Offshore Hedge Fund Caused Executing Brokers to Violate Reg SHO
An offshore hedge fund and its manager agreed to pay $8.8 Million for mis-characterizing short sales as long sale orders, thereby causing the executing brokers to violate Regulate SHO.
By mis-identifying the transactions, the hedge fund avoided stock borrowing costs associated with short sales and benefited from two extra trading days to close out failures to deliver. The hedge fund also engaged in direct transactions with some of the underlying companies, which also constituted dealer activity requiring registration under the Exchange Act. The principals were also fined. As part of the settlement, the firm agreed to implement policies and procedures and deliver legal opinions in connection with orders placed in securities acquired directly from the issuer.
Just because you operate offshore, you still must observe U.S. regulatory requirements when you do business with U.S. brokers and exchanges. The SEC can allege “causing” a regulatory violation as a predicate to bring a case against an otherwise unregistered entity. Also, activist hedge funds should note that they can run afoul of the dealer registration requirements when they acquire securities directly from issuer and then sell them into the market. One open question: What is the responsibility of a U.S.-based executing broker when an offshore customer lies about its transactions?
Read SEC Order here.