In recent years, it's become fashionable for CEOs to blame short-sellers for any dip in their companies' share prices. But once in a while, it's actually true.
The Securities and Exchange Commission settled a case Thursday with a short-seller who e-mailed a negative rumor about a company one afternoon last year, then profited when the stock dropped 17% in 30 minutes.
The target of the e-mail attack was Alliance Data Systems ads, a credit card transaction processor that agreed to be acquired by private-equity firm Blackstone Group bx last May for $81.75 a share.
According to an SEC complaint filed in New York, Paul Berliner, a 32-year-old trader at the Schottenfeld Group, sent out e-mails and instant messages to 31 traders shortly after 1 p.m. on Nov. 29, claiming Blackstone had lowered its takeover offer.
The message said, in part: "ADS getting pounded — hearing the board is now meeting on a revised proposal from Blackstone to acquire the company at $70/share, down from $81.50."
Traders forwarded the messages to other market players, and news reports picked up the "story." Within 30 minutes, ADS stock dropped from $77 a share to $63.65, a 17% decline. Trading volume in ADS for the day was almost 34 million shares, more than 20 times the previous day's volume of 1.6 million shares.
Berliner sold 10,000 shares of the company short at about $77 a share within minutes of disseminating the rumor, betting that he could buy back the shares at a cheaper price in the future. Sure enough, ADS shares moved down quickly, and Berliner netted almost $25,509 in profits.
"He closed out fast," said Scott Friestad, associate director of the SEC's enforcement division. "If he had waited a couple more minutes, he could have made well over $100,000."
Not that he would have been able to keep it. Blackstone notified the SEC immediately of the rumor. After chasing down dozens of messages that got swapped among traders that day, the SEC traced the rumor back to Berliner.
Without admitting or denying the allegations, Berliner agreed to settle the charges, disgorge his profits and pay $130,000 in penalties. He also agreed to a lifetime ban from working for a broker or dealer. His attorney could not be reached for comment.
Friestad says that even if Berliner hadn't made a penny on the manipulation, the SEC still would have gone after him.
Coincidentally, Blackstone dropped its offer for ADS, blaming regulatory issues, and ADS is suing Blackstone for a breakup fee.