SEC Charges Wall Street Short-Seller With Spreading False Rumors
FOR IMMEDIATE RELEASE
2008-64
Washington, D.C., April 24, 2008 - The Securities and Exchange Commission today charged Paul S. Berliner, a Wall Street trader formerly associated with Schottenfeld Group LLC, with securities fraud and market manipulation for intentionally spreading false rumors about The Blackstone Group's acquisition of Alliance Data Systems (ADS) while selling ADS short.
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Additional Materials
Litigation Release No. 20506
SEC Complaint [see below]
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The SEC alleges that five months ago, Berliner disseminated the false rumor through instant messages to numerous individuals, including traders at brokerage firms and hedge funds. The false rumor also was picked up by the media.
Heavy trading in ADS stock ensued, and within 30 minutes the false rumor had caused the price of ADS stock, trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share - a 17 percent decline. In response to the unusual trading activity, the New York Stock Exchange temporarily halted trading in ADS stock. Later in the day, ADS issued a press release announcing that the rumor was false. By the close of trading, the price of ADS stock recovered to its pre-rumor price of approximately $77 per share. Berliner profited by short selling ADS stock during its precipitous decline.
"The message of this case is simple and direct. The Commission will vigorously investigate and prosecute those who manipulate markets with this witch's brew of damaging rumors and short sales," said SEC Chairman Christopher Cox.
"Today's action makes clear that the Commission will act swiftly and decisively against those who would seek to profit by disseminating false information to the marketplace," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.
"The story disseminated by Mr. Berliner was a figment of his imagination," said Scott W. Friestad, Associate Director of the SEC's Division of Enforcement. "Conduct like this is particularly insidious because it harms investors by distorting the information they use to make investment decisions."
The SEC's complaint alleges that on Nov. 29, 2007 - approximately six months after Blackstone entered into a definitive acquisition agreement for ADS at $81.75 per share - Berliner fabricated and disseminated a rumor that the acquisition was being renegotiated at $70 per share because of purported troubles in the company's consumer banking division, and the ADS Board was meeting to discuss the revised proposal. The complaint further alleges that around the same time Berliner began disseminating the false rumor to the marketplace, he started selling short ADS securities.
Without admitting or denying the allegations in the SEC's complaint, Berliner agreed to settle the charges against him by consenting to the entry of a final judgment enjoining him from future violations of the antifraud and anti-manipulation provisions of the federal securities laws, and requiring him to disgorge $26,129 in profits and interest, pay a maximum third-tier penalty of $130,000, and consent to the entry of a Commission Order barring him from association with any broker or dealer....
sec.gov
SEC Complaint in this matter
sec.gov
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20537 / April 24, 2008
SEC v. Paul S. Berliner, Civil Action No. 08-CV-3859 (JES) (S.D.N.Y.)
SEC Charges Wall Street Trader With Fraud For Spreading False Rumor
The U.S. Securities and Exchange Commission today filed a settled civil action in the United States District Court for the Southern District of New York, charging Paul S. Berliner, a Wall Street trader formerly associated with Schottenfeld Group, LLC, with securities fraud and market manipulation for intentionally disseminating a false rumor concerning The Blackstone Group's acquisition of Alliance Data Systems Corp. The Commission's complaint alleges that on November 29, 2007 — approximately six months after Blackstone entered into an agreement to acquire ADS at $81.75 per share — Berliner drafted and disseminated a false rumor that ADS's board of directors was meeting to consider a revised proposal from Blackstone to acquire ADS at a significantly lower price of $70 per share. The Commission alleges that this false rumor caused the price of ADS stock to plummet, and that Berliner profited by short selling ADS stock and covering those sales as the false rumor caused the price of ADS stock to fall.
According to the complaint, Berliner disseminated the false rumor through instant messages to traders at brokerage firms and hedge funds. Shortly thereafter, the news media picked up the "story." As alleged in the complaint, heavy trading in ADS stock ensued, and within thirty minutes the false rumor had caused the price of ADS stock, which had been trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share — a 17% decline in the share price. According to the complaint, the false rumor had such a significant impact on trading in the securities of ADS that day that the New York Stock Exchange temporarily halted trading in ADS stock. Later in the day, ADS issued a press release announcing that the rumor was false and by the close of trading, the price of ADS stock had recovered. Over 33,000,000 shares of ADS were traded that day — more than twenty times the previous day's trading volume.
By engaging in the foregoing conduct, the complaint alleges, Berliner violated Section 17(a) of the Securities Act of 1933, Sections 9(a)(4) and 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Without admitting or denying the allegations in the Commission's complaint, Berliner agreed to settle the charges against him by consenting to entry of a final judgment that (i) enjoins him from future violations of the antifraud and antimanipulation provisions of the federal securities laws, (ii) orders him to disgorge $26,129 in illicit trading profits and prejudgment interest, and (iii) orders him to pay a third-tier civil penalty of $130,000. Berliner also consented to entry of a Commission Order barring him from association with any broker or dealer.
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