Traders settle with SEC over ‘naked’ short-selling

The Securities and Exchange Commission for the first time has enforced new rules intended to limit a practice known as “naked” short-selling.

The SEC said Wednesday that two traders and their firms have agreed to settle charges that they violated the rules without admitting or denying guilt.

The rules were put in place last year at the height of the financial crisis, and the SEC made them permanent last month.

The agency said New York-based Stephen Hazan and Hazan Capital Management LLC have agreed to pay $3 million to settle the charges, while Chicago-based TJM Proprietary Trading LLC agreed to a penalty of $541,000.

The two firms were charged with circumventing a rule that requires brokers to promptly produce shares in “naked” short-selling transactions.

“Naked” short sales involve bets against a company’s share price by investors who don’t own the shares at the time of the sale. Such sales can be used to drive down the share price of a company’s stock.

The SEC also charged Michael Benson, a TJM trader, for violating the rule, and the firm’s chief operating officer, John Burke, for failing to supervise Mr. Benson.

The agency suspended Mr. Benson from associating with any broker for three months, while Mr. Burke has been suspended from acting as a supervisor at any brokerage for nine months.

Mr. Hazan and his firm, as well as TJM and its two employees, also reached separate settlements with the New York Stock Exchange and several other private institutions. Mr. Hazan was fined $1 million by the NYSE.

Michael Bachner, a lawyer for Mr. Hazan, said his client decided to settle the charges because “the cost of defending these actions would have been similar” to the amount of the fines and penalties paid.

A lawyer for TJM declined to comment.

Short-sellers borrow a company’s shares, sell them, and then buy them back when the stock falls and return them to the lender - pocketing the difference in price.

“Naked” short-selling occurs when sellers don’t borrow the shares before selling them, and then look to cover positions sometime after the sale.