SEC Charges Wall Street Short-Seller With Spreading False Rumors

by Mike Godfrey, for LawAndTax-News.com, Washington

28 April 2008

The US Securities and Exchange Commission (SEC) on Thursday charged Paul S. Berliner, a Wall Street trader formerly associated with Schottenfeld Group LLC, with securities fraud and market manipulation for intentionally spreading false rumors about The Blackstone Group's acquisition of Alliance Data Systems (ADS) while selling ADS short.

The SEC alleges that five months ago, Berliner disseminated the false rumor through instant messages to numerous individuals, including traders at brokerage firms and hedge funds. The false rumor also was picked up by the media.

Heavy trading in ADS stock ensued, and within 30 minutes the false rumor had caused the price of ADS stock, trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share - a 17% decline.

In response to the unusual trading activity, the New York Stock Exchange temporarily halted trading in ADS stock.

Later in the day, ADS issued a press release announcing that the rumor was false. By the close of trading, the price of ADS stock had recovered to its pre-rumor price of approximately USD77 per share.

Berliner profited by short selling ADS stock during its precipitous decline.

"The message of this case is simple and direct. The Commission will vigorously investigate and prosecute those who manipulate markets with this witch's brew of damaging rumors and short sales," announced SEC Chairman Christopher Cox.

"Today's action makes clear that the Commission will act swiftly and decisively against those who would seek to profit by disseminating false information to the marketplace," added Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.

"The story disseminated by Mr Berliner was a figment of his imagination," observed Scott W. Friestad, Associate Director of the SEC's Division of Enforcement. "Conduct like this is particularly insidious because it harms investors by distorting the information they use to make investment decisions."

Without admitting or denying the allegations in the SEC's complaint, Berliner agreed to settle the charges against him by consenting to the entry of a final judgment enjoining him from future violations of the antifraud and anti-manipulation provisions of the federal securities laws, and requiring him to disgorge USD26,129 in profits and interest, pay a maximum third-tier penalty of USD130,000, and consent to the entry of a Commission Order barring him from association with any broker or dealer.

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