SEC Charges Investment Adviser and Principal in Abusive Naked Short Selling Scheme

The U.S. Securities and Exchange Commission (SEC) has levied fraud charges against Sabby Management LLC, an investment advisory firm, and its managing partner, Hal D. Mintz. The charges relate to a long-standing scheme involving misrepresentation, violation of short-selling and order-making rules, and other forms of non-compliant trading that resulted in more than $2 million in illicit profits.

The SEC’s case contends that, from March 2017 to May 2019, Sabby and Mintz repeatedly dodged trading rules to execute unauthorized trades in the stocks of no fewer than 10 publicly traded corporations. Short selling, which is a legitimate operation where a trader borrows a security from an owner and sells it, expecting to repurchase it at a lower price before returning it to the owner, was one of their tactics. As outlined in the lawsuit, Sabby and Mintz partook in illicit “naked short selling.” This was done by knowingly or carelessly failing to borrow or locate the shares before making short sales and subsequently failing to deliver the shares on time. The SEC lawsuit argues that the aim of Sabby and Mintz’s deceitful strategy was to garner earnings that were unattainable via legal trading.

Furthermore, the lawsuit alleges that Sabby and Mintz occasionally used their naked short selling to artificially lower securities’ prices, enabling them to purchase more shares at a reduced rate.

According to the SEC’s charges, Sabby and Mintz sought to hide their fraudulent transactions. This included using securities procured post-trade to feign compliance with the borrowing or locating prerequisites for trades to the brokers executing those trades. When queried about their trading practices by at least one broker, Sabby and Mintz allegedly falsified details about the transactions.

Carolyn Welshhans, the Associate Director of the SEC’s Enforcement Division, stated, “Sabby and Mintz are accused of attempting to exploit the system for illegal profit. When manipulative practices like naked shorts are used to defraud the market and investors, the SEC will act to ensure those responsible face the consequences.”

The SEC’s lawsuit, lodged in the U.S. District Court for the District of New Jersey, accuses Sabby and Mintz of contravening Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-21 therein. Sabby is also charged with contravening Sections 204 and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2 and 206(4)-7 therein, with Mintz being accused of facilitating these violations. The lawsuit seeks permanent injunctive relief, surrender of unlawfully obtained gains with interest accrued before judgement, and civil penalties.

The SEC’s inquiry was conducted by Edward Reilly and Christopher Mathews, with support from Patrick McCluskey and Brian Shute. The inquiry was supervised by Amy Friedman and Ms. Welshhans. The litigation will be headed by Daniel Maher and Mr. Reilly, under the oversight of David Nasse.