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SEC fines 22 firms $14.4 mn over illicit short sales

The Securities and Exchange Commission said it won settlements from 22 of the 23 firms accused of illicit stock sales
US securities regulators Tuesday fined 22 firms more than $14.4 million for alleged violations of short-selling rules linked to public stock offerings.

US securities regulators Tuesday fined 22 firms more than $14.4 million for alleged violations of short-selling rules linked to public stock offerings.

The Securities and Exchange Commission (SEC) said it won settlements from 22 of the 23 firms accused of the illicit stock sales, netting more than $14.4 million in penalties and disgorgement of gains.

The firms allegedly sold the securities short -- betting the share price will decline -- shortly before purchasing shares of the same security in a public stock offering.

To prevent any activity that might influence how the market sets the price for a stock offering, SEC rules prohibit short sales during a restricted period, generally five days before the public offering, and the purchase of the same stock through the offering.

Selling the shares short could pull down the price of the offering, enabling a short-seller to pocket immediate gains from shares sold at the earlier, higher price.

Short-selling could also potentially benefit a buyer of the new shares, if they surge sharply higher when they hit the market.

"The rule applies regardless of traders' intent, and promotes offering prices that are set by natural forces of supply and demand rather than manipulative activity," the SEC said in a statement.

The SEC's case against DE Shaw & Co., a New York investment adviser, listed five occasions where the firm bought shares in an offering just after engaging in short-selling.

In one of the transactions, DE Shaw sold short 14,263 shares of Hercules Offshore, a drilling company, for $5.4110 per share. The following day, DE Shaw received an allocation of shares under a public offering at $5.10 per share.

Between gains on the short sale, and gains on the low-priced shares it bought in the offering, DE Shaw garnered total profits of $81,032.

DE Shaw agreed to pay the SEC $447,794 in penalties, disgorgement, and interest.

Other market participants fined included Blackthorn Investment Group, Deerfield Management Company and Ontario Teachers' Pension Plan Board.

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