Deerfield Capital Management agreed to pay $1.9 million to the SEC to settle violations of the financial watchdog’s short-selling rules in stocks including Insulet (NSDQ:PODD), Derma Sciences (NSDQ:DSCI) and TearLab Corp. (NSDQ:TEAR).
It’s part of an SEC crackdown on illegal short sales of stock that the agency announced today. The SEC said it slapped 23 investment firms with short-selling violations, reeling in more than $14.4 million in "monetary sanctions," according to an agency press release.
In short selling, an investor sells shares and agrees to repurchase them later, assuming that the share price will have fallen by then – in effect, it’s a bet that the shares will be bought back at lower price than they were sold for, with the difference going into the investor’s pocket. The risk is that the share price rises, meaning the investor is out of pocket for the difference.
The SEC said its Rule 105 "prohibits the short sale of an equity security during a restricted period – generally 5 business days before a public offering – and the purchase of that same security through the offering," according to the release.
Deerfield shorted shares of Insulet, Derma Sciences, TearLab and other companies, netting some $1.3 million in illicit profits, according to the SEC. Deerfield agreed to repay those profits, plus another $19,000 in prejudgment interest and $610,000 in penalties.
Late last year and early this year Deerfield sold short about 268,900 PODD shares for an average price of $21.56 apiece during the restricted period ahead of a follow-on offering priced at $20.75 per share, , according to the SEC. Deerfield’s allotment in the offering was 275,000 shares, resulting in proceeds of $217,237 plus more than $5,000 from buying up the remainder at a discount, for total illicit profits of nearly $223,000, the agency said.
Deerfield pulled in about $141,000 when it shorted more than 233,000 shares of DSCI stock ahead of that company’s follow-on offering, selling for $9.28 apiece and buying for $9.25 each, then buying another 267,000 shares at a discount, according to the SEC. The investment firm pulled in $32,000 for short-selling about 65,000 TEAR shares in another follow-on, selling for $3.89 per share and buying for $3.60 each, then snapping up another 35,000 shares at a discount, the SEC said.
