The US Securities and Exchange Commission (SEC) has settled a case with the board of the Ontario Teachers’ Pension Plan (OTPP) involving illegal short selling violations, with the OTPP agreeing to pay more than US$200,000 in settlement costs.
"We have entered into an agreement with the SEC involving Rule 105, which regulates short selling in advance of secondary offerings in the US," an OTTP spokeswoman told Wealth Professional. "As part of the agreement, Teachers' will pay a total of US$224,835.90, which includes return of profit, a fine and interest. The SEC has recognized our prompt remedial action and cooperation; we appreciate the quick resolution of this matter."
The OTPP settlement was announced as part of enforcement actions against 23 firms for short selling violations. The enforcement actions are being settled by 22 them, resulting in more than US$14.4 million in monetary sanctions, the SEC said.
“The benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent,” said Andrew Ceresney, co-director of the SEC enforcement division. “Through this new program of streamlined investigations and resolutions… we are sending the clear message that firms must pay the price for violations while also conserving agency resources.”
The SEC said it is increasing its focus on preventing firms from improperly participating in public stock offerings after selling short those same stocks. Such violations typically result in illicit profits for the firms, it said.
According to the settlement agreement, on four occasions, from July 2010 through February 2011, OTPP bought offered shares from an underwriter or broker or dealer participating in a follow-on public offering after having sold short the same security during the restricted period.
These violations collectively resulted in profits of $144,898.
SEC regulations prohibit the short sale of an equity during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering. The rule applies regardless of the trader’s intent, and promotes offering prices that are set by natural forces of supply and demand rather than manipulative activity.
It noted that such short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.
The firms charged in these cases allegedly bought offered shares from an underwriter, broker, or dealer participating in a follow-on public offering after having sold short the same security during the restricted period.
In determining to accept the OTPP, the SEC said it had taken into consideration remedial acts promptly undertaken by fund and the cooperation it had afforded to commission staff.