The SEC has charged two Boca Raton, Florida residents for illegal short selling of securities in secondary offerings. These charges mark the initial enforcement claims that the SEC has brought pursuant to Rule 105 of Regulation M against defendants with no securities industry background.
In separate orders issued by the SEC, the SEC charged Peter Grabler with repeatedly violating Rule 105 over two years for profits of $636,123. The SEC charged Leonard Adams with violating Rule 105 for profits of $331,387.
Both Grabler and Adams engaged in a strategy of participating in numerous secondary offerings of stock in public companies to improve their access to initial public offerings underwritten by the same broker-dealers through which they participated in the secondary offerings.
Grabler and Adams agreed to pay a combined total of more than $1.5 million to settle the SEC’s charges.
Short selling before offerings can reduce the proceeds received by public companies by artificially depressing the market price shortly before the company prices its offering. The SEC amended Rule 105 prevents this trading practice known as “shorting into the deal.” The revised rule generally prohibits the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.
In settling the SEC’s charges without admitting or denying the SEC’s findings, Grabler and Adams separately consented to cease and desist from violating Rule 105.