Rule 203(b) of Regulation SHO sets borrowing and delivery requirements for Short Sales. For example Regulation SHO requires a market participant who seeks to effect a short sale borrow, arrange to borrow or have reasonable grounds to believe that a security can be borrowed in time for delivery when due prior to effecting the short sale. Jeffrey and Robert Wolfson disregarded Regulation SHO by engaging in naked short selling when they failed to locate shares involved in short sales and subsequently failed to close out the resulting failures to deliver. Their actions attempted to gain an illegal advantage over others who incurred the costs of borrowing the securities.
The brothers generated more than $17 million in ill-gotten gains from naked short selling transactions involving stocks such as Chipotle Mexican Grill, Inc., Fairfax Financial Holdings Ltd., Novastar Financial Inc., and NYSE Group. They engaged in two types of transactions: (1) a “reverse conversion” where they sell a stock short and simultaneously sell a put option and buy a call option on the stock; and (2) a stock and option combination by creating the illusion that the party satisfied their close-out obligation by buying the same kind and quantity of securities, sold short. As Jeffrey Wolfson stated in a recorded conversation “What I sell them is not guaranteed, it never gets delivered, it’s funny paper.”
Jeffrey Wolfson generated approximately $8.8 million in net illicit trading profits and agreed to settle the charges by paying $13.425 million, which includes a $2.5 million penalty in addition to disgorgement and prejudgment interest. Robert Wolfson made more than $700,000 through the use of his broker-dealer, Golden Anchor. Collectively, they agreed to pay approximately $1.1 million in disgorgement, prejudgment interest, and penalties.
For additional information about Regulation SHO or any other compliance topic, please contact Andrew Deddeh at (619) 278-0020 or firstname.lastname@example.org.