Hedge fund manager faces SEC allegations
Officials accuse local firm of illegally short-selling stocks
Securities regulators said a local hedge fund manager made $1.1 million by allegedly illegally short-selling stocks during a blackout period.
The Securities and Exchange Commission issued an order yesterday accusing Fontana Capital LLC of Boston and its principal, Forrest Fontana, with violating securities rules in three transactions during the heart of the financial crisis two years ago.
Specifically, the SEC said Fontana and the company violated an obscure regulation called Rule 105, which bars traders from short-selling — or betting that stock will fall — in the days before a company conducts a secondary stock offering if those traders were also planning to buy shares in that offering.
The rule is designed to block investors from reducing the amount of money companies raise from a stock offering by pressuring share prices downward through short sales. But the SEC says it enforces the rule regardless of the investor’s intent.
And in this case, the SEC did not accuse Fontana or the company of fraud or deliberately trying to manipulate prices of any of the shares, Fontana’s lawyer said.
“This is what I would call a technical matter,” said Lisa Wood, a lawyer with Boston law firm Foley Hoag who represents both Fontana and his firm. “This involves isolated, inadvertent violations of the regulation.”
Wood said Fontana and the firm are disputing the SEC’s request that Fontana be penalized for the infractions.
Under SEC rules, traders are supposed to wait five business days after they short a stock before they can participate in a public offering by that company. That way investors can’t use shorting to drive down the price they will pay a few days later in the offering.
The SEC said Fontana violated that rule three times in 2008.
For instance, on July 25, 2008, Fontana shorted 40,000 Merrill Lynch shares.
Four days later, Fontana bought 200,000 shares of Merrill Lynch at a discount as part of a company stock sale. The SEC estimated Fontana earned $792,000 in profit by buying the Merrill Lynch shares.
Fontana Capital was launched five years ago by Fontana, a veteran of both Fidelity Investments and SAC Capital Advisers. He is also vice chairman of the board of selectman in Winchester.
Wood said the firm has shut its investment funds. The SEC said it withdrew its registration with the agency last spring.
The trades, made between July and November 2008, involved three financial firms, Merrill Lynch & Co., Wells Fargo & Co., and XL Capital Ltd.
The SEC said it plans to hold a hearing before an administrative law judge to determine whether the allegations are true and what, if any, sanctions are appropriate.
The agency said it has brought about 15 cases involving the regulation since 2008, and most resulted in settlements. In September, a hedge fund adviser in Dallas, Carlson Capital, agreed to pay more than $2.6 million to settle similar charges.
Typically, firms agree to give up about half their profits in a settlement, the SEC noted.
Todd Wallack can be reached at email@example.com.