Hedge Fund to Pay $8.2 Million In SEC Short-Sale Settlement

Sandell Asset Management and its founder are to pay $8.2 million to settle claims that the hedge-fund firm improperly sold a New Orleans bank's shares short after Hurricane Katrina.

The New York company, which manages about $7 billion, sold Hibernia shares it did not hold in 2005 as it sought to offset losses from an expected drop in the stock price, the Securities and Exchange Commission said yesterday. The practice is known as naked short selling.

"Sandell Asset Management gained an unfair trading advantage over other market participants" by breaking rules to make the sales, said Scott W. Friestad, an SEC official.

In a short sale, a trader normally borrows shares and sells them, aiming to profit by repurchasing them after the price falls. In naked shorting, the trader sells stock without borrowing the shares. The practice can drive down a stock's price, hurting investor confidence and a company's ability to attract capital, SEC Chairman Christopher Cox has said.

Sandell agreed to forfeit $6.7 million in proceeds from the trades, plus interest, and pay a $650,000 fine. Founder Thomas E. Sandell, a former senior managing director at Bear Stearns, is to pay a $100,000 fine. The SEC also fined two Sandell employees $90,000. Neither the company nor its employees admitted wrongdoing.

Sandell wagered that Hibernia's stock would rise after Capital One Financial made a $5.35 billion bid for the bank in March 2005. After Hurricane Katrina struck that August, Sandell's employees speculated that the takeover would be postponed and Capital One would reduce its offer, the SEC said. To offset anticipated losses, they sought to borrow shares for short sales.

Finding too few shares available, the SEC said, the firm sold shares it didn't borrow and also mislabeled some trades as "long" in brokerage records to circumvent restrictions on short sales.

Capital One completed its acquisition of Hibernia in November 2005 after lowering its bid.