The Securities and Exchange Commission (SEC) has announced settled charges against Greenwich, Connecticut-based investment advisory firm Contrarian Capital Management L.L.C. for violating an SEC Rule when it purchased stock in two public offerings of securities for advisory clients after effecting short sales in the same stock for advisory clients during a period of time when the SEC Rule prohibited those purchases.
The SEC’s order finds that Contrarian violated Rule 105 of Regulation M of the Securities Exchange Act, which prohibits short selling an equity security during a restricted period (generally five business days before a covered public offering) and then purchasing the same security in the offering, absent an exception. The Rule applies regardless of the trader’s intent, and is designed to prevent potentially manipulative short selling before the pricing of covered secondary offerings of securities.
The SEC’s order finds that Contrarian violated Rule 105 by participating in two covered offerings of securities, in April and June 2020, after effecting short sales of the same securities during the respective restricted periods.
According to the order, in each instance the short sales resulted from the exercise and assignment of call options that Contrarian had sold on behalf of its clients prior to the restricted period. The SEC’s order states that Contrarian has since undertaken remedial steps, including revising its Rule 105 policies and procedures.
Without admitting or denying the findings in the SEC’s order, Contrarian agreed to cease and desist from committing or causing violations of Rule 105, and to pay disgorgement of $351,726.86, prejudgment interest of $29,600.50, and a civil penalty of $140,000.
