Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, May 5, 2008

SEC Issues Order in False Rumors Proceeding

The SEC issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (Order) against Paul S. Berliner. The Order finds that Berliner was enjoined from future violations of Section 17(a) of the Securities Act of 1933, Sections 9(a)(4) and 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder pursuant to a final judgment that was entered by consent on April 29, 2008, in a Commission civil injunctive action.

According to the Commission's complaint in that action, on May 17, 2007, Alliance Data Systems Corp. (ADS) announced that it entered into a definitive agreement to be acquired by The Blackstone Group (Blackstone) at a price of $81.75 per share. The Commission alleged in its complaint that, on Nov. 29, 2007, Berliner drafted and disseminated a false rumor that ADS's board of directors was meeting to consider a revised proposal from Blackstone to acquire ADS at a significantly lower price of $70 per share. According to the complaint, Berliner disseminated this false rumor through instant messages to numerous individuals, including traders at brokerage firms and hedge funds. The complaint alleged that this false rumor spread rapidly across Wall Street, and various news services quickly picked up the "story." The complaint further alleged that heavy trading in ADS stock ensued, and within thirty minutes the false rumor had caused the price of ADS stock, which had been trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share -- a 17% decline in the share price. The complaint alleged that Berliner profited from spreading this false rumor by short selling ADS stock at the same time he was disseminating the false rumor. The complaint further alleged that Berliner covered these short sales when the price of ADS stock began to decline. According to the complaint, Berliner made approximately $25,000 in illicit trading profits before the price of ADS stock recovered later in the day.

Based on the above, the Order bars Berliner from association with any broker or dealer. Berliner consented to the issuance of the Order without admitting or denying the Commission's findings, except as to entry of the injunction.

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