SEC Sues Three Hedge Fund Advisers for Illegal Short Sale Activity in Connection with Twenty-Two Follow-On Offerings

FOR IMMEDIATE RELEASE
2005-77

Washington, D.C., May 19, 2005 — The Securities and Exchange Commission today announced the entry of final orders in actions brought against three hedge fund advisers, Galleon Management, L.P., Oaktree Capital Management, LLC and DB Investment Managers, Inc., for violations of Rule 105 of Regulation M. In total, the Commission will collect close to $2.4 million in disgorgement, penalties and pre-judgment interest in the three cases.

Rule 105, an anti-manipulation rule, prohibits covering a short sale with securities obtained in a follow-on offering if the short sale occurred within five business days before the pricing of that offering. The rule is designed to prevent funds from improperly profiting by selling short with the expectation that they will cover that short position with lower priced shares obtained from the offering. Such short sales can play a major role in contributing to a decrease in a follow-on offering’s share price, and can ultimately reduce an issuer’s proceeds from the deal by millions of dollars.

The Commission alleged that in total, the respondents violated Rule 105 in connection with twenty-two follow-on offerings of seasoned issuers, resulting in ill-gotten gains in the amount of $1,040,882 for Galleon, $169,773 for Oaktree and $15,585 for DB Investment Managers. On some occasions, Galleon and Oaktree engaged in so-called “sham” transactions. In these situations, funds created large short positions within the Rule 105 restricted period, purchased shares in a follow-on offering and then engaged in further transactions or trading practices to make it appear that the trading complied with Rule 105, when in fact it did not.

“Enforcement of Rule 105 is an important way to protect the integrity of the public offering process and to discourage activities that could unfairly influence the market for an offered security,” noted Peter H. Bresnan, an Associate Director of the Division of Enforcement. “When funds violate Rule 105, the impact can be twofold -- investors already owning shares in the offering company can be short-changed by a sudden artificial drop in the value of their stock and the companies themselves can be short-changed by an unwarranted cheap valuation of their offering.”

Galleon Management, L.P.

• According to the Commission, in connection with 17 follow-on offerings from 2000 through 2003, Galleon’s funds sold securities short within five business days before the pricing of public offerings and then covered the short positions with securities purchased in the offerings. In doing so, Galleon routinely created boxed positions by establishing a long position with shares purchased in an offering while simultaneously maintaining a corresponding pre-pricing short position in the securities of the same issuer. In some instances, Galleon instructed its prime broker to flatten these boxed positions through the use of riskless, offsetting journal entries, a practice known as “collapsing the box.” On other occasions, Galleon unwound its boxed positions by contemporaneously entering a market order to sell the offering shares and another order to purchase an equivalent number of shares, which were then used to cover the short position that had been established during the Rule 105 restricted period. These unwinding transactions were entered through two different brokers and executed in the open market, with little risk to Galleon.
   
• Without admitting or denying the allegations made by the Commission, Galleon consented to the issuance of an Order directing them to (1) cease and desist from committing or causing violations or future violations of Rule 105 of Regulation M, (2) disgorge $1,040,882 in profits and pay prejudgment interest of $109,321, and (3) adopt and implement written policies and procedures reasonably designed to prevent violations of Regulation M of the federal securities laws, review those policies and procedures annually, and designate an employee as a chief compliance officer for these purposes. Galleon also consented to the entry of a Final Judgment ordering it to pay a $870,247 civil money penalty.

Oaktree Capital Management, LLC.

• According to the Commission’s order, on four occasions from September 2003 to March 2004, Oaktree Capital Management, LLC’s Emerging Markets Fund sold securities short within five business days before the pricing of public offerings and then covered the short positions with securities purchased in the offerings. Oaktree created boxed positions, and then crossed the long and short position against the other resulting in a flat position in the issuer’s stock. Oaktree then instructed a broker-dealer to print the buy cover and sell long transactions to the consolidated tape.
   
• Without admitting or denying the allegations made by the Commission, Oaktree consented to the issuance of an Order directing them to (1) cease and desist from committing or causing violations or future violations of Rule 105 of Regulation M, (2) disgorge $169,773 in profits and pay prejudgment interest of $6,155, (3) pay a $169,773 civil money penalty, and (4) adopt and implement written policies and procedures reasonably designed to prevent violations of Regulation M of the federal securities laws, review those policies and procedures annually, and require the chief compliance officer to administer these policies and procedures.

DB Investment Managers, Inc.

• According to the Commission’s order, on three occasions from January 2001 to May 2004, DB Investment Managers, Inc., a subsidiary of Deutsche Bank AG, sold securities short within five business days before the pricing of a follow-on offering and then covered the short position with securities purchased in the offering. On the pricing date for each offering, but prior to any sale transactions in the relevant securities, DB Investment Managers submitted a tiered indication of interest to the lead underwriter demonstrating its willingness to purchase various amounts of offering stock depending on the ultimate price of the offering. DB Investment Managers then sold short shares of the issuer, in amounts which represented a portion of its anticipated allocation in the deal.
   
• Without admitting or denying the allegations made by the Commission, DB Investment Managers consented to the issuance of an Order directing them to (1) cease and desist from committing or causing violations or future violations of Rule 105 of Regulation M, (2) disgorge $15,585 in profits and pay prejudgment interest of $1,989, (3) pay a $15,585 civil money penalty, and (4) adopt and implement written policies and procedures reasonably designed to prevent violations of Regulation M of the federal securities laws, review those policies and procedures annually, and require the chief compliance officer to administer these policies and procedures.

For more information, contact:

Peter H. Bresnan
Associate Director
Division of Enforcement
(202) 551-4597

John Reed Stark
Chief, SEC Office of Internet Enforcement &
Counselor to the Director
(202) 551-4892

  Additional materials: Administrative Proceedings Release Nos. 34-51707; 34-51708; 34-51709

http://www.sec.gov/news/press/2005-77.htm