price.
The market in ISIL just prior to the offering had been trading near $36.00 per share. By October 31, 2001 the market had dropped to a closing price of $32.75. How much of this can be attributed to the shorting taking place by Colonial is unknown but certainly the sell side market created by the short sales would most likely have had some impact. The short sales traded represented 3% of the reported trade volume over the 5-day period leading into the offering.
In fact, based on the evidence provided by the SEC the average price of the short was above the offering price in 16 of the 18 offerings involved in this complaint.
All this leads to one simple question, why doesn't the SEC treat Brody and CIM with the same vigilance they impose upon a recidivist penny stock promoter or corporate officer? In cases such as those involving microcap issues the SEC has no remorse in banning the violators from future participation in penny stock markets.
For this particular case, with 18 known violations and with the evidence of intent before us, why hasn't the SEC decided to pull the ticket of Mr. Brody as they would a sham promoter? What is Brody still doing operating in this industry as a registered market representative when poor decision-making was repetitive over the course of many years? Certainly the actions of CIM and Brody had the potential to cost investors hundreds of millions in lost market capitalization.
It is also unknown how many other violations of this nature CIM engaged in over the years. For decades the Commission rarely investigated trading issues such as these and only began investigating such issues after investors begged for reforms in the short sale arena. Certainly with the profits that can be achieved by undertaking such activities, and the low risk of getting caught, the SEC's methods of deterrence are certainly lacking the teeth concerned investors would like to see.
Colonial Investment Management LLC is the second fund in two weeks that the SEC has filed a civil action against dealing in illegal shorting practices.
Last week it was Sandell Asset Management who had executed illegal shorts totaling nearly 9 Million shares in Hibernia in August 2005. The SEC engaged in a similar passive approach in fines and sanctions of Sandell despite the evidence that Sandell management was well aware that the actions they had undertaken were highly questionable. It could have been the $7 Billion in assets under management that persuaded the SEC to reconsider any type of stiff penalties.
With the prevalence of illegal short sales growing exponentially, the SEC must take the approach that examples must be made if culture is to change. Whether it be these small players or that of the larger more connected firms, examples must be made of those that want to ride on the risk v. reward train and get caught. While FINRA [formerly NASD] has grown into this method of thinking the SEC has yet to grasp the value it brings.
Ultimately the SEC is short on cultivating fraud deterrence wishing instead to continue working the token cases for good measure. Until the SEC goes through a cultural change of their own the agency will continue to put all investors at risk of being cheated by the industry insiders.
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007