We now have new details about the SEC’s investigation into Appaloosa’s Wells Fargo stock trading activity in late 2008.
Here is what the SEC is investigating:
After two of Appaloosa funds’ sold short 1,034,896 Wells Fargo shares, the two funds bought 125,000 Wells Fargo shares in a secondary offering announced by the bank.
That’s a problem. There is a rule against executing these two trades close together.
The rule: The SEC’s Rule 105 makes it unlawful for any person to sell short the security (in this case, Wells Fargo’s) that is the subject of the offering and purchase the offered securities…if such short sale was effected during the period that is beginning five business days before the pricing of the offered securities.
So the SEC had to investigate Appaloosa. Appaloosa is in breach of Rule 105 because they sold short Wells Fargo within 5 days of Wells Fargo’s announcement of a second offering and then participated in Wells Fargo offering.
Specifically, Appaloosa’s short sale of 1,034,896 Wells Fargo shares took place between October 31 2008 and November 5 2008. Wells Fargo announced a secondary offering after the close of the market on November 5 2008. Then Appaloosa bought 125,000 shares.
Because this is an obvious SEC red flag, it raises doubts that Appaloosa intended misconduct. So does their letter to investors, which explains what happened.