Berliner charged with securities fraud

The SEC has charged Paul Berliner, formerly of the Schottenfeld Group LLC, with securities fraud and market manipulation.

It claims (he neither admits nor denies -- though he has settled) that he intentionally spread falsehoods about Alliance Data Systems (ADS) while selling ADS short.

Some background. Last May, ADS -- a company that does something for retailers that involves processing their credit card transactions -- agreed to be acquired by The Blackstone Group, at a price of $81.75 a share. During the period between such an announcement and the actual consummation of the sale, the price of the target company often fluctuates, sometimes rising avove the bid price on speculation that the would-be buyer will have to improve its offer. Sometimes, on the other hand, the target company's price will stay at a discount below the bid price because there will be some skepticism in the market about whether the deal will go through -- whether, especially, the stockholders and the necessary regulatory bodies will sign on to it.

In fact, the ADS/Blackstone merger never happened. The reasons? that's in litigation. Blackstone says it was a regulatory problem -- the Comptroller of the Currency raised objections, because ADS owns a bank. [Actually, it owns two banks, but only one of them is under the regulatory authority of the Comptroller.]

At any rate, the merger was still pending in November, when the stock price for ADS went for its thrill ride, at the Red Flags Theme Park.

Enough background. The gist of the complaint is that during a five minute period in the early afternoon of November 29, Mr. Berliner sent instant messages to 31 other traders/securities professionals that Blackstone was twisting ADS' arms into accepting a lower stock price as part of the merger -- that it would acquire the company at only $70 a share.

When Berliner began disseminating this misinformation, ADS price was selling at $77 a share, so some (justified) skepticism that the $81.75 deal would ever go through was already priced into the stock. But, according to the SEC, what Mr. Berliner was i-m-ing around was simply false: Blackstone had not proposed a lower acquisition price, nor was the ADS board "now meeting" on the subject.

As the rumor spread, the stock price cratered. The intra-day low was $63.65 -- or 17% less than the pre-rumor value.

This enabled Berliner to cover his substantial short position and pocket a quick profit.

In consequence, the SEC brought this lawsuit in the federal district court in Manhattan, and simulatneously settled it. Mr. Berliner agreed to "disgorge" (I love that word) $26,129 in profits and interest, to pay a maximum third-tier penalty of $130,000, and to consent to the entry of an SEC order barring him from association with any broker or dealer.

There is more that might be said about this case, of course. I hope to say a bit of it tomorrow.