By: Cydney Posner

The SEC has announced another enforcement action with respect to short-selling in connection with a PIPE transaction. 

See: Litigation and Complaint.

The SEC's complaint charged a hedge fund manager with insider trading and registration violations as a result of her short sales of securities of CompuDyne Corporation prior to the public announcement of a PIPE offering and prior to the effective date of the resale registration statement for the PIPE shares.

The complaint alleges that, in September of 2001, the fund manager was offered the opportunity to participate in a PIPE offering. The SEC contended that the PIPE offering was likely to have a significant dilutive effect on the value of existing shares because the PIPE shares would triple the public float and were offered at a significant discount to market. The stock price did drop significantly when the PIPE was announced. The SEC alleged that the fund manager agreed to purchase shares in the PIPE offering for her personal account and for one of the hedge fund accounts she managed and that she had agreed to keep information about the PIPE offering confidential. The SEC charged that, before the public announcement of the PIPE offering and prior to effectiveness of the resale registration statement, she began selling short CompuDyne securities in both her personal account and the hedge fund’s account until she had sold the same number of shares as she had been allocated in the PIPE offering. At the time of her short sales, she did not borrow, or deliver to the purchaser, the shares of CompuDyne stock that she sold. Rather, she covered all of her short sales with the shares she obtained in the PIPE offering, making substantial profits for both accounts. As a result, she was charged with violating, not only Rule 10b-5, but also the registration provisions of the federal securities laws because she was viewed, in essence, as having sold the PIPE shares at the time of the short sales before the resale registration statement became effective.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as "Cooley"). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction, and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. When advising companies, our attorney-client relationship is with the company, not with any individual. This content may have been generated with the assistance of artificial intelligence (Al) in accordance with our Al Principles, may be considered Attorney Advertising and is subject to our legal notices.