A hedge fund adviser got hit with $2.6 million in sanctions for violating short-selling rules — including two bets against bank stocks during the financial crisis.
The Securities and Exchange Commission charged Carlson Capital of Dallas with breaking a rule that prevents investors from participating a stock offering within five days after they have made a short sale. The idea is to prevent traders from manipulating the stock price to get a better deal in the offering.
Carlson broke that rule, known as Rule 105, on four occasions during 2008, the SEC said, including two instances during that fall’s financial crisis.
Carlson shorted 500,000 shares of credit card bank Capital One in the days before buying 325,000 shares in the bank’s Sept. 24, 2008, stock offering, the SEC said.
Carlson also sold short 398,225 shares of Wells Fargo on Nov. 6, 2008. Later that day, Wells priced a stock offering and Carlson bought 600,000 shares.
The firm also pulled variations on the same stunt earlier in 2008 against chemicals company Rockwood and gas distributor EQT, the SEC said.
The SEC brought the case against Carlson, which has $5.1 billion in assets under management, despite the fact that in the Wells case different desks at the firm made the short and long trades. But the agency said the firm failed to adopt policies and procedures that would have prevented the conflicting trades.
“Investment advisers must recognize that combined trading by different portfolio managers can still constitute a clear violation of Rule 105 when short selling takes place during a restricted period,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “This is true even when the portfolio managers have different investment approaches and generally make their own trading decisions.”
Carlson, which didn’t admit or deny the charges, consented to a censure and agreed to pay $260,000 in penalties. It also gave back more than $2 million in ill-gotten gains, the SEC said.