The anti-manipulation rule you can break without intending anything
Rule 105 of Regulation M bars buying in a follow-on offering after short selling that stock in the days before pricing. The SEC's orders say it applies irrespective of intent, so an order finds a rule breach, not a plan to manipulate. The library holds 84 records under it because the SEC treats the conduct as manipulation-adjacent.
On the morning of 28 May 2009, one team at UBS O’Connor sold 125,000 Terex shares short at an average of $13.66. That evening Terex priced a follow-on offering at $13. Other teams at the same firm then put in for shares, and the fund that had sold short was allocated 132,128 of them at the offering price. The SEC’s order, entered four years later, puts the fund’s profit on the short sales at $82,550.61, with a further benefit of $4,156.22 on the 7,128 shares beyond the shorted amount. (order)
What the order does not say is that anyone set out to push Terex down. It says the firm’s policies rested on a mistaken belief that its investment teams counted as separate accounts, so that one team could short while another bought. That mistake was enough. The SEC found sixteen such breaches by UBS O’Connor between January 2009 and March 2011, and the firm agreed to a cease-and-desist order, disgorgement of $3,787,590, interest of $369,766 and a penalty of $1,140,000, without admitting or denying the findings.
That is the shape of Rule 105. It is the largest technique in this library’s benchmark and cross-market family, 84 records as of 2026-09-20, and the one that sits least comfortably in it. The argument of this post is narrow. An order under Rule 105 is not a finding that anyone intended to manipulate a price, and the SEC’s own orders say so. The SEC nevertheless treats the conduct as manipulation-adjacent, and the pattern of enforcement follows from that.
What does the rule actually prohibit?
Rule 105 of Regulation M is short. Its operative sentence, in 17 C.F.R. § 242.105(a), makes it unlawful, in connection with a registered cash offering of equity securities, to sell the stock short and to buy the offered securities from an underwriter or a participating broker or dealer, if the short sale fell inside the restricted period. That period is the shorter of two windows, both ending at pricing: five business days back, or back to the first filing of the registration statement. The rule covers only offerings sold on a firm commitment basis.
Two features of that timeline matter for everything that follows.
First, the violation is the pair, not either half. A short sale in the window is lawful if the seller stays out of the offering, and a purchase in the offering is lawful if there was no window short. Nothing requires the offering shares to be used to close out the short. The rule did once turn on covering. The SEC’s 2007 adopting release, Exchange Act Release No. 34-56206, removed that element with effect from 9 October 2007 because, it said, covering was being disguised by ever more elaborate structures. What remained was a bright line: short in the window, then no purchase.
Second, there is a way through. The bona fide purchase exception lets a trader who shorted in the window still buy in the offering, if before pricing they made real purchases at least equal to the whole short, in regular hours, after the last short sale and no later than the business day before pricing, and made no reported short sale in the final thirty minutes of trading on that day. There are also exceptions for separate accounts and for registered investment companies. Most of the orders in this library are about traders who believed an exception applied and were wrong, or who never checked.
Does intent matter?
Not to the finding, and the SEC says so repeatedly. The adopting release calls the rule prophylactic and says its provisions apply irrespective of a short seller’s intent. That sentence, or a close variant, is in all 75 of the administrative orders in this library that were available as cached copies of the SEC’s own documents, from 2013 to 2024. Five later orders, from 2024 and 2025, read on sec.gov, and the SEC’s announcements of two 2023 court actions, repeat it in the form “regardless of the trader’s intent.” An SEC staff risk alert published on 17 September 2013 puts it plainly: the rule does not require intent on the part of the short seller.
The word “willfully” complicates this, and it should not. Some orders, UBS O’Connor’s among them, find that the respondent willfully violated Rule 105. A footnote in that order defines willfully to mean only that the person knew what they were doing, with no need to know they were breaking a rule. It is a statement about awareness of the act, not about a purpose to move the price.
So the honest reading of a Rule 105 order is a settled finding, made without admission or denial, that a prohibited sequence of trades took place and profited the respondent. It is not a fraud finding and it is not a finding of manipulation. The SEC’s 2013 announcement of the first sweep, press release 2013-182, was headed as a crackdown on potential manipulation. A reader who concludes that each firm was found to have manipulated a market has read more into the headline than the orders support.
Why treat it as manipulation at all?
Because of the discount. Follow-on offerings are normally priced below a recent market price. The SEC’s release explains that a person expecting an allocation therefore has a reason to sell short just before pricing, which can press the market price down and the offering price with it, and then to buy the allocation, locking in a gain with little market risk. The issuer or selling shareholder receives less.
BlackRock’s order shows the arithmetic. Across three offerings between April 2010 and March 2011, the SEC counted profits of $1,122,400, of which the MetLife offering above accounts for $308,904. The order puts BlackRock’s disgorgement at that figure, adds $22,471.13 of prejudgment interest and a penalty of $530,479. Nothing in it alleges that BlackRock’s short sales of 3,377 to 15,011 shares, against allocations of 60,000 to 1.2 million, moved a stock by any measurable amount. The rule does not ask. (order)
That is the sense in which the conduct fits the library’s benchmark and cross-market family. It moves one price, the market price that anchors the offering, or is at least placed to move it, to profit somewhere else, on the discounted allocation. The rule reaches anyone who does both, and the respondents range from hedge fund advisers to a pension plan board to individual traders.
What does the record hold?
The library holds 84 records under this technique, and most of them come from two days.
On 16 September 2013 the SEC instituted proceedings against 23 firms, announced the next day as 22 settled and one contested, with over $14.4 million in sanctions. On 16 September 2014 it announced actions against 19 firms and one individual trader, over $9 million in all, saying it had worked with FINRA and the examination staff and used one method to calculate profits and penalties. Twenty-three records here carry the 2013 date, twenty the 2014 date, and six a further date in October 2015: 49 of the 84 records fall on three days. That is a pattern of one regulator running a data-driven programme, and it says nothing reliable about how many people broke the rule.
There is also a hole at the front. The SEC’s 2013 risk alert says it had settled over 40 Rule 105 actions since January 2010. The earliest record here is from February 2013. The library’s count is a count of what was ingested, not of what was brought.
The tail is different. A 2016 order against a Pennsylvania individual and seven companies he controlled describes 130 separate offerings between 2010 and 2014, with short sales and offering purchases spread over 69 accounts at seven broker-dealers, and a penalty of $707,132 on $1,275,985 of disgorgement (order). Worldwide Capital and Jeffrey W. Lynn were found to have breached the rule in 60 offerings between 2007 and 2012, and were ordered to pay $4,212,797 in disgorgement, $526,358 in interest and $2,514,571 in penalty, jointly and severally, the largest penalty for Rule 105 conduct in the set (order). These are sustained patterns of trading, and the SEC announced the Worldwide order as its largest monetary sanction for Rule 105 to that date (press release 2014-43). Both orders still describe them as breaches of the rule, and both settled.
What does breaking it cost?
The usual order combines a cease-and-desist order, disgorgement of the profit, prejudgment interest and a civil penalty. The median penalty is about $107,000. The bar that stands out is the flat one: twenty orders impose exactly $65,000, all of them dated between 2013 and 2015, and 18 of them on the three sweep days. In one, a $4,091 disgorgement came with a $65,000 penalty (order). In a dozen others the penalty is about half the disgorgement.
Disgorgement produces the largest sums. Weiss Asset Management was ordered in 2022 to pay $6,508,792.81 in disgorgement, the largest in the set, plus interest and a $200,000 penalty (order). Two 2014 orders, against SuttonBrook Capital Management and Nob Hill Capital Management, computed profits of $2,635,642 and $95,902 and then waived all or nearly all of the payment on the respondents’ sworn statements of financial condition, with no penalty (SuttonBrook, Nob Hill). The library’s money fields for those two show the computed figures, not the amounts actually payable.
Where does the label fit, and where does it not?
It fits in one respect. The rule protects a price that is supposed to come from supply and demand, and what it prohibits is trading that can bend that price toward a profit collected in a different place. The SEC’s own description of its purpose is about pricing integrity.
It does not fit in the respects that usually define manipulation. No false signal is sent. Nothing is misrepresented. Neither trade is unlawful alone. No one has to be shown to have planned anything, and the price does not have to have moved. A trader with no purpose to move a price can still be in breach, which is the point of a prophylactic rule and the reason the SEC calls it that. Compare short and distort, where the falsity of the claims is the offence.
Two cautions on the record. The figures above are from this library, which holds what regulators announced and what was ingested, and which is not a sample of market conduct. And an order is not proof that a price moved; some orders record offerings that priced above the short-sale price, as BlackRock’s PVH offering did. What the orders support is narrower and firmer: the SEC has repeatedly found, in settled orders, that firms which shorted in the window bought in the offering, and it has treated the resulting profit as the harm to be taken back.
The full description of the technique, with the case list and penalty statistics that update as the library grows, is on the Rule 105 offering shorts page.