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AMERICAN STOCK EXCHANGE ANNOUNCES TWO DISCIPLINARY ACTIONS FOR VIOLATIONS OF REGULATION SHO SHORT SALE RULES
NEW YORK, July 31, 2007 - The American Stock Exchange® (Amex®) today announced two final disciplinary actions for violations of Securities and Exchange Commission (SEC) Regulation SHO short sale rules in connection with trading activity in threshold securities, which occurred on various options and equity exchanges. In the first action, Scott H. Arenstein and his firm SBA Trading, agreed to a fine of $3.6 million, disgorgement of $1.4 million in trading profits, a censure and a five-year suspension from Amex membership in any capacity, including employment or association with an Amex member or member organization during such period. In the second action, Brian A. Arenstein and his firm ALA Trading, LLC agreed to a fine of $1.2 million, disgorgement of $1.8 million in trading profits, a censure and a five-year suspension from Amex membership in any capacity, including employment or association with an Amex member or member organization during such period.
SEC Regulation SHO generally requires market participants to locate shares to borrow prior to effecting a short sale transaction. However, options market makers receive a limited exemption from this requirement when selling an underlying equity security short to hedge options positions established during the course of bona fide options market making activity.
Despite the fact that neither respondent was acting as a bona fide options market maker in the particular securities in question, each of them improperly utilized this market maker exemption to impermissibly engage in naked short selling by failing to locate securities to borrow and then engaged in a series of close out transactions designed to circumvent his Regulation SHO delivery obligations in such securities by creating the appearance of a bona fide repurchase of the securities he initially sold short. As a result of this violative trading activity, they were able to maintain impermissible naked short positions in a number of Regulation SHO threshold securities for a virtually unlimited period of time.
“Regulation SHO is a critically important framework of regulatory requirements designed to prevent and deter abusive short selling and reduce persistent fails to deliver. The respondents’ circumvention of these requirements was egregious and improperly contributed to persistent fails to deliver in certain Regulation SHO threshold securities,” said Claudia Crowley, Senior Vice President and Chief Regulatory Officer of the Amex. “This settlement should send a strong message to other market participants that trading which involves the improper use of the Regulation SHO market maker locate exemption and circumvention of the requisite delivery obligations are unacceptable and will result in serious sanctions.”
Scott H. Arenstein, SBA Trading, Brian A. Arenstein and ALA Trading consented to findings that they violated SEC Rule 203, Article V, Sections 4(h) and (i) of the Amex Constitution and Amex Rule 958 – ANTE. In settling these matters the respondents neither admitted nor denied the charges.
This violative activity was detected and investigated by the Financial Industry Regulatory Authority (FINRA), formerly the NASD, acting on behalf of the Amex’s Regulatory Division.
The Decisions and related Stipulations of Facts and Consent to Penalty can be viewed at the following link:
About American Stock Exchange
The American Stock Exchange® (Amex®) offers trading across a full range of equities, options and exchange traded funds (ETFs), including structured products and HOLDRSSM. In addition to its role as a national equities market, the Amex is the pioneer of the ETF, responsible for bringing the first domestic product to market in 1993. Leading the industry in ETF listings, the Amex lists 336 ETFs to date. The Amex is also one of the largest options exchanges in the U.S., trading options on broad-based and sector indexes as well as domestic and foreign stocks.