The Securities and Exchange Commission (SEC) announced on Monday that it charged investment adviser Sabby Management LLC and its managing partner, Hal D. Mintz in the latest naked shorting scheme.
The partners generated more than $2 million in illegal profits from what the regulator claims were in connection with a long running scheme involving misrepresentations and violations of rules for short selling and order making, as well as other violative trading.
This is one of the latest ‘naked shorting’ case in 2023 despite ‘experts’ in the financial industry still claiming the illegal practice to be a myth.
The SEC’s complaint alleges that, from at least March 2017 through May 2019, Sabby and Mintz repeatedly circumvented trading rules to conduct unlawful trades in the stock of at least 10 public companies.
Short selling is a legal practice where, generally, a trader borrows a security from a securityholder and sells the security at one price, speculating that the trader can buy the security at a lower price in the future before it must be returned to its owner.
As alleged in the complaint, for example, Sabby and Mintz engaged in illegal “naked short selling” by intentionally and improperly placing short sales when they knew or were reckless in not knowing that they had not borrowed or located the shares, and then failed to make timely delivery of the shares.
According to the SEC’s complaint, the purpose of Sabby and Mintz’s fraudulent scheme was to earn profits they could not have gained through legal trading.
“Additionally, as the complaint alleges, on occasion Sabby and Mintz used their naked short selling to artificially deflate the price of securities, allowing them to obtain more shares at a cheaper price”, said the SEC press release.
Naked Short Selling is Not a Myth, It’s A Real Problem
The SEC’s complaint further alleges that Sabby and Mintz tried to conceal their fraudulent trading, including by using securities acquired after the trades to make it appear to brokers executing the trades that they had complied with the requirement to have borrowed or located the shares prior to their trades.
As the complaint alleges, when questioned by at least one broker regarding their trading, Sabby and Mintz repeatedly lied about the trading.
“The SEC alleges that Sabby and Mintz attempted to game the system and make an illegal profit,” said Carolyn Welshhans, Associate Director of the SEC’s Division of Enforcement.
“When someone uses naked shorts or other manipulative practices to cheat the market and investors, the SEC will ensure that they are held accountable.”
Naked short selling continues to be a problem primarily in small to mid-size market cap companies.
Companies like AMC and GameStop helped expose the overleveraging of the stocks during the ‘meme stock’ frenzy of 2021.
The SEC Adopts New Rule to Prevent Fraud and Manipulation
In other fraud news, The SEC announced on Wednesday it has adopted a new rule to prevent fraud, manipulation, and deception in connection with security-based swap transactions.
A second rule aims at prohibiting influence over Chief Compliance Officers at certain security-based swap entities.
“Any misconduct in the security-based swaps market not only harms direct counterparties but also can affect reference entities and investors in those reference entities,” said SEC Chair Gary Gensler.
“Given these markets’ size, scale, and importance, it is critical that the Commission protect investors and market integrity through helping prevent fraud, manipulation, and deception relating to security-based swaps.
Today’s set of rules will do just that,” he continued.
“The antifraud and anti-manipulation rule adopted today is designed to prevent misconduct in connection with effecting any transaction in, or attempting to effect any transaction in, or purchasing or selling, or inducing or attempting to induce the purchase or sale of, any security-based swap.
The rule takes into account the features fundamental to a security-based swap and will aid the Commission in its pursuit of actions that directly target misconduct that reaches security-based swaps,” the Press Release read.
The final rules will become effective 60 days after the date of publication of the adopting release in the Federal Register.
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