The SEC has fired a warning shot to hedge funds and other market participants that it will target Rule 105 violations in its enforcement efforts and that hedge funds are expected to have robust policies and procedures for preventing and detecting Rule 105 violations.  On Thursday, the SEC charged Dallas-based hedge fund manager Carlson Capital, L.P. with four violations of Rule 105 of Regulation M.  The regulation prohibits purchases of an equity security made available through a public offering from an underwriter or broker or dealer participating in the offering after having sold short the same security during a restricted period (which is generally five business days before the pricing of the offering).  Rule 105 is designed to prevent market participants from selling short a security just before a company prices a public offering, thereby artificially depressing the market price of the security and allowing the short seller to purchase the security at a lower price.  Rule 105 applies irrespective of a trader’s intent.  Carlson agreed to settle the charges for more than $2.6 million dollars and was also censured and ordered to cease and desist from further violations. Continue reading →