Jul. 1, 2011

Brookside Settlement Suggests That in Calculating Disgorgement Based on a Rule 105 Violation, the SEC Will Look to the Number of Shares Purchased in a Secondary Offering Rather Than the Number of Shares Sold Short Prior to the Offering

In an order dated June 28, 2011 (Order), Brookside Capital, LLC (Brookside) settled SEC allegations that it violated Rule 105 of Regulation M of the Securities Exchange Act of 1934. The SEC adopted Regulation M to foster secondary and follow-on offering prices that are determined by independent market dynamics. For more on secondary offerings, see “Registered Direct Offerings Enable Hedge Funds to Make Advantageously-Structured Investments in Public Equity While Avoiding the Illiquidity and Other Downsides of PIPEs,” Hedge Fund Law Report, Vol. 3, No. 25 (Jun. 25, 2010). For hedge fund managers, the Order is noteworthy for two primary reasons.