The Securities and Exchange Commission logo seen on its headquarters in Washington.The Associated Press
Regulators in the U.S. have charged two brothers who live in Chicago and New York with improperly trading shares of Fairfax Financial Holdings Ltd. and other companies.
The Securities and Exchange Commission alleges in a news release that the brothers, Jeffrey and Robert Wolfson, made more than $17-million in "ill-gotten gains" from transactions involving stocks such as Fairfax, Chipotle Mexican Grill Inc., Novastar Financial Inc. and NYSE Group.
Specifically, the brothers stand accused of naked short selling. Short selling, which is legal, is when an investor borrows shares and sells them. The investor is essentially betting that the stock's price will fall, and they will later be able to buy the shares at a lower price, and return them to the individual or company that they borrowed them from. Naked short selling, which is generally not allowed, is when the investor doesn't really borrow the shares. For instance, they might "borrow" the shares from another naked short seller who doesn't actually have them.
According to the SEC news release, Jeffrey Wolfson was caught saying in a recorded phone conversation: "What I sell them is not guaranteed, it never gets delivered, it's funny paper."
The SEC crackdown marks a major victory for Fairfax, the investment company led by Prem Watsa, which has been pressing the regulator to look into short sales of its stock for years.
In 2006, Fairfax vice-president Paul Rivett wrote a letter to the SEC outlining his concerns about naked short selling, and the impact that he felt it was having on Fairfax. The Toronto-based company delisted from the New York Stock Exchange in 2009, in part because it did not think that the expense and inconvenience of an American listing – including what it saw as improper short trading of its shares – was worth it.
In a press release Tuesday, George Canellos, director of the SEC's New York regional office, said that "by engaging in naked short selling, the Wolfsons had a major advantage over competitors who complied with the law and incurred the costs associated with actually borrowing the securities."
The regulator accuses Jeffrey Wolfson of engaging in illegal naked short sales while he was working as a broker-dealer and a principal trader, and says that he taught his brother how to do it.