SEC charges Dallas hedge fund in short sale scheme

Sept 25, 2010 - (Tip Report) Dallas - On Thursday, the SEC levied charges against Dallas-based hedge fund, Carlson Capital, L.P. for participating in four public offerings after selling their stock short.

The hedge fund was charged under Rule 105 of Regulation M, which was enacted to prevent the intentional depression of a company's shares shortly before pricing their shares in an offering.

What the SEC is alleging in their charges is that Carlson Capital wanted to crush the companies' share price and then buy stock cheap in an offering, betting on the companies eventually recovering with no consideration or care about those companies' shareholders accept to line their own pockets. Now, Carlson Capital will be lining the pockets of their attorneys in trying to defend themselves.

Carlson quickly agreed to a a settlement, offering to pay the SEC $2.6 million. But that does not relieve the hedge fund from any future liability should some opportunistic ambulance-chasing law firm decide to bring a class-action suit against the hedge fund. The Companies themselves will surely want compensation as well.

We should point out that while the SEC's role is to "enforce securities law," under the Obama administration they've turned into a lawsuit factory which generates millions of dollars that they get to keep.

The funds collected when companies are damaged in a short sale scheme of this nature goes into the SEC's war chest. The companies themselves are on their own, as are the shareholders who were damaged by those kinds of actions.

In commenting on the hedge fund case, Antonia Chion, Associate Director of the SEC's Division of Enforcement warned investment advisors across the board that they were gunning for more cases like Carlson's.

"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 Chion. "This is true even when the portfolio managers have different investment approaches and generally make their own trading decisions."

In its order, the SEC found that the "separate accounts" exception to Rule 105 did not apply to Carlson's participation in that offering. If certain conditions are met, this exception allows the purchase of an offered security in an account that is "separate" from the account through which the same security was sold short.

The four companies the hedge fund shorted where: Equitable Corp. (Nyse: EQT), Rockwood Holdings (NYSE: ROC), Capital One Financial Corp. (NYSE: COF) and Wells Fargo (NYSE: WFC). And you thought we'd be giving you the names of some small cap companies. These guys at Carslon Capital have got balls, eh? Or they did until Chion's gorilla team of attorneys, David Mendel and Robert Cohen, got through with them. Look for these two super sleuths' names to appear again in Tip Report very soon. There the boyz with the badges! But, if they keep knocking them down like this it won't be long and they'll both be working for big dollar lawfirms because of their track records. Then they'll be advising and defending others against similar charges as the SEC is more a place where young lawyers get their wings before going into private practice.