NJ Advisor Charged in ‘Naked Short-Selling' Scheme

NJ Advisor Charged in ‘Naked Short-Selling' Scheme

SEC targets scheme in a case that may have implications for ETF traders.

Reviewed by: Lisa Barr
Edited by: Ron Day

The Securities and Exchange Commission charged a New Jersey financial advisory firm and one of its principals with fraud for their roles in a long-running “naked short-selling" scheme that generated more than $2 million in ill-gotten gains.  

The agency charged Sabby Management and managing partner Hal D. Mintz with “misrepresentations and violations of rules for short selling and order making, as well as other violative trading, that generated more than $2 million in illegal profits,” according to a statement

Sabby Management of Upper Saddle River, New Jersey, didn’t respond to a call from etf.com seeking comment.  

Naked short-selling is the illegal practice of short-selling with stocks or exchange-traded funds that may not exist; short sales are bets that a share price will fall, and are handled using borrowed shares.  

The SEC charges may have implications for the ETF industry. A 2018 Wharton School paper concluded that short-selling activity has grown in step with the enormous rise in ETFs’ popularity among investors.   

ETF investors may find short-selling ETFs more “compelling” than short-selling to individual investors, and that regulators and market participants have taken note, according to the paper titled “ETF Short Interest and Failures-to-Deliver: Naked Short-Selling or Operational Shorting.” The authors at the time wrote that “recent enforcement actions against authorized participants by FINRA and Nasdaq underscore this concern about the improper short-selling of ETFs.” 

In the New Jersey case, the SEC alleges that from at least March 2017 through May 2019, the firm “circumvented trading rules to conduct unlawful trades in the stock of at least 10 public companies.”  

The two used stocks they didn’t own or borrow, a common practice in short-selling, to make profits they otherwise wouldn’t have been able to get through legal trades, the SEC says.  

The firm and Mintz also used naked short sales to “artificially deflate” securities prices, which enabled them to grab more shares at cheaper prices. They also attempted to hide their illegal activities from brokers, the regulatory agency alleged. 

“The SEC alleges that Sabby and Mintz attempted to game the system and make an illegal profit,” said Carolyn Welshhans, an associate director of the SEC’s Division of Enforcement, in a press release. 

The agency’s recent charges against Sabby and Mintz may be one more indication of other such enforcement actions to come. 


Follow Michelle Lodge on Twitter @lodgemich 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.