TWO SHORT SELLERS FOUND TO HAVE VIOLATED THE RULES

The SEC has caught two more individuals that were illegally shorting stocks. This is the first enforcement actions brought under rule 105. Rule 105 is meant to help stop the malicious market manipulations which has caused harm to the markets and has driven many retail (individual) investors away. Short selling when used as a hedge against sharp losses is a good thing. Short selling as a method of gambling is a dangerous thing to do for the short seller. The only time it is not dangerous is if the short seller has taken his own risk from the gamble via manipulating the market so that the stock will go down. It is like playing with a loaded deck of cards and that is perhaps a greater threat to capitalism than communism, fascism or any other ism.

The following is an excerpt from the SEC internet site. The SEC is at least finding some of the miscreants. It is too bad The Department of Justice does not take a keener interest in what may be the greatest threat to our national survival since WWII.

“Washington, D.C., May 11, 2010 — The Securities and Exchange Commission today charged two Boca Raton, Fla., residents for engaging in illegal short selling of securities in advance of participating in numerous secondary offerings to make illicit profits.

These mark the first enforcement actions brought by the SEC under Rule 105 of Regulation M against individuals with no securities industry background. Rule 105 helps prevent abusive short selling and market manipulation by ensuring that offering prices are set by natural forces of supply and demand for the securities in a secondary offering rather than by manipulative activity.

In separate orders issued by the Commission, Peter G. Grabler was charged with repeatedly violating Rule 105 over a period of more than two years for gains of $636,123. Leonard Adams was charged with similarly violating Rule 105 for gains of $331,387. According to the orders, Grabler and Adams engaged in a strategy of participating in numerous secondary offerings of stock in public companies in order to improve their access to initial public offerings underwritten by the same broker-dealers through which they participated in the secondary offerings.

Grabler and Adams, who both lived in Massachusetts during the period of the wrongdoing, agreed to pay a combined total of more than $1.5 million to settle the SEC's charges.

"Rule 105 applies just as much to individuals trading in their own accounts as it does to investment advisers and their related funds, which have been the subject of prior SEC enforcement actions," said David P. Bergers, Director of the SEC's Boston Regional Office. "Grabler and Adams engaged in a trading strategy that by its very nature violates the SEC's rules."

Short selling ahead of offerings can reduce the proceeds received by public companies and their shareholders by artificially depressing the market price shortly before the company prices its offering. The SEC amended Rule 105 effective October 2007 to prevent this trading practice known as "shorting into the deal." The revised rule generally prohibits the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.
According to the SEC's orders, Grabler engaged in transactions prohibited by Rule 105 on at least 119 occasions between February 2006 and November 2008, involving secondary offerings by at least 102 issuers. Adams engaged in illegal transactions on at least 94 occasions between March 2006 and November 2008, involving secondary offerings by at least 86 issuers. The SEC found that Grabler opened or controlled at least 52 brokerage accounts at more than a dozen broker-dealers and that Adams opened or controlled at least 32 brokerages accounts also at more than a dozen broker-dealers.
In settling the SEC's charges without admitting or denying the SEC's findings, Grabler and Adams separately consented to cease and desist from violating Rule 105. Grabler will pay more than $988,000 to settle the SEC's charges, and Adams will pay more than $514,000”

Well, the SEC has caught and fined more crooks. As a long time investor in securities and commodities I have seen a lot of market manipulation. In this case the criminals were stealing a relative small amount of money but, they did get a just fine and perhaps they should get some criminal charges brought against them but unfortunately, the SEC cannot try people and put them away.

One thing that should be noted in this case is how much trouble a couple of guys can cause through illegal short sales. It would be good if the SEC would look into a lot of the shenanigans that went on in the 2007-2008 melt down. Several major brokerages have been rumored to have made a tremendous fortune shorting stocks so far down that the underlying businesses could not get loans to stay in business. Some of these short sellers may have been such large institutions that they created the short selling market for these stocks which wiped a lot of retail investors out and forced good companies to lay off employees. The aforesaid happens if the collapsing price of a stock of a business causes that business to have problems getting loans to fund day to day operations.