Securities Law Prof Blog

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

Tuesday, October 7, 2008

SEC Charges Securities Firm with Illegal Short Sales

The SEC filed an injunctive action in the United States District Court for the Central District of California against Lion Gate Capital, Inc. (Lion Gate) and its principal, Kenneth Rickel alleging illegal short selling. According to the complaint, from January 2005 through September 2006, Lion Gate and Rickel allegedly used shares purchased in fourteen registered public offerings to cover short sales that occurred during the five business days before the pricing of those offerings (the restricted period). The Commission’s complaint alleges that this conduct violates Rule 105 of Regulation M under the Securities Exchange Act of 1934. The SEC alleges that in each instance, Lion Gate and Rickel engaged in transactions that created the appearance that the shares covering the restricted period short sales were purchased on the open market. According to the complaint, Lion Gate and Rickel realized profits of at least $207,291 from their illegal trading.

At the time of the conduct in the complaint, Rule 105 prohibited covering a short sale made during the restricted period with securities purchased in a registered offering.The Commission seeks permanent injunctions against each defendant, and disgorgement, prejudgment interest, and civil penalties against each defendant.

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