The Securities and Exchange Commission (SEC), in a release dated April 24, 2008, charged Wall Street trader Paul S. Berliner with securities fraud and market manipulation for intentionally spreading false information about The Blackstone Group’s acquisition of Alliance Data Systems (ADS) while selling ADS short.
The SEC alleges that approximately six months after Blackstone entered into an acquisition agreement for ADS at $81.75 per share, Berliner utilized instant messaging sent to many individuals, including traders at brokerage firms and hedge funds, stating the acquisition was being renegotiated at $70 per share because of purported troubles in the company’s consumer banking division, and the ADS Board was meeting to discuss the revised proposal. At the same time, Berliner was selling short the ADS securities. Heavy trading ensued and within 30 minutes the false rumor caused the price of ADS stock, trading that day at approximately $77 per share, to drop to an intraday low of $63.65 per share.
The SEC has made it clear that it will act quickly against those who seek to profit from disseminating false information to the marketplace.
What You Can Do to Protect Your Firm
- Do a thorough review of your trading staff’s emails and instant messages over a specific period of time. Look for tone and content in the messages.
- Carefully read the context of the email or instant message and pay close attention to whom the communication is being sent.
- Review the responses received to your staff emails and information shared from the respondent.
- Carefully check for a pattern of emails going to certain individuals outside of your firm and determine if these individuals raise any particular concerns for speading rumors.
- Be sure to train your staff on the perils of speading rumors and the impact it can have on them and your firm.
Due to the elevated number of complaints to financial regulators, and press reports geared toward the spread of negative rumors in 2008, FINRA’s Market Regulation Department, along with NYSE Regulation, has been conducting an ongoing review of firms’ compliance with industry rules. In addition, FINRA has added surveillance relative to the spreading of rumors as a priority on its examinations in 2009.
Current Rules Relating to Rumors
NYSE Rule 435(5) - prohibiting the circulation of false or misleading rumors “of a sensational character which might reasonably be expected to affect market conditions”
FINRA Rule 6140(e) – prohibiting the circulation of any information which is false or misleading or which would improperly influence the market price of a security
SEC Rule 10b-5 – relating to false or misleading rumors that may be considered manipulative
FINRA Rule 2010 – reminding registered persons to refrain from any conduct or activity inconsistent with just and equitable principles of trade
To be prepared for questions FINRA may ask during their examinations, firms should make sure they have adequate procedures, internal controls and surveillance practices to detect the possible spread of rumors, and to ensure that any potential misconduct is handled in a timely manner.
If you have questions about the rules relating to rumors, please contact your Compliance Partners account manager at 603-434-3594.
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