The Securities and Exchange Commission on Thursday announced nearly $2.4 million in penalties in relation to actions brought against three hedge fund advisers, Galleon Management, L.P., Oaktree Capital Management, LLC and DB Investment Managers, Inc., for violations of Rule 105 of Regulation M.
Rule 105 is an anti-manipulation rule, which prohibits covering a short sale with securities obtained in a follow-on offering if the short sale occurred within five business days before the pricing of that offering. Such short sales can play a major role in decreasing a follow-on offering's share price, and can ultimately cut an issuer's proceeds from the deal by millions of dollars.
The SEC alleged that in total, the respondents violated Rule 105 in connection with twenty-two follow-on offerings of seasoned issuers, resulting in unlawful gains worth $1,040,882 for Galleon, $169,773 for Oaktree and $15,585 for DB Investment Managers.
"Enforcement of Rule 105 is an important way to protect the integrity of the public offering process and to discourage activities that could unfairly influence the market for an offered security," said Peter H. Bresnan, an associate director of the division of enforcement.
"When funds violate Rule 105, the impact can be twofold - investors already owning shares in the offering company can be short-changed by a sudden artificial drop in the value of their stock and the companies themselves can be short-changed by an unwarranted cheap valuation of their offering."