SEC Charges SG Cowen & Co.’s former Managing Director with Illegal Shorting. April 25, 2005
David Patch
Last week the SEC and US Attorney Office concluded a 3-year investigation into former SG Cowen and Co. Managing Director Guillaume Pollet on illegal shorting and insider trading charges.
On April 21, 2005 Pollet plead guilty in NY District court on insider trading charges stemming from a private placement financing deal (PIPE) with HealthExtra Inc. Pollet had arranged the deal in 2001 while working at SG Cowen and Co. Pollet, under the plea, could face up to 10 years in prison for his actions.
In a separate civil complaint, the SEC initiated enforcement actions against Pollet for similar securities violations on a minimum of 10 separate PIPE deals he arranged in 2001 and the years prior to 2001. As has been the case so many times in the past, it was not the SEC that picked up Pollet’s illegal trading activities but, in this case, SG Cowen’s internal compliance department identified the activities and notified the SEC in late 2001 of the problems. SG Cowen terminated Pollet in December of 2001 based on the activities.
According to the SEC Complaint “Pollet routinely sold short the publicly traded securities of these PIPE issuers prior to the close of the PIPE transaction in order to lock in gains for SG Cowen's proprietary account. As a result of Pollet's illicit trading, SG Cowen locked in over $4 million in trading profits, in addition to other gains SG Cowen made on the transactions.”
A report out of the NY Post last week went further stating that as a result of the illicit short selling, Pollet was able to drive down the value of at least one company’s market capitalization by 50%. Each shareholder who remained long during this period lost 50% or more of their investment in the company. This would equate to tens of millions in investor losses. In total, if you consider the $4 Million in profits off the short selling, and use an estimate that the PIPE was for average of 5% of the shares outstanding, Investor losses would reach over $80 Million in the 10 deals discussed.
The SEC, on their April 11 updated publication of Regulation SHO states: [Is Naked Shorting Illegal?] ”Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price. This manipulative activity, in general, would violate various securities laws, including Rule 10b-5 under the Exchange Act. Regulation SHO does not address this issue.” Pollet was charged with a 10b-5 violation.
When asked about the specifics in this case, SEC Associate Regional Director Dave Rosenfeld could not respond as to whether these trades met proper settlement indicating that this 3-year investigation is still on going. On Going?
The US Attorney has generated a criminal guilty plea out of Pollet, SG Cowen terminated Pollet in December of 2001 and handed over their internal investigation to the SEC, and in April of 2005 the SEC is “Still Investigating” the matter. Since the SEC appears a little slow to act, I felt maybe they should be provided some regulatory guidance.
Without knowing whether Pollet sold short without delivery, but based on historical past, I will assume for the moment that the shorting conducted was naked shorting with the collateral used in the trades for delivery being the shares expected when the PIPE deal was signed [Ref: Dec 2004 NASD vs. Hilary Shane]. If that is the case:
Why has the SEC failed to initiate actions against SG Cowen and the trader who executed the short sale trades without meeting proper locate requirements? The NASD termed identical trading strategies as the “sale of unregistered securities” when Ms. Shane acted in this manner. The abuses were not isolated to a single deal but 10 separate deals involving a significant number of short sale trading orders being executed for each. Where was the internal compliance at the trading levels? One may slip through the cracks but 10 are a dam breaker. [In NASD vs. Hilary Shane, 975 short sale trade executions took place in a single PIPE deal]
Where are the SEC actions against the buy-side broker/dealers who accepted these trades without forcing settlement on the fails? Under Rule 15c6-1 and 15c3-3 the buy-side broker dealer must act in good faith to settle all trades within 3-days for the benefit and protection of their client. Without initiating and executing buy-ins, the buy-side broker dealers aided Pollet in orchestrating the fraud. Ironically, under Section 20 of the Securities Act of 1934:
Prosecution of persons who aid and abet violations. For purposes of any action brought by the Commission under paragraph (1) or (3) of section 21(d), any person that knowingly provides substantial assistance to another person in violation of a provision of this title, or of any rule or regulation issued under this title, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.
The buy-side broker/dealer knowledge came at the time the trades failed settlement without proper justifications.
The issue of naked shorting abuses has been labeled as financial terrorism to businesses and their shareholders. The SEC, if to be taken seriously as an investor protection agency, must stop taking the small steps and start looking at the global picture. Stop the conspiracy to commit fraud by attacking all parties involved.
The stock manipulation associated with selling short shares that do not exist, as a means of preserving profitability, or as a means of manipulating a stock price, is not a scheme that can be fostered by any single individual. Like mutual fund late-trading, it takes an orchestrated effort of many to succeed. Naked shorting requires a manipulative short seller to have agreements with the buy-side broker dealers that they will not buy-in the fails that are generated by the naked shorting. The SEC knows this. It is now time the SEC stepped up to the plate and enforced it. Maybe SEC Enforcement Director Stephen Cutler can do one proactive thing before he leaves.
Guillaume Pollet is the most recent figurehead scapegoat to a much larger systemic industry problem. As one reporter stated, “he is the Pirate the SEC is walking off the plank but the SEC is not seeing that the entire ship is made up of pirates.” It is time to scuttle the boat and preserve the rights of investors and the preserve the safety of our financial markets. For those at the SEC who continue to deny this abuse exists, give them a seat on the ship before it is scuttled. Closed minded attorneys have no place in securities regulation.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005
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ps. We've still got a long long way to go before our markets are safe/friendly to investors. Fight back....Don't be a victim.
- I will not be a slave to or of death cults - n/b/k - NO QUARTER FOR CORRUPTION http://investorshub.advfn.com/boards/board.asp?board_id=3319 
