The Royal Gazette Monday, November 13, 2006
Trader to pay $1.6m for improper short sales
A Bermuda-based trader agreed to pay $1.6 million for improperly short selling shares of companies before 176 secondary stock offerings, the US Securities and Exchange Commission said.
Bloomberg News reported yesterday that James J. Todd, who managed funds for Panama’s Solar Group S.A., bought stock from the offerings between 2001 and 2005 to complete short sales he had started days earlier, the SEC said in a settlement filed today at US District Court in New York.
The practice, banned by regulators, can drive down a stock’s trading price just as a company uses it for a benchmark in setting the price of a share sale.
Mr. Todd, a US citizen living in Hamilton Parish, agreed to return $1.1 million of allegedly illicit profits and pay a $500,000 fine to settle the case, said Robert Kaplan, an SEC enforcement official overseeing the case. Solar Group is a Panamanian firm operating from Bermuda, according to the SEC.
By making the trades “he was able to significantly reduce risk by participating in these offerings,” said Mr. Kaplan. “Other market participants, who were obeying the law, didn’t get that advantage.”
In a short sale, a trader normally borrows shares and then sells them, hoping the price will fall and the stock can be bought back for less money. Share offerings often lower the price of a stock by diluting it.
The brokerage firm Mr. Todd used never told him the trades were improper, his attorney, Paul Bazil of law firm Pickard and Djinis LLP said via phone. He declined to name the brokerage.
“Mr. Todd appreciates the SEC does not claim that he deceived anybody or that Mr. Todd caused any disruption to the securities markets,” Mr. Bazil said.
Mr. Todd settled the case, without admitting or denying the allegations, “due to the high cost of litigation,” the attorney said.
The complaint by the SEC cited two examples of short selling abuses. In once case it alleged that Solar Group purchased 100,000 shares of Cabelas Inc. at a price of $22.50 per share in a public offering in November, 2004. In the five days before the offering, Solar sold short 50,000 shares of Cabelas at prices ranging from $23.50 to $25.22 and covered the sales with shares bought in the offering at $22.50. Solar made a total profit of $69,507 as a result.
In the second example, Solar bought 100,000 shares of Seagate Technology at $18.75 in a public offering in July, 2003. In the previous five days, Solar sold short 68,500 of Seagate at prices ranging from $19.29 to $20.50 per share. Solar realised a profit of $45,452.
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