The Securities & Exchange Commission today charged investment adviser Sabby Management LLC & its managing partner, Hal D. Mintz, with fraud in connection with a long running scheme involving misrepresentations & violations of rules for short selling & order making, as well as other violative trading, that generated more than $2 million in illegal profits.
The SEC’s complaint alleges that, from at least March 2017 through May 2019, Sabby & Mintz repeatedly circumvented trading rules to conduct unlawful trades in the stock of at least 10 public companies. Short selling is a legal practice where, generally, a trader borrows a security from a securityholder & sells the security at one price, speculating that the trader can buy the security at a lower price in the future before it must be returned to its owner. As alleged in the complaint, for example, Sabby & Mintz engaged in illegal “naked short selling” by intentionally & improperly placing short sales when they knew or were reckless in not knowing that they had not borrowed or located the shares, & then failed to make timely delivery of the shares. According to the SEC’s complaint, the purpose of Sabby & Mintz’s fraudulent scheme was to earn profits they could not have gained through legal trading.
Additionally, as the complaint alleges, on occasion Sabby & Mintz used their naked short selling to artificially deflate the price of securities, allowing them to obtain more shares at a cheaper price.
The SEC’s complaint further alleges that Sabby & Mintz tried to conceal their fraudulent trading, including by using securities acquired after the trades to make it appear to brokers executing the trades that they had complied with the requirement to have borrowed or located the shares prior to their trades. As the complaint alleges, when questioned by at least one broker regarding their trading, Sabby & Mintz repeatedly lied about the trading.
“The SEC alleges that Sabby & Mintz attempted to game the system & make an illegal profit,” said Carolyn Welshhans, Associate Director of the SEC’s Division of Enforcement. “When someone uses naked shorts or other manipulative practices to cheat the market & investors, the SEC will ensure that they are held accountable.”
The SEC’s complaint, filed in the U.S. District Court for the District of New Jersey, charges Sabby & Mintz with violations of Section 10(b) of the Securities Exchange Act of 1934 & Rules 10b-5 & 10b-21 thereunder. The complaint also charges Sabby with violations of Sections 204 & 206(4) of the Investment Advisers Act of 1940 & Rules 204-2 & 206(4)-7 thereunder & charges Mintz with aiding & abetting those violations. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, & civil penalties.
The SEC’s investigation was conducted by Edward Reilly & Christopher Mathews, with assistance from Patrick McCluskey & Brian Shute, under the supervision of Amy Friedman & Ms. Welshhans. The litigation will be led by Daniel Maher & Mr. Reilly & supervised by David Nasse.