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In its order, the SEC said that Carlson violated Rule 105 on at least four occasions and even introduced internal policies and procedures that lack the necessary mechanism to prevent the firm from participating in relevant offerings.

The SEC alleged that in one occasion, the violation occurred when the portfolio manager who sold short stocks and the portfolio manager who bought the offering shares were different.

Antonia Chion, Associate Director of the SEC’s Division of Enforcement commented, "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. This is true even when the portfolio managers have different investment approaches and generally make their own trading decisions."

Under SEC Rule 105 of Regulation M, short sellers are prevented from reducing proceeds received by companies and shareholders by artificially depressing the market price shortly before the company prices its public offering. Rule 105 ensures that offering prices are set by natural forces of supply and demand rather than manipulative activity by prohibiting the short sale of an equity security during a restricted period — generally five business days before a public offering — and the purchase of that same security through the offering. The rule applies regardless of the trader's intent in selling short the stock.

On March 25, 2010, the SEC announced it was conducting investigation against Carlson Capital over four alleged secondary stock offerings between late 2007 and mid-2009.

A day later, a spokesman for Carlson admitted that the SEC was investigating the fund and that the firm was cooperating with the regulator.

"Carlson Capital has been cooperating voluntarily and fully with the SEC relating to an inquiry in connection with Rule 105 and will continue to do so," a spokesman for the fund said.

Last week (September 23), Carlson agreed to settle its case with the SEC and pay $2.65m in disgorgement, penalties and pre-judgment interest, without admitting or denying the SEC’s findings.
- P. Dumlao.

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