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SEC Gets $7.2 Million Regulation M – Rule 105 Settlement

The SEC continues to crackdown on Regulation M – Rule 105 short selling violations throughout the country. Yesterday, the SEC announced its largest Regulation M settlement to date. Jeffrey W. Lynn and his company Worldwide Capital agreed to pay a total of $7.2 million to settle all charges. According to the SEC’s allegations in an Order Instituting Administrative Proceedings, Mr. Lynn and many traders working for him at Worldwide Capital engaged in an investment strategy to purchase new shares of public issuers in secondary offerings and follow-on public offerings. The Worldwide Capital traders had numerous accounts with many of the broker-dealers involved in the offering where they purchased much of the stock allocated to them. The stock was then delivered to a prime broker and then sold short through a Worldwide Capital account. The large number of traders that Mr. Lynn employed allowed him to obtain large allocations of shares of the soon to be publicly offered issuer. In anticipation of declines in the market price of the shares of the issuer on the effective date of the offering, Mr. Lynn and his traders would sell those shares short and reap huge profits when they delivered the stock allocated to them in the secondary and follow-on offerings. The SEC alleged that Mr. Lynn directly and indirectly participated in over 60 public stock offerings and sold stock short during a restricted period that resulted in Rule 105 violations.

The SEC has formed a task force to initiate investigations and enforcement actions to garner monies from Regulation M violators in the form of restitution and civil monetary penalties. This has been a very profitable area for SEC enforcement actions. In September of last year the SEC cracked down on 23 firms and recovered more than $14.4 million. The investigations are minimal thanks to a sophisticated computer software program focusing on short sellers during a restricted period. The government regulator adopted Rule 105 to stop what it views as manipulation of the stock market. Rule 105 prohibits short selling of stocks by anyone during a restricted period. The restricted period is the shorter of the period: 1) beginning 5 business days prior to the pricing of the offered stocks and ending with such pricing; or 2) beginning with the initial filing of the registration statement or Form 1-A or Form 1-E notifications and ending with the pricing. According to the SEC, all of the restrictive provisions of Rule 105 apply without regard to the seller’s intent in effecting the transaction. This is a strict liability rule violation. In other words, there are no excuses. Either you sold short during the restricted period or not, and if you did, you are automatically liable for disgorgement, prejudgment interest and civil monetary penalties.

We have been actively defending these Rule 105 enforcement actions. Many cases are indefensible. However, there are exceptions which may be applicable to your trading activities. For example, there is a separate accounts exception to Rule 105 that Mr. Lynn and Worldwide Capital could not take advantage of in this case. As a former SEC enforcement attorney, Robert W. Pearce, can parse the facts and law quickly and advise you on whether to litigate or settle and get the best deal possible.

This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over , Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to representing investors and financial industry professionals throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com  for answers to any of your questions about this blog post and/or any related matter.