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SEC orders New York firm to pay record $7.2 million sanction

A man walks past a doorway at the Fort Worth Regional Office of the Securities and Exchange Commission (SEC) in Fort Worth, Texas June 28, 2
A man walks past a doorway at the Fort Worth Regional Office of the Securities and Exchange Commission (SEC) in Fort Worth, Texas June 28, 2

By Sarah N. Lynch

WASHINGTON (Reuters) - A New York proprietary trading firm and its owner will pay $7.2 million to settle civil charges in what U.S. regulators said on Wednesday marks the largest sanction they have ever imposed for certain short-selling violations.

Long Island-based Worldwide Capital Inc and its sole owner, Jeffrey Lynn, are settling the case without admitting or denying the charges, the Securities and Exchange Commission said.

According to the SEC order, Lynn and his firm violated Rule 105 of "Regulation M," which prohibits a trader from shorting stock prior to a public offering, and then subsequently buying that same stock through the offering.

Lynn's defense attorney, Ira Lee Sorkin, declined to comment.

The SEC's Rule 105 is designed to protect against potential market manipulation; however, the SEC does not need to prove a defendant intended to violate the rule in order to bring charges.

The SEC has been cracking down on Regulation M violations over the past year.

On March 1, SEC examiners also launched a new high-tech data program that will, among other things, help the SEC better detect violations of Regulation M, as well as more serious offenses like insider trading.

In the Lynn case, the SEC said he and his trading shop participated in 60 different offerings from October 2007 through February 2012 by shorting shares during the restricted periods and then purchasing those shares in the offering.

Typically, the restricted period lasts for five business days before a public deal.

As a result of the trades, the SEC said Lynn and Worldwide reaped ill-gotten gains of more than $8.4 million. About half of that amount was paid out to individual traders who had facilitated the short sales, and Lynn and his firm kept the rest.

Under the terms of the settlement with the SEC, Worldwide and Lynn will pay back the roughly $4.2 million in ill-gotten gains, plus a $2.5 million penalty and more than $500,000 in prejudgment interest.

(Reporting by Sarah N. Lynch; Editing by Andre Grenon and Dan Grebler)

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