Legal

Regulators Look at Sub-Account Use in Short Selling Crack Down

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Hedge funds and buy-side investment firms were targeted last month by the Securities and Exchange Commission for their actions in shorting shares in companies within the five days leading up to the pricing of a stock offering, and then purchasing those same securities from a broker-dealer participating in the offering. All but one of the twenty-three firms hit with the regulatory enforcement action over Rule 105 violations have settled. Eleven of the 23 firms involved, including Hudson Bay Capital, D.E. Shaw, and Deerfield Management, are active in PIPE and equity private placement investments and garnered some of the heftiest penalties in the case. Only one firm accused of the short-sale violations, G-2 Trading, is fighting the SEC’s claims. In settling with the other investors the regulator collected $14.4 million as monetary fines and the firms were allowed to continue doing business. The SEC has received complaints of this kind of “naked shorting” for years but this is the first time market participants have seen such a large scale crackdown.

Legal
Mary Jo White

SEC’s White Reiterates Support for Tick Size Pilot

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Seems that the SEC’s new head is both tough and flexible – flexible in her approach to the plight of stranded emerging growth companies without support from market-makers and research analysts. In recent appearances Mary Jo White, the agency’s new chair, has declared that a “one size fits all” approach to the markets is a poor model for securities regulation, and that one example of how poorly such an approach works is in the area of share price decimalization. Just last week White reiterated her support for a tick size pilot program that would study whether increasing the minimum pricing increment for small cap company shares – or allowing companies to choose their own “tick” size – would create greater liquidity by encouraging market-making and sell-side research coverage of emerging growth companies. The comments, coming in remarks White made at a securities traders association conference in Washington last week, reiterated her earlier statements that the tick size study should be greenlighted sooner rather than later. White told reporters that she had instructed SEC staff to move ahead with developing a tick size pilot program with the major U.S. exchanges.

Legal

Lazard Capital Markets Fined $300K for Lack of Research Disclosure

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Lazard Capital Markets, the private banking spin-off of publicly traded Lazard Ltd. (LAZ), was fined $300,000 by the SEC after the agency accused the placement agent of long-standing failures to disclose market-making conflicts with the companies it issued equity research reports about. In a settlement release issued by the agency, the SEC said Lazard failed to include required disclosures in 47% of the research reports issued during a two-year period from April 2009 to May 2011. During the three and a half year period from January 2007 to May 31, 2011, the firm failed to include required disclosures regarding its market-making activities in covered companies in over 4,100 equity research reports, the SEC found. During that period, Lazard expanded its market making business rapidly, but failed to update its research disclosures to reflect it.

Legal

ChinaCast Education Execs Charged with Fraud, Insider Trading

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The senior executives of one of the darlings of the Chinese reverse merger boom were charged with misappropriating tens of millions of dollars of shareholder funds in self-dealing transactions, and with insider trading to avoid losses when the frauds began to be revealed, according to the SEC. ChinaCast Education’s ex-CEO Chan Tze Ngon was accused of transferring $41M of shareholder funds to a subsidiary and then outside the country by the SEC. The agency also charged the company’s former president, Jiang Xiangyuan, with allegedly selling 50,000 shares of the company to avoid $200,000 in losses after transferring other assets out of the company. "Chan orchestrated the systematic looting of ChinaCast and hid his misconduct by repeatedly lying to investors about the company's assets," said Sanjay Wadhwa, senior associate director for enforcement in the SEC's New York office. ChinaCast Education (CAST) went public on the Singapore Stock Exchange in May 2004, after having been backed by the venture capital arms of Intel and DirecTV, and Sun Hung Kai, a large Hong Kong company.