Sandell Asset Management Draws SEC Scrutiny fSandell Asset Management Draws SEC Scrutiny for Short Sales
By Katherine Burton and David Scheer
Oct. 31 (Bloomberg) -- Sandell Asset Management Corp., a New York-based hedge-fund manager with $4.5 billion in assets, is under investigation by the U.S. Securities and Exchange Commission for alleged improper trading of Hibernia Corp. shares last year, two investors in the firm said.
The SEC staff plans to recommend that the commission take civil action against Sandell, according to the investors, who said they received a letter from the firm explaining the situation. John Heine, an SEC spokesman in Washington, and Shawn Pattison, a Sandell spokesman, declined to comment.
The probe involves ``naked shorting,'' a form of short selling, the investors said. In a short trade, which is legal, an investor borrows shares and sells them, betting the price will decline and the shares can be repaid later at a lower price, generating a profit. A naked short is when the shares aren't borrowed before the sale.
``There seems to be a trend that the regulatory agencies are looking into naked short-selling matters more often,'' said Ross Intelisano a lawyer at Rich & Intelisano LLP in New York.
Not all naked shorting is improper. There are exemptions, such as for brokers maintaining a market for a stock. Regulators pursuing violations may also be required to prove an element of fraud, such as a plan to manipulate prices.
Sandell Asset Management, founded in 1998 by Thomas Sandell, a former senior managing director at Bear Stearns Cos., is cooperating with the SEC, according to the investors, who declined to be identified because the probe isn't public. They said the firm has kept them informed about the investigation since it started earlier this year.
The fund has returned 18 percent so far in 2006, they said, compared with about 9 percent for similar funds, according to data compiled by Chicago-based Hedge Fund Research Inc.
Hit by Katrina
The SEC is looking into whether Sandell broke securities rules during trading of Hibernia, a New Orleans-based bank that agreed to be bought by Capital One Financial Corp. in March 2005. Sandell, which bets on corporate events like mergers, wagered Hibernia's shares would rise after Capital One made its $5.35 billion bid.
The shares traded just below Capital One's price of $33 a share until Aug. 30, 2005, a day after Katrina slammed into the Gulf Coast and two days before the deal was scheduled for completion. Over the next week, Hibernia shares fell more than 11 percent as it became clear New Orleans wouldn't quickly rebound from a storm that killed thousands of people and left 80 percent of the city under water.
It was then that Sandell allegedly sold short Hibernia without borrowing the shares.
Activist Investor
Capital One, the No. 5 U.S. credit-card issuer, cut the price of the purchase of Hibernia, Louisiana's biggest lender, to $5 billion, or $30.49 a share in cash and stock, on Sept. 7.
Before founding his firm, Sandell was a senior managing director for Bear Stearns's merger arbitrage department, which wagers on the shares of companies involved in takeovers. Prior to joining Bear Stearns, Sandell worked in Paris as a securities analyst for Atlantic Finance and as head of equity research at Group Delphi.
He received a bachelor's degree in international business administration and economics from Uppsala University in Sweden and graduated from Columbia Business School in 1989. At one time, he was the No. 2 ranked badminton player in Sweden.
Sandell is also an activist investor, pushing companies to make changes to improve their stock prices. In the past year, he's worked with Nelson Peltz's campaigns at ketchup maker H.J. Heinz Co. and fast-food restaurant chain Wendy's International Inc.
To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net ; David Scheer in Washington dscheer@bloomberg.net
Last Updated: October 31, 2006 15:59 EST