The Securities and Exchange Commission on February 17, 2023 filed a settled complaint in the United States District Court for the District of Connecticut against investment advisory firm Candlestick Capital Management LP for violating an SEC Rule when it purchased stock in a public offering for two private fund clients after selling short the same stock for those clients, during a time period when the SEC Rule prohibited those purchases. The complaint also names the two private fund clients, Candlestick Master Fund LP and Candlestick US F&F Fund LP, as relief defendants. Candlestick Capital has agreed to pay an $810,000 penalty to settle the charges. The two private fund clients have agreed to disgorge the profits received from Candlestick Capital’s unlawful trading, totaling approximately $1.6 million, plus prejudgment interest. The settlement is subject to court approval.
The SEC’s complaint alleges that in June 2020 Candlestick Capital violated Rule 105, which prohibits short selling an equity security during a restricted period (generally five business days before a covered public offering) and then purchasing the same security in the offering, absent an exception. The Rule applies regardless of the trader’s intent, and is designed to prevent potentially manipulative short selling before the pricing of covered offerings.
According to the SEC’s complaint, after concluding it had violated Rule 105, Candlestick Capital did not initiate a formal review of its trading history or self-report its violation to the Commission. The complaint alleges that Candlestick Capital only acknowledged the violation after Commission staff asked about it during a routine examination in 2021. According to the complaint, Candlestick Capital has since undertaken remedial steps, including revising its Rule 105 policies and procedures.
The SEC’s complaint charges Candlestick Capital with violating Rule 105 of Regulation M under the Securities Exchange Act of 1934. Without admitting or denying the allegations in the SEC’s complaint, Candlestick Capital consented to the entry of a final judgment ordering it to pay a penalty of $810,000. Without admitting or denying the SEC’s allegations, Candlestick Master Fund has agreed to the entry of a final judgment ordering it to disgorge profits of $1,565,305 and to pay interest of $89,439, and Candlestick US F&F Fund has agreed to the entry of a final judgement ordering it to pay disgorgement of $55,092 and to pay interest of $3,147. Candlestick Capital has also agreed to the entry of a related order in SEC administrative proceedings finding that it violated Rule 105, based on the same facts as alleged in the complaint. Without admitting or denying the SEC’s findings in the order, Candlestick Capital agreed to cease and desist from committing or causing violations of Rule 105.
The SEC’s investigation was conducted by Anne Hancock, Dawn Edick, Chip Harper, and Amy Gwiazda of the Boston Regional Office, with assistance from Wendy Kong of the Office of Investigative and Market Analytics.