$6.9m: Weiss Asset Management settles with SEC for unintentionally unlawful short selling

Rick Steves

Weiss Asset Management violated Rule 105, 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 through the offering.

The Securities and Exchange Commission has charged investment advisory firm Weiss Asset Management LP with unlawful purchase of stock in seven public offerings after selling short those same stocks.

Without admitting or denying the findings in the SEC’s order, Weiss Asset Management LP agreed to pay approximately $6.9 million to settle charges (disgorging profits of $6,508,793 and paying interest of $190,211 and a penalty of $200,000).

Deterring short selling practices that interfere with offering prices

“Holding violators accountable for Rule 105 violations protects the integrity of our markets by deterring short selling practices that interfere with offering prices. This settlement credits Weiss Asset Management’s cooperation during the investigation, and we encourage other companies to be forthcoming in their cooperation and comprehensive in their remediation”, said D. Mark Cave, Associate Director in the Division of Enforcement.

According to the SEC, between December 2020 and February 2021, Weiss Asset Management violated Rule 105, 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 through the offering, absent an exception.

The rule applies regardless of the trader’s intent and promotes offering prices that are set by natural forces of supply and demand rather than potentially manipulative activity.

The financial watchgod admits that Weiss Asset Management’s violations occurred because it repeatedly miscalculated the restricted period and dismissed a number of red flags raised by its internal controls that suggested possible violations of Rule 105.

The order finds that Weiss Asset Management improperly benefited by participating in offerings covered by Rule 105, resulting in ill-gotten gains totaling over $6.5 million.

The order also highlights the significant remedial efforts undertaken by Weiss Asset Management and the cooperation it provided in the investigation, including self-reporting the violations to the staff after conducting a review of its trading records, segregating the ill-gotten profits, and updating and revising its compliance and training efforts.

SEC charges Charles Schwab for “egregious” conduct in robo-advisery

Earlier this week, the SEC charged three Charles Schwab investment adviser subsidiaries for misleading customers and agreed to pay $187 million to harmed clients to settle the charges.

According to the order, the firms did not disclose that they were allocating client funds in a manner that their own internal analyses showed would be less profitable for their clients under most market conditions.

“Schwab’s conduct was egregious and today’s action sends a clear message to advisers that they need to be transparent with clients about hidden fees and how such fees affect clients’ returns”, said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

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