The Securities and Exchange Commission today announced a settled enforcement action against New York hedge fund adviser Sandell Asset Management Corp. (SAM), its chief executive officer, and two other employees for engaging in improper short sales in connection with trading in the securities of Hibernia Corporation in the immediate aftermath of Hurricane Katrina.Hibernia was a New Orleans-based bank holding company and the subject of an acquisition agreement with Capital One Financial Corporation at the time Katrina occurred. As part of its merger arbitrage investment strategy, SAM held a large long position in Hibernia. According to the Commission's Order, SAM personnel believed that Capital One would lower its offering price for Hibernia shares in the wake of Katrina. In an attempt to offset an anticipated loss to a client, SAM personnel began to sell short as many shares of Hibernia stock as possible, improperly marking certain sales orders as "long" or misrepresenting to the broker-dealers executing some of the trades that they had located stock to borrow.
"Today's action is part of our ongoing effort to ensure that hedge funds comply with the federal securities laws, including all applicable trading rules," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.
Scott W. Friestad, Associate Director of the SEC's Division of Enforcement, added, "By mismarking certain trades and falsely claiming that firm personnel had located stock to borrow, Sandell Asset Management gained an unfair trading advantage over other market participants. This settlement deprives the firm of the profits made from the improper trading, and includes penalties and other sanctions designed to deter others from engaging in similar misconduct."
Without admitting or denying the Commission's findings, SAM agreed to pay more than $8 million to settle the charges, including $6,716,683.93 in disgorgement, $730,811.74 in prejudgment interest, and a $650,000 civil penalty. Also charged were the firm's CEO Thomas Sandell, senior managing director Patrick Burke, and head trader Richard Ecklord, all of whom consented to the Commission's Order without admitting or denying wrongdoing. Sandell, Burke and Ecklord were ordered to pay civil penalties of $100,000, $50,000 and $40,000, respectively.
The Commission's Order finds that, after the Hibernia-Capital One merger was announced on March 6, 2005, SAM purchased approximately 9.3 million shares of Hibernia stock for one of the firm's hedge fund clients. Thereafter, SAM sold the Hibernia shares to third parties and entered into "swap" transactions with them. The hedge fund managed by SAM no longer owned the Hibernia shares, but retained all of the economic risk of loss if the price of the shares declined.
On Aug. 29, 2005, Hurricane Katrina struck New Orleans, where Hibernia was headquartered and maintained substantial assets. On Aug. 31, 2005, in its effort to offset a potential loss to its client, SAM personnel improperly marked certain sales orders as "long" even though they were, in fact, short. On Sept. 2, 2005, SAM personnel made some additional short sales by representing to the broker-dealers executing the trades that they had located stock to borrow, when in fact they had not. The Commission's Order finds that the Aug. 31 trades violated Section 10(a) of the Securities Exchange Act of 1934 and Exchange Act Rule 10a-1 and that the Sept. 2 trades violated Section 17(a)(2) of the Securities Act of 1933.
The Commission's Order censures each of the respondents and orders SAM to cease and desist from committing or causing future violations of Section 17(a)(2) of the Securities Act.
Additional materials: Administrative Proceeding 33-8857
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