Full opinion text
FINDINGS OF FACT AND CONCLUSIONS OF LAW P. KEVIN CASTEL, District Judge. The Securities and Exchange Commission (“SEC”) brings this action against Colonial Investment Management LLC (“CIM”), Colonial Fund LLC (“Colonial”), and Cary G. Brody (“Brody”) asserting multiple violations of Rule 105 of Regulation M under the Securities Exchange Act of 1934 (“Exchange Act”). 17 C.F.R. § 242.105; see also 15 U.S.C. § 78u(d)(l). The SEC claims that, with respect to eighteen public secondary offerings between 2001 and 2004, defendants, a hedge fund and an affiliated person and entity, violated Rule 105 by using shares purchased in the offerings to cover short sales that they effected during the five business days before the pricing of those offerings. The SEC seeks a final judgment permanently enjoining defendants from further violations of Rule 105, ordering defendants to disgorge any ill-gotten gains, including prejudgment interest, and imposing a civil monetary penalty on Brody. The case was tried to the Court without a jury on May 5-7, 11-12, and 18, 2009. This Opinion sets forth the Court’s Findings of Fact and Conclusions of Law. Fed.R.Civ.P. 52(a). For the reasons explained below, the Court finds that the SEC has proven that defendants violated Rule 105 on each of the eighteen alleged transactions, and that a permanent injunction, disgorgement, and a civil penalty are all warranted. FINDINGS OF FACT 1. BACKGROUND A. Short Selling 1. A “short sale” is defined as “any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.” 17 C.F.R. § 242.200(a). Short selling can be a logical trading strategy for a trader who believes that the price of shares is likely to decline over the near-term. See Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir.1998). To sell short, the trader typically borrows the shares from a broker who obtains them either from its own reserves or from an external source. See id. The trader then sells the borrowed shares in the open market. See id. At this point, the trader has an “open short position” in the stock. At some point in the future, the trader “covers” the short position by purchasing an identical number of shares and returning them to the lender. See id. If, as the trader hopes, the share price declines, the trader earns a profit equal to the difference between the price at which she sold short and the price at which she purchased the shares back to cover the short position (not taking into account fees or commissions). See id. Short selling can be “extremely risky” because if the stock price rises, the trader must cover the short position at a loss. Id. 2. As a general rule, short selling is a permissible and “well-established securities trading practicef ].” Id. (footnote omitted). Indeed, the SEC “has long held the view that short selling provides the market with important benefits, including market liquidity and pricing efficiency.” SEC Release No. 34-59748, 74 Fed. Reg. 18042, 18044 (Apr. 20, 2009). But “Although short selling serves useful market purposes, it also may be used to illegally manipulate stock prices.” Id. (footnote omitted). Thus, the SEC has promulgated various restrictions on short selling. B. Secondary Offerings 3. A secondary offering — also referred to as a “follow-on offering” — is an issuance of shares by a company that already has had an initial public offering. Shares from secondary offerings are often sold to buyers, such as institutional investors or retail networks, through a “syndicate,” consisting of lead managers (“book runners”) among other members. The syndicate members are broker-dealers who underwrite the secondary offering. See Kanterman Decl. ¶ 6; Watson Decl. ¶ 5. 4. To purchase shares in a secondary offering, a prospective buyer must “indicate” an interest for a certain quantity of shares by communicating with a member of the syndicate. Tr. 14. An indication is only a request for shares, and is not binding. Tr. 16. 5. On the date set as the “pricing date,” after the market closes, the price of the secondary offering is set by a negotiation between the book runners and issuer. See Kanterman Decl. ¶ 8. Before the market opens on the next trading day, the shares are “allocated” to buyers that have made an indication of interest. Each buyer is then notified of the number of shares it has been allocated, and the buyer must accept or reject that allocation. Once all newly offered shares have been allocated and accepted, the syndicate “breaks” and the offering “terminates.” At that point, the allocated shares can trade free of restriction. Typically, an offering terminates before the market opens for trading on the day of allocation. See id. ¶¶ 9-10; Watson Decl. ¶¶ 11,13, 17. C. Rule 105 6. Rule 105 “govern[s] short selling in connection with a public offering,” such as a secondary offering. Anti-Manipulation Rules Concerning Securities Offerings, 1996 WL 734255, at *4 (Dec. 20, 1996) (“December 1996 Release”). 1. The Rule at the Time of the Alleged Violations 7. The SEC alleges that defendants violated Rule 105 with respect to eighteen secondary offerings that took place between 2001 and 2004. At that time, Rule 105 provided, in pertinent part, that “[i]n connection with an offering of securities for cash pursuant to a registration statement ... filed under the Securities Act, it shall be unlawful for any person to cover a short sale with offered securities purchased from an underwriter or broker or dealer participating in the offering, if such short sale occurred during ... [t]he period beginning five business days before the pricing of the offered securities and ending with such pricing.... ” 17 C.F.R. § 242.105(a) (2006). This five-day time-frame is referred to as the “restricted period.” Thus, Rule 105 prohibited covering a short sale with securities purchased in a registered offering if the short sale occurred during the restricted period. 2. The Purpose of Rule 105 8. The SEC has explained that the purpose of the rule is “to prevent manipulative short selling prior to a public offering by short sellers who cover their short positions by purchasing securities in the offering, thus largely avoiding exposure to market risk. Such short sales could result in a lower offering price and reduce an issuer’s proceeds.” December 1996 Release, 1996 WL 734255, at *35. The SEC has further explained: The reason for the prohibition is that pre-pricing short sales that are covered with offering shares artificially distort the market price for the security, preventing the market from functioning as an independent pricing mechanism and eroding the integrity of the offering price. Prices of “follow-on offerings” are typically based on a stock’s closing price prior to the time of pricing, and thus short sales during the period immediately preceding pricing that reduce the market price can result in a lower offering price. The goal of Rule 105 is to promote offering prices that are based upon open market prices determined by supply and demand rather than artificial forces.... A trader who sells short pre-pricing and knows or has a high degree of assurance that he will be able to obtain covering shares in the offering does not assume the same market risk as a short seller who intends to cover using open market shares, and may not be contributing to pricing efficiency and true price discovery. Therefore, the rule prohibits pre-pricing short sales, effected within five days of pricing of an offering, from being covered with offering securities acquired from an underwriter or other broker-dealer participating in the offering. Moreover, this manipulative conduct can negatively affect the issuer, which receives reduced offering proceeds as a result of the lower offering price, and harms the market by inhibiting the capital raising process. In addition, the presence of such shorting activity can lead other investors, who believe that the short selling is the result of an evaluation of the stock’s value, to sell short as well. By prohibiting such artificial selling activity, the Rule contributes to the integrity of the capital raising process. Short Sales, 69 Fed. Reg. 48008, 48020 (Aug. 6, 2004) (“August 2004 Release”) (footnotes omitted). 3. SEC Guidance on Rule 105 9. On November 6, 2003, the SEC proposed rules that included amendments to Rule 105. Short Sales, 68 Fed. Reg. 62972 (Nov. 6, 2003) (“November 2003 Release”). The SEC stated: Recently, the Commission has become aware of, and taken action, with respect to conduct designed to evade, but which violates Rule 105.... This conduct may involve short sales within the restricted period of Rule 105, the purchase of offering shares, and the contemporaneous sale and purchase of the same class of shares as the offering shares. For example, an individual may sell the shares in the market and immediately purchase an equivalent number of shares. Where the transaction is structured such that there is no legitimate economic purpose or substance to the contemporaneous purchase and sale, no genuine change in beneficial ownership, and/or little or no market risk, that transaction may be a sham transaction. The Commission would continue to consider enforcement action against those participating in sham transactions structured in a manner to give the appearance of compliance with Rule 105, but in fact, violate the rule. We are not proposing revisions to Rule 105 with respect to activities that violate the current rule. We seek comment, however, on criteria in addition to economic purpose or substance, change in beneficial ownership, and market risk, that may distinguish sham transactions from legitimate trading. Id. at 62999 (footnote omitted). 10. On August 6, 2004, the SEC “issue[d] interpretive guidance to address transactions that violate Rule 105 by utilizing offering-shares to cover short sales made in the pre-pricing restricted period, while structuring the transactions so as to falsely give the appearance that the short sale has been covered using shares purchased in the open market. Transactions structured in this way violate Rule 105.” August 2004 Release, 69 Fed. Reg. at 48021. As an “illustrative” example of a “sham transaction” that violates Rule 105, the SEC described a situation in which a trader effects pre-pricing short sales during the Rule 105 restricted period, receives offering shares, sells the offering shares into the open market, and then contemporaneously or nearly contemporaneously purchases an equivalent number of the same class of shares as the offering shares, which are then used to cover the short sales. Where the transaction is structured such that there is no legitimate economic purpose or substance to the contemporaneous purchase and sale, no genuine change in beneficial ownership, and/or little or no market risk, that transaction may be a sham transaction that violates Rule 105. Id. (footnote omitted); see also Proposed Rules, 71 Fed. Reg. 75002, 75004 (Dec. 13, 2006) (“December 2006 Release”) (“Once the restricted period short sale is executed and the person purchases ... the offered securities, the position is economically flat. A contemporaneous or nearly contemporaneous post-offering purchase and sale does not undo the Rule 105 violation.”) (footnote omitted). An example of this would be where an individual places limit orders to sell and buy the same amount of shares, and the transaction is crossed in the individual’s brokerage account. There is no change in beneficial ownership and no market risk associated with the transaction, i.e., these are “wash sales.” Although the individual has attempted to disguise the fact that the offering shares are being used to cover the short sale, in fact, he is covering his pre-pricing short sale with shares obtained in the offering. August 2004 Release, 69 Fed. Reg. at 48021 n. 126 (citing Ascend Capital, LLC, Securities Exchange Act Release No. 48188 (July 17, 2003)). The SEC explained that it was “not ... necessary or desirable to add rule language to address these kinds of trading, as this activity violates the current rule and can vary in its details.” Id. at 48021. 11. Also in the August 2004 Release, the SEC eliminated the “shelf offering exception.” Id. at 48020. Prior to this amendment, Rule 105 did not apply to shelf offerings filed under Rule 415. See November 2003 Release, 68 Fed. Reg. at 62998. 4. Amendments to Rule 105 12. On December 13, 2006, the SEC, noting the “evidence of non-compliance with the current rule,” proposed “amending Rule 105 to make it unlawful for a person to effect a short sale during the Rule 105 restricted period and then purchase, including enter into a contract of sale for, such security in the offering.” December 2006 Release, 71 Fed. Reg. at 75002. On August 10, 2007, the SEC stated that it was adopting an amendment to Rule 105 that “changes the prohibited activity from covering to purchasing the offered security, in order to put an end to strategies that obfuscated the prohibited covering but replicated its economic effect.” Final Rule, SEC Release No. 56206, 2007 WL 2254466, at *5 (Aug. 10, 2007) (footnote omitted) (“August 2007 Release”). The SEC noted that “[t]he prohibition on purchasing offered securities also provides a bright line demarcation of prohibited conduct consistent with the prophylactic nature of Regulation M.” Id. (footnote omitted). 13. Thus, effective October 9, 2007, amended Rule 105 provides that “[i]n connection with an offering of equity securities for cash pursuant to a registration statement ... filed under the Securities Act ..., it shall be unlawful for any person to sell short ... the security that is the subject of the offering and purchase the offered securities from an underwriter or broker or dealer participating in the offering if such short sale was effected during the [Restricted Period].” 17 C.F.R. § 242.105(a) (2009). Amended Rule 105 generally prohibits purchasing a security in a registered offering if the buyer has a restricted period short position in that security. The transactions at issue in this case occurred prior to the October 2007 amendments to Rule 105. 5. Alleged Violations of Rule 105 14. The SEC claims that defendants violated Rule 105 between 2001 and 2004, before the rule was amended in 2007. The SEC alleges that defendants violated Rule 105 by covering restricted period short positions with shares purchased in secondary offerings of eighteen issuers: CoorsTek Inc. (“CRTK”), Intersil Corp. (“ISIL”), Endo Pharmaceuticals Holdings Inc. (“ENDP”), The Midland Co. (“MLAN”), Cubist Pharmaceuticals Inc. (“CBST”), Essex Corp. (“KEYW”), Nastech Pharmaceutical Company (“NSTK”), Legg Mason, Inc. (“LM”), Technical Olympic USA, Inc. (“TOUS”), SupportSoft, Inc. (“SPRT”), White Electronic Designs Corp. (“WEDC”), Net2Phone Inc. (“NTOP”), Komag, Inc. (“KOMG”), Palmsource Inc. (“PSRC”), Integrated Silicon Solutions, Inc. (“ISSI”), Pain Therapeutics Inc. (“PTIE”), Atari Inc. (“ATAR”), LCC International Inc. (“LCCI”). (Amended Compl. ¶¶ 19-55.) With respect to all of these transactions, it is undisputed that defendants were allocated shares in the secondary offerings and it is undisputed that, at the time of each allocation, defendants had a restricted period short position in the stock. Thus, the central issues to be tried were (1) whether defendants used shares from the allocations to cover their restricted period short positions, and (2) if so, what relief, if any, should be granted. 15. With respect to seven of the transactions, defendants conceded before trial (MLAN, CBST, KEYW, NSTK, and LM) or at trial (CRTK and ENDP) that then-trades violated Rule 105. See Tr. 587-88, 600-601, 652-54, 717, 788-89; see also FPTC at 3, 5-6. Thus, with respect to those seven transactions, liability has been established and the sole remaining issue is relief. 16. Of the eleven transactions for which liability was not conceded, with respect to ten of them (WEDC, ATAR, PTIE, TOUS, SPRT, NTOP, LCCI, KOMG, ISSI, and PSRC), the SEC further alleges that defendants structured their trading with “sham transactions” designed to hide their unlawful activity. (See Amended Compl. ¶¶ 32, 34, 36, 38, 40, 42, 44, 46, 48, 50.) II. COLONIAL A. Management and Structure 17. Colonial is a private hedge fund headquartered in New York, New York. Colonial holds itself out as a private investment company under Section 3(c)(1) of the Investment Company Act of 1940. 15 U.S.C. § 80a-3(c)(l). 18. Colonial was formed in 1998 by Brody and Jeffrey Miller, among others. J. Miller Deck ¶ 4. Brody and Miller are Colonial’s two principals. Brody Deck ¶ 4; Tr. 413-14. Brody and Miller also are the managing directors of, and are investors in, Colonial. PTO Stip. 5; Brody Deck ¶ 9; see J. Miller Deck ¶ 4. 19. CIM is Colonial’s managing member and adviser. CIM’s managing member is Colonial Asset Management Advisors, Inc., of which Brody is the sole principal and president. PTO Stip. 4; PX-112 at CFLLC 0000599-600. 20. Brody and Miller are both sophisticated professional traders. 21. Brody began his career in the securities business in 1992 as a cold caller with Merrill Lynch. From 1992 to 1993, he worked for Weiskopf Silver Equities as an assistant trader and back office reconciler and he also traded equities and convertibles. Brody Deck ¶ 7. He graduated with a degree in finance, passed his Series 7 examination to become registered as a securities broker, and has taken courses in accounting and risk management. Id. ¶¶5-6; Tr. 462. In 1994, Brody joined A.F. Bruan & Company, where he traded equity securities and managed a team of traders. Brody Deck ¶ 8; Tr. 463. 22. Brody is Colonial’s president, head portfolio manager and head trader. Tr. 463. He supervised all traders and other portfolio managers at Colonial. See Tr. 318-19, 463-64, 634. At all relevant times, Brody supervised Colonial’s back office operations. Tr. 464, 634. Brody ultimately is responsible for all of Colonial’s trading and investment decisions. Tr. 336, 476; PX-112 at CFLLC 0000600. Brody was responsible for covering open short positions at Colonial and for ensuring that those covering transactions did not run afoul of Rule 105. Brody Decl. ¶ 16; J. Miller Decl. ¶ 52. 23. Miller played a lead role in indicating an interest for Colonial in secondary offerings. J. Miller Decl. ¶ 7; Brody Decl. ¶ 11; Tr. 515. 24. During the period of 2001 through 2004, Miller researched and analyzed approximately thirty-five secondary allocations per week. Tr. 418. He prepared memoranda in connection with his secondary offering research. Tr. 417. Miller sometimes shared his secondary offering research with Brody. Tr. 535. B. Prime Brokers and Trading Systems 25. During the relevant time period, Colonial had two prime brokers: Banc of America Securities LLC (“BAS”) from November 2000 until early 2003; and Goldman Sachs Execution and Clearing (“GSEC”) from 1998 to 2000 (when Colonial switched to BAS) and 2003 (when Colonial switched back to GSEC) to the present. See Lewis Decl. ¶ 7; D. Miller Decl. ¶ 6. 26. Colonial’s prime broker for the relevant transactions in CRTK and ISIL was BAS, and for all other relevant transactions was GSEC. 27. A prime broker is a broker that settles and clears trades for its customers, whether those trades are executed at the prime broker or elsewhere, and also performs various record keeping functions for its customers. D. Miller Decl. ¶ 6. “Settling” means processing a purchase and delivery of a purchase or sale of a security. “Clearing” means recording the owner of a security that is purchased or sold. Lewis Decl. ¶ 5. It is a customer’s responsibility to report its trading accurately and to otherwise instruct its prime broker so that the prime broker can properly settle and clear trades. See D. Miller Decl. ¶ 8; PX-26. 28. Colonial reported its daily trading activity to its prime broker at the end of each day. Brody Decl. ¶ 22. Before the market opened for trading the next trading day, Colonial received reports from its prime brokers, which revealed Colonial’s securities positions and trading profit and loss figures (“P & L”) as of the close of the market on the previous trading day. D. Miller Decl. ¶ 31; Tr. 212-13, 356, 359. Colonial’s back office made sure that the equity positions and P & Ls reported by the prime brokers matched what Colonial believed they should be. Tr. 356. If there was a discrepancy in the equity positions or P & Ls, Colonial’s back office and its prime broker engaged in a reconciliation. Tr. 362-63. Colonial’s prime broker also received trade reports from various executing brokers utilized by Colonial. The prime broker then compared Colonial’s reports with the executing brokers’ reports and sought to reconcile any discrepancies (or “trade breaks”) between Colonial and its executing brokers by the open of the next trading day. D. Miller Decl. ¶ 14. 29. Colonial placed its trades with various executing brokers or directly through the Routing and Executing Dot Interface (“REDI”) or Instinet (“INET”) systems (discussed below), and reported the trades daily to its prime broker. Both prime brokers provided defendants with daily summaries reflecting positions and profit and loss data as of the close of the prior trading day, and defendants could access those reports at any time. Tr. 56, 104-05, 212-13, 359, 361-62, 411, 539-40, 763-64. 1. Banc of America Securities LLC 80. BAS customers interfaced with BAS through a secure internet portal, “primebroker.com,” through which they could access information, post trade activity and view various reports concerning their account. BAS customers could also use a software application called “Trade Blotter” to upload their daily trading activity electronically to BAS for processing. Lewis Decl. ¶ 8. 31. Unless a customer elected otherwise, BAS used a First-In-First-Out (“FIFO”) liquidation method, meaning that oldest short positions were covered first. Tr. 119-22. Customers could choose a different liquidation method, whether for all of their transactions or on a transaction-by-transaction basis, by instructing BAS representatives or by entering the changes themselves into BAS’s system. Tr. 121-22. BAS records indicate that Colonial’s prime brokerage account used a FIFO liquidation method at all relevant times. Lewis Decl. ¶ 29. 2. Goldman Sachs Execution & Clearing, L.P. 32. During the relevant time period, Colonial had two prime brokerage accounts at GSEC. D. Miller Decl. ¶ 10. Account 7SE2 was (and still is) a “direct” client account. Account 4VF5, which was opened in July 1998 and closed in August 2005, was an “introduced account,” introduced by Carlin Equities Corp. (“Carlin”). Id. ¶ 11. Each of these two “base accounts” had subaccounts associated with it. Id. ¶ 18. One of the subaccounts, referred to as a type “1309” “short against the box” or “short vs. box” account, enabled GSEC customers to hold a short position open “against the box,” that is, to maintain a short position in a stock while also holding a long position in that stock. Tr. 215-16. 33. GSEC’s standard practice was that if a customer had a short position in a particular security in a particular base account and the customer purchased or otherwise acquired shares of that security, those purchases and receipts would be netted against the open short position. However, the customer could give specific instructions otherwise. D. Miller Decl. ¶ 20; Tr. 233-34. GSEC customers can be short against the box only if the short position is held in a “1309” “short against the box” subaccount and the long position is held in a different subaccount. D. Miller Decl. ¶ 21; Tr. 215-216. Brody knew about the “short against the box” subaccount and used it in connection with certain IPO’s. Tr. 234-35, 512-13, 548-50. 34. GSEC’s custody reporting system netted all purchases at the end of each trade day, but defendants could have instructed GSEC not to cover a short position with certain shares. D. Miller Decl. ¶ 20; Tr. 232-33. Short positions were collapsed, or covered, unless a customer instructed GSEC to hold the short position open using a “1309” “short against the box” subaccount. D. Miller Decl. ¶21. Colonial never instructed GSEC regarding whether certain purchases of shares by Colonial should or should not be used to cover existing short positions in Colonial’s account. See id. ¶ 24. 35. Many of the trades cleared by GSEC were entered by Colonial traders using the REDI or INET system. a. REDI and INET 36. From 1999 to 2005, Colonial licensed its office space from Carlin. Colonial was a customer of Carlin. Kornfeld Decl. ¶ 9. Carlin provided Colonial with access to INET, an electronic securities order trading and information system, having the capability to receive and execute orders within milliseconds. Carlin also provided Colonial with access to REDI, an electronic trading platform provided by GSEC, which also had the capability to receive and execute orders within milliseconds. Id. ¶¶ 6, 9. Carlin provided Colonial’s personnel with INET and REDI terminals for their trading. Id. ¶ 9. Carlin cleared Colonial’s trades through GSEC. Id. ¶ 7. 37. Orders entered for execution in INET or REDI were either filled during the trading day or expired automatically at the end of the trading day. Id. ¶ 19. Colonial traders had the ability to monitor their positions and trading through these systems at all times during the trading day and could change or cancel an unfilled or partially filled order up until the order either was filled in full or expired at the end of the day. Id. ¶ 19. Brody was assigned the unique supervisory user code, U52852, to use these systems, and had the ability to trade in any account linked to Colonial, and to view and change any order in any account linked to Colonial. Id. ¶ 10; Tr. 33-34. INET and REDI electronic order tickets reflect order and execution information concerning Colonial’s trading. Kornfeld Decl. ¶ 12; PX-2; PX-3A; PX-3B; PX-4; PX-204; PX-205. C. Back Office 38. From 2001 through 2004, Colonial’s back office consisted of Andrew Salis, Claudia Hawkes and Erica Shaw. Salis Decl. ¶ 5; Brennan Decl. ¶ 5. 39. During this time period, none of Colonial’s back office personnel informed Colonial’s prime broker whether certain newly purchased shares should or should not be used to cover an existing short position. Salis Decl. ¶ 31. 40. During the time that Colonial was a customer of BAS, Colonial reported trading data electronically, either by keypunching the data directly into the “Trade Blotter” software application, or by entering the data into a Microsoft Excel spreadsheet and uploading it through Trade Blotter. Tr. 71, 80,145, 345. 41. Colonial’s handwritten blotters were not written in chronological order. J. Miller Decl. ¶ 40; Tr. 526. Sometimes, but not always, markings on the blotters, such as squiggly lines or arrows, purported to indicate whether a certain purchase of stock was intended to cover a specific short position. However, such notations were not communicated to the prime broker. Tr. 516, 522, 690-92, 695. D. Accounting 42. Michael Mezzapelle has provided accounting services to Colonial since 1998. Mezzapelle Decl. ¶ 6. 43. Brody’s testimony at trial to the effect that Colonial did not liquidate its trading positions internally using FIFO was not credible. During the SEC’s investigation, Brody testified that he used the FIFO method to cover a pre-existing short position before taking another position in that stock. Tr. 495-97. 44. Colonial’s audited financials for the year ended December 31, 2007 disclose: “Realized gains and losses are computed by use of the first-in-first-out method.... ” PX-269 at 9. Brody testified at trial that this statement did not apply to Colonial, because it referred to long term capital gains and losses and that Colonial does not have such gains and losses. Tr. 488. But the audited financials do not contain that limitation. It is unlikely that Colonial’s auditors would have described as a significant accounting policy something that does not apply to Colonial. The audited financials are given to and relied upon by investors and most certainly relate to Colonial’s business. Tr. 488. Although earlier financial statements do not disclose a particular method for computing realized gains and losses, there was no evidence that Colonial had disclosed any change of significant accounting policies, which one would expect to see if there had been a change to the FIFO methodology. 45. Defendants’ claim that they used a system known as “real time” accounting, rather than FIFO, for internal accounting purposes is not credible. Colonial’s handwritten blotters, which supposedly provided the data of Colonial’s own internal P & L calculations, were disorganized and inconsistent, and could not have been reasonably relied upon by Colonial’s accountants. In fact, defendants’ own expert, DeRosa, testified that the blotters are “very difficult to read” and “frankly, very sloppy.” Tr. 794. Moreover, Colonial’s accountants also relied on the monthly P & L reports from Colonial’s prime brokers, which were generated using the FIFO methodology. Additionally, the audited financials do not refer to “real time” accounting, and such a statement would conflict with the statement in the audited financials for the year ended December 31, 2007, which refers specifically to FIFO. See PX-269 at 9. 46. BAS’s “Realized Gain & Loss” reports calculated Colonial’s P & L on a FIFO basis. PX-15;PX-19;Tr. 101-06. 47. If Colonial had wanted B AS to use a method of liquidation other than FIFO, it could have requested a different accounting method. Tr. at 121. There is no credible evidence that Colonial requested that BAS use anything other than FIFO for Colonial’s prime brokerage account. Evidence was introduced showing that Colonial selected “LIFO” and not “FIFO” when opening an account with BAS. PX-81 at SEC 0094860; Tr. 140-42. However, there was a gap of over one hundred pages between this document and the preceding documents in the exhibit. Although the Tax ID number on the document corresponds to Colonial, see Tr. 483, 499-500, it is not clear whether this document pertained to Colonial’s prime brokerage account or some other account that Colonial had at some time with BAS. Thus, the probative value of this document is very low. 48. GSEC employed an accounting software called Advent Geneva, which used a FIFO liquidation method for accounting purposes. Tr. 213-14. The system kept track of which lots of short shares are covered with which lots of long shares. Tr. 233-34. GSEC told Colonial that it used FIFO. Tr. 232. Colonial provided printouts from GSEC’s accounting system, reflecting realized gains and losses, to Mezzapelle, Colonial’s accountant. Tr. 764; PX-289. 49. It is more likely than not that Colonial knew that BAS and GSEC were liquidating Colonial’s trades using the FIFO method. Brody had access to the prime brokers’ equities position and profit and loss reports and knew or should have known that both firms used FIFO. See Tr. 119-22, 212-14, 232. Defendants provided Mezzapelle with reports from the prime brokers’ systems. Colonial’s back office and Mezzapelle relied on these reports in reconciling Colonial’s P & Ls. Tr. 763-64; PX-289; PX-290. E. Internal Compliance System 50. During the relevant period, Colonial did not have in place a system of internal controls adequate to monitor trading and prevent violations of Rule 105. Today, Colonial’s system remains inadequate to prevent unlawful trading. 1. System in Place at the Time of the Alleged Violations 51. Brody failed to ensure that Colonial’s back office personnel were trained in how to comply with Rule 105. See Tr. 576-77. Moreover, he believed that these personnel were very sloppy. Tr. 577. The head of the back office did not recall Brody discussing Rule 105 with the back office employees tasked with reporting Colonial’s trades to its prime brokers. See Tr. 401-OS, 777. 52. Colonial did not adequately explain Rule 105 to its traders. Brett McDonald, a Colonial trader, testified that Brody did not communicate with him about the rules and regulations applicable to trading. McDonald was unfamiliar with Rule 105. Tr. 334-36. 53. Margaret-Mary Brennan, who worked as Colonial’s office manager, human resources manager, accountant liaison, and who sometimes reported trade information to Colonial’s prime brokers, did not understand Rule 105’s prohibitions. Tr. 777; Brennan Decl. ¶ 4. 54. Miller, co-founder of Colonial, principal of the firm and the individual who Brody alleges is responsible for purchasing allocated stock and selling it into the market, could not specify any steps that defendants took to avoid violating Rule 105. Tr. 435-37. Miller personally took no steps to determine whether Colonial had an open short position in a stock before purchasing allocated shares, and he was unaware of anyone else taking such steps even though Colonial established restricted period short positions and purchased allocated shares in the same account. Tr. 424-25. Similarly, Brody and other employees know of no steps taken to ensure that defendants’ back office complied with Rule 105. Tr. 354-56, 401, 576-77. 55. Defendants took no steps to instruct Colonial’s prime brokers as to which shares should be used to cover specific short positions. Tr. 515-16, 774; Brennan Decl. ¶ 13; Salis Ded. ¶ 17; Maltz Ded. ¶ 6. The sole exceptions (discussed below) were defendants’ trades in CRTK and ISIL, where defendants marked their allocations “CS,” thereby instructing BAS to use those shares to cover Colonial’s short positions in those stocks. See Lewis Decl. ¶¶ 14-17. 56. Brody maintained a careless attitude toward Colonial’s compliance obligations. Vince DeMarco, who manages Colonial’s middle and back office operations and currently serves as compliance officer, holds no securities industry licenses. Tr. 577-78. Brody was responsible for hiring DeMarco but did not believe that DeMarco had any compliance experience prior to joining Colonial. Tr. 573-76. According to Brody, he was unaware of any training that DeMarco had concerning rules and regulations applicable to short sales. Id. Miller indicated that he had no input whatsoever into the hiring of DeMarco, did not know for what position Brody had hired DeMarco, and took no steps to ascertain anything about DeMarco’s background or qualifications at the time he was hired. Tr. 429. 57. Brody testified that prior to hiring DeMarco in 2002 or 2003, Colonial hired someone named Sam Weiser for marketing. Tr. 564. Brody “ended up” making Weiser Colonial’s compliance officer and Chief Financial Officer because marketing was “going slow.” Id. Brody indicated that he did not believe Weiser had any compliance experience or held any securities industry licenses. Tr. 565. Miller indicated that he had no input into the hiring of Weiser, did not know whether Weiser had any compliance function and did not know whether Weiser had a compliance background. Tr. 427-28. 58. According to Brody, Weiser drafted a compliance manual that was distributed to all Colonial employees in 2003 or 2004. See Tr. 581. However, Colonial’s trader McDonald testified that Colonial had no compliance manual during that time period. Tr. 333. Colonial produced only one edition of a compliance manual to the SEC in response to a document request for all such manuals, and that document bears the date October 1, 2005. Tr. 579-84; PX-73. At no time has Colonial had a manual that addressed compliance with Rule 105. Tr. 582-83. 2. System in Place Now 59. Colonial has improved its compliance systems, but still has not established a system adequate to prevent Rule 105 violations. 60. In mid-2004, Colonial installed the EZE Castle system. It provides an automated platform by which traders can report their trade data to Colonial’s prime broker. See Aronson Decl. ¶¶ 21-22; Tr. 327, 410-11. It also performs several monitoring functions. Tr. 622. 61. Operations personnel input information regarding secondary offerings. Tr. 623-24. This information is inputted after the Colonial syndicate desk indicates an interest in the secondary allocation, but before the allocation shares are received. Tr. 624. 62. Then, if a trader makes a trade that results in a violation of Rule 105, the EZE Castel system sends a monitoring alert to Vince DeMarco. However, the EZE Castle system does not prevent violations of Rule 105 from occurring in the first place. Tr. 627-28. The system merely sends an electronic monitoring alert to operations personnel to let them know that a violation has occurred. Id. 63. Another flaw in the EZE Castle system is that it depends on Brody and Miller to disclose to compliance and operations personnel that Colonial is participating in a secondary offering. See Tr. 628-30. 64. In addition, many of the employees tasked with Colonial’s compliance have insufficient qualifications or training in compliance procedures. The key back office employees, Brennan and Salis, are unlicensed in the securities industry and have no training in rules or regulations regarding securities trading. Tr. 339-40, 777. 65. Miller is an essential link in Colonial’s current compliance system. Yet, Brody claims that Miller was responsible for the Rule 105 violations with respect to the shelf offerings. Tr. 589. Additionally, Miller has an extensive disciplinary history, arising from his deliberately providing a customer with false monthly account statements and a false document purporting to be from the New York Stock Exchange. He has been permanently barred by the SEC, New York Stock Exchange and National Association of Securities Dealers. Tr. 449-452 66. The current compliance system also is ineffective because Brody remains in charge and supervises all personnel at Colonial, including all individuals responsible for compliance. Tr. 634, 463-64. 67. Defendants offered an expert witness, Raymond Aronson, to testify as to the effectiveness of their compliance system. The testimony of Aronson was based on one visit to Colonial’s office lasting at most eight hours, including an approximately thirty minute meeting with Brody. Tr. 619, 634-35. The “dedicated, well-trained personnel” that he cited in support of his opinion include Brody and the same back office employees that Brody considered sloppy during the relevant period. See Aronson Deck ¶27; Tr. 577. They also include the same individuals described above who have little or no securities background or training, have no securities industry licenses, or, in the case of Miller, have a troublesome disciplinary history in the securities industry. 68. Aronson has had no formal training in computer systems. Tr. 613-14. He was retained to review Colonial’s current trading operations and compliance procedures, yet he did not examine the software used by Colonial and admits that he has no understanding of how the software operates. Tr. 620-21. Aronson’s opinion was based largely on information and reports provided to him by Colonial personnel. See Tr. 621, 635. He did not see how the reports were generated, and he did not recall whether in the time period covered by the reports he reviewed whether Colonial even had any outstanding indications of interest in any secondary offering. Tr. 635-36. Aronson testified that the system had certain capabilities to block trades but he had “no idea mechanically how it does that,” then further testified that the system did not in fact do what he initially stated. Tr. 624-26. Aronson acknowledged that the success of the compliance system relied on operations personnel to input that there was an offering, but he apparently did not take into account the origin of the information even though he testified that would be “useful” to know. Tr. 629-30. 69. Defendants’ continued failure to implement an effective compliance system raises a substantial risk that defendants will again commit violations of Rule 105. F. Legal Advice 70. While employed at A.F. Bruan in or about 1995, Brody and Miller learned that restricted period short positions could not be covered with shares received in secondary offerings. J. Miller Decl. ¶ 27; Tr. 424. 71. Upon establishing Colonial in 1998, Brody and Miller sought legal advice from Katten Muchin Rosenman (formerly Rosenman Colin, then Katten Muchin Zavis) (“KMR”). See Tr. 433. KMR attorneys told Brody and Miller that restricted period short positions could not be covered with shares received in secondary allocations. Id.; Tr. 812. 72. In approximately June 2002, Brody and Miller were advised by Edward John-sen, an attorney at KMR, that shares received in a shelf-registered offering could be used to cover restricted period short positions, in compliance with Rule 105. Brody Decl. ¶ 53; Johnsen Decl. ¶¶ 15-16; see DX-188. 73. On or about April 27, 2004, Johnsen advised Brody that Rule 105 did not apply to shelf-registered securities. Johnsen Decl. ¶ 22. Johnsen also advised Brody that in the November 2003 Release, the SEC proposed to eliminate the shelf offering exemption from Rule 105. Id. 74. On or about May 4, 2004, Brody received an email from Johnsen in which Johnsen had inserted portions of the November 2003 Release relating to Rule 105. PX-277; Brody Decl. ¶ 57; Tr. 659-60. The email also included a link to the entire “proposing release” and an SEC case summary regarding Ascend Capital. PX-277; Tr. 661. In the November 2003 Release, the SEC stated that it “propose[d] eliminating the current shelf offering exception in Rule 105 of Regulation M.” 68 Fed. Reg. at 62999. 75. On August 6, 2004, the SEC adopted a final rulé, explaining that “in the Proposing Release [of November 2003], we proposed to amend Rule 105 to eliminate the shelf offering exception. We are adopting the amendment as proposed.” August 2004 Release, 69 Fed. Reg. at 48020 (footnote omitted). Thus, effective September 7, 2004, the shelf offering exemption to Rule 105 was eliminated. 76. Defendants admit that they violated Rule 105 in connection with MLAN, CBST, NSTK, LM and KEYW. See FPTC at 3, 5-6; Tr. 587-88. Defendants claim that they relied on counsel in covering those restricted period short positions because their counsel did not inform them that the SEC had adopted the final rule eliminating the shelf offering exemption from Rule 105. See Brody Decl. ¶¶ 16, 47-55. Good faith reliance on counsel is not a defense to liability under Rule 105. See August 2004 Release, 69 Fed. Reg. at 48027. But it may be relevant to a determination of the appropriate relief. Here, the Court concludes that defendants did not rely in good faith on the advice of counsel with respect to their unlawful trading in MLAN, CBST, NSTK, LM and KEYW. 77. Johnsen’s testimony contradicted Brody’s in key areas. Despite Brody’s testimony to the contrary, Johnsen indicated that he did not consider KMR to be Colonial’s “in-house” counsel and did not have access to Colonial’s books and records during the relevant period. Tr. 811. Rather, Johnsen testified that he never provided legal services to Colonial without Colonial first approaching him with specific questions. Johnsen Decl. ¶ 12. Furthermore, Johnsen testified that he had no understanding with Brody during the relevant period that he would alert Brody when proposed Regulation SHO became effective, and it was not his practice to advise Colonial as to changes in the securities laws. Tr. 821-22. Johnsen did acknowledge that Regulation SHO was the topic of financial press at the time of the proposed changes. Tr. 821. No one at KMR looked at any of Colonial’s trading documents, or reviewed any specific trades, and no one at KMR ever rendered an opinion to Colonial concerning whether any specific trades violated Rule 105. Tr. 437-38, 602-04, 824-25. 78. No attorney ever advised anyone at Colonial that their trades in MLAN, CBST, NSTK, LM and KEYW, between November and December 2004, were lawful under Rule 105. Colonial could not reasonably have expected that an attorney from KMR would notify Colonial if, and when, the SEC promulgated changes to Rule 105. Moreover, Colonial was placed on notice that the shelf offering exemption might soon be eliminated because Johnsen sent Brody a link to the November 2003 Release, which proposed to eliminate the exemption. See PX-277; Tr. 661. 79. Furthermore, defendants provided insufficient details about their activities to KMR. See Tr. 824-27, 602-04, 607. For example, Miller testified that he (i) never showed Colonial’s trading records to KMR; (ii) did not think that KMR ever reviewed Colonial’s trading records; (iii) never discussed with KMR particular transactions and whether specific transactions complied with Rule 105 and did not know of anyone who had such discussions; and (iv) did not know if he ever told KMR that Colonial shorted stock and purchased allocated shares in that same stock in the same account. Tr. 435-38, 458-59. 80. Brody testified that his practice during the relevant time period was to keep himself informed of rules and regulations relating to his trading practices, including monitoring Rule 105 through the use of the internet. Tr. 585. He also admitted that (i) he did not recall showing KMR Colonial’s trading records; (ii) prior to December 2004, he never discussed particular transactions with KMR; (iii) he told KMR that Colonial always covered the short positions in the open market; and (iv) he does not recall telling KMR that no one at Colonial instructed prime brokers regarding which shares should be used to cover which short positions. Tr. 602-07, 660-62. III. TRADES AT ISSUE A. Colonial’s Trading Practices Generally 81. The GSEC account through which certain of the trading at issue occurred was the “7SE2” account. This account had a number of subaccounts designated internally at Colonial, but the account was treated as one account by GSEC and executing brokers. Brody Deck ¶ 17-18, 61. Brody and Miller both traded in a 7SE2 subaccount known as the “listed” subaccount, through which they shared trading profits. Tr. 423. 82. Defendants engaged in a strategy by which they (i) took short positions in stocks, and (ii) at the same time purchased shares in secondary offerings for those stocks. Defense expert DeRosa testified that he had not ever seen a hedge fund indicate an interest in purchasing shares in an offering while also having a short position in that offering. Tr. 790. He testified that the strategy “doesn’t make sense” and that he has “never been too certain about why they were doing this” because taking a short position reflects the “view that the share price is going down,” whereas indicating an interest in a secondary offering reflects a “bet that the price is going to go up.” Tr. 800-01. 83. Both the short positions and the purchases of shares in secondary offerings were designated to the same subaccount— “listed” — and were recorded on blotters for the listed subaccount. Tr. 511; Brody Decl. ¶ 18; DX-203A-R. 84. Defendants depict Colonial’s (i) purchase of allocated shares and (ii) covering of restricted period short sales as two unrelated, separate processes within Colonial, handled by two different people. See Brody Decl. ¶¶ 11-16; Tr. 435-36. Defense expert DeRosa opined that “this is a case of two strategies going on at the same time.... ” Tr. 802. Brody testified that Miller determined whether Colonial participated in offerings and sold the allocated stock in the market, while Brody was responsible for using market shares to cover short sales that happened to occur in the restricted period. Brody Deck ¶¶ 11-16, 54. Brody further testified that Miller only occasionally informed Brody that Colonial had indicated an interest, and rarely told Brody the size of the indication. Id. at ¶ 11. Defendants’ testimony was not credible and conflicted with more reliable evidence. More likely than not, Brody and Miller were engaged in a unified trading strategy, with Brody possessing full knowledge of Miller’s activities. 85. Miller notified Brody on the morning of an allocation as soon as Miller found out that Colonial had received an allocation, which occurred as early as 7:00 a.m. on the day of the offering. Tr. 426, 540; J. Miller Deck ¶ 23. 86. Both Brody and Miller were involved in Colonial’s purchases of shares in secondary offerings. Tr. 414-16. Colonial subscribed to a service that tracked secondary offerings and sent Colonial a weekly report alerting Brody and Miller to upcoming deals. Tr. 416. Both Brody and Miller spoke to syndicate representatives. J. Miller Deck ¶¶ 12-13. Miller prepared summaries of offerings in which he felt Colonial should participate and shared those summaries with Brody. Id. ¶ 17; Tr. 419. Miller testified that he sometimes kept Brody apprised on Colonial’s indications of interest in purchasing offered shares. J. Miller Deck ¶¶ 17-18. Miller spoke to Brody daily about upcoming offerings, and whether he was interested, on behalf of Colonial, in participating in a particular offering and the size of the indication of interest Miller recommended. See J. Miller Decl. ¶¶ 13, 17; Tr. 419. Sometimes Brody was the one who suggested the number of shares in Colonial’s indication of interest. J. Miller Decl. ¶ 19. Miller provided Brody with information on most, if not every, deal. Tr. 419. The Court concludes that Brody had substantial input in, and supervisory authority over, the decision whether to participate in a secondary offering. Tr. 336. 87. Brody knew “the firm’s positions at all times” and kept track of trades in the account he shared with Miller “as best [he] could.” See Tr. 510-511. Brody kept the blotters reflecting both his and Miller’s trades, so that he “knew where [Colonial] stood all the time before [they] had computers to tell [them] what [their] P & L was.” Id. Brody and Miller sat adjacent to one another and likely spoke throughout the day. See Tr. 317-18, 413-14, 510-11. 88. When Colonial participated in secondary offerings, the allocation “hit” Colonial’s account prior to the opening of the market on the allocation date. J. Miller Decl. ¶ 22. Miller and Salis learned even earlier from the syndicate salesperson how many shares Colonial had been allocated. Id. Miller informed Brody as soon as he knew on the morning of an allocation that Colonial had received an allocation in a particular offering. Tr. 426, 540. 89. Defendants were notified about and accepted their allocations before syndicate termination, which typically occurred prior to the market opening. See Kanterman Decl. ¶ 10; Watson Decl. ¶¶ 12-13. The purchase of allocated stock in each instance was the first purchase in defendants’ account on allocation day and occurred by the time each offering terminated prior to the market opening. See PX-30-40, PX-43-51, PX-206; Kanterman Decl. ¶ 10; Watson Decl. ¶ 13; J. Miller Decl. ¶ 22. 90. Brody kept trading blotters for the listed subaccount and had access to them at all times. Tr. 509-11. Brody and Miller each testified to having different and inconsistent notations for designating which stock would be used to cover short positions. See J. Miller Decl. ¶¶ 42-43; Tr. 516, 522, 739. Brody and Miller each testified that the blotters they kept were “sloppy,” and were sometimes rewritten. See J. Miller Decl. ¶ 34; Brody Decl. ¶ 39; Tr. 522. Brody testified that he was “sure there were times when [he] got careless” when rewriting his blotters and did not include all notations in his original blotter. Tr. 522. Those blotters were provided to Colonial’s back office staff at the end of the day so that information concerning Colonial’s trading could be transmitted by the back office staff to Colonial’s prime brokers; however, the back office staff also testified that the blotters were often “sloppy and illegible.” Salis Decl. ¶ 13; Tr. 404. Salis testified that he could not always tell what various marks on Brody’s blotters meant, and sometimes he could not determine which shares were intended to cover a short position. Tr. 348, 404, 406. Despite his own employees’ confusion concerning the blotters, Brody testified that he “thought it was pretty evident [to the prime brokers] by my blotters which stock covered the short position.” Tr. 515-16. Yet, neither the blotters nor the notations on the blotters were provided to the prime brokers. Tr. 348-49. Both McDonald and Brennan testified that they were never instructed as to what various marks on Brody’s blotters meant. Tr. 330-31, 777. Salis testified that Miller did not instruct him as to which shares should be used to cover a particular short position. Tr. 401. 91. Regardless how the blotters were kept, no one at Colonial informed their prime brokers which shares should be used to cover short positions to avoid violating Rule 105. Tr. 348-49, 515-16. After Salis testified that the back office “made sure that allocated stock did not cover a short position,” he was asked how they did that. Tr. 355. Salis responded: “I don’t know. I don’t know how we did that. We didn’t book a cover. I don’t even know. I don’t know how we did that.” Id. Salis then admitted that he had been accurate when he previously gave sworn testimony to the SEC stating that there was nothing he or the back office did to make sure that Colonial’s trading did not violate Rule 105. Id. B. Shelf Offerings 1. Generally 92. Defendants admit that shares purchased in secondary offerings were used to cover restricted period short positions in the transactions involving MLAN, CBST, KEYW, NSTK and LM. See FPTC at 3, 5-6; Tr. 587-88. As discussed above, defendants claim this happened because they were not told by their attorneys that the SEC had eliminated the shelf offering exception to Rule 105. See Brody Decl. ¶¶ 16, 47-55. Defendants now concede that the November 23, 2004 offering of KEYW was not a shelf offering. See Stip. 5.29.09 ¶ 6. 93. The evidence establishes that defendants used shares purchased in secondary offerings to cover restricted period short positions in MLAN, CBST, KEYW, NSTK and LM. With respect to these five transactions, Colonial did not purchase sufficient stock in the open market on each allocation date to cover its restricted period short position in that stock, yet Colonial’s position in the stock was flat or long by the end of the allocation day. Thus, shares that Colonial purchased in the offering must have been used to cover Colonial’s restricted period short positions in the stock. See Ferrante Decl. ¶ 10; PX-52. 2. Specific Offerings a. MLAN 94. On November 19, 2004, Colonial purchased 5,000 shares of MLAN at $27.60 per share in a registered shelf offering. See PX-22 at SEC0030239. During the five business days before the pricing of this offering, Colonial sold short a net of 6,174 shares at prices averaging $29.16 per share. Id.; PTO Stip. 24. In violation of Rule 105, Colonial used all of its shares purchased in the offering to partially cover its restricted period short position. Defendants concede that they violated Rule 105 in connection with the trades in MLAN. See FPTC at 3, 5-6; Tr. 587-88. Colonial realized a profit of approximately $7,783.23 on the portion of its restricted period short position that it covered with the offered shares. Ferrante Decl. ¶ 19. b. CBST 95. On November 23, 2004, Colonial purchased 7,000 shares of CBST at $11.20 per share in a registered shelf offering. See PX-22 at SEC0030184. During the five business days before the pricing of this offering, Colonial sold short a net of 10,500 CBST shares at prices averaging $10.73 per share. Id.; PTO Stip. 26. In violation of Rule 105, Colonial used all of its offered shares to partially cover its short position but sustained a loss of approximately $3,304.70, partly because it did not purchase the offered shares at a price that was lower than the average price at which it sold short during the restricted period. See Ferrante Decl. ¶ 19. Defendants concede that they violated Rule 105 in connection with the trades in CBST. See FPTC at 3, 5-6; Tr. 587-88. c. KEYW 96. On November 23, 2004, Colonial purchased 10,000 shares of KEYW at $16.50 per share in a registered offering. During the five business days before the pricing of this offering, Colonial sold short a net of 5,000 KEYW shares at prices averaging $17.69 per share. Id.; PTO Stip. 30. In violation of Rule 105, Colonial fully covered its restricted period short position with shares purchased in the offering. Defendants concede that they violated Rule 105 in connection with the trades in KEYW. See FPTC at 3, 5-6; Tr. 587-88. Colonial realized a profit of approximately $5,960 from the illicit trading. Ferrante Decl. ¶ 19. d. NSTK 97. On December 9, 2004, Colonial purchased 25,000 shares of NSTK at $13.50 per share in a registered shelf offering. See PX-23 at SEC0153021-022. During the five business days before the pricing of this offering, Colonial sold short a net of 15,400 NSTK shares at prices averaging $15.49 per share. Id.; PTO Stip. 32. In violation of Rule 105, Colonial fully covered its restricted period short position with shares purchased in the offering. Colonial realized a profit of approximately $30,638.30 from the illicit trading. Ferrante Decl. ¶ 19. Defendants concede that they violated Rule 105 in connection with the trades in NSTK. See FPTC at 3, 5-6; Tr. 587-88. e. LM 98. On December 16, 2004, Colonial purchased 5,000 shares of LM at $70.30 per share in a registered shelf offering. See PX-23 at SEC0153005. During the five business days before the pricing of this offering, Colonial sold short a net of 10,000 LM shares at prices averaging $69.76 per share. Id.; PTO Stip. 36. In violation of Rule 105, Colonial used all of its offered shares to partially cover its short position but sustained a loss of approximately $2,700, partly because it did not purchase the offered shares at a price that was lower than the average price at which it sold short during the restricted period. Ferrante Decl. ¶ 19. Defendants concede that they violated Rule 105 in connection with the trades in LM. See FPTC at 3, 5-6; Tr. 587-88. C. Trades Cleared by Banc of America 1. Generally 99. On October 31, 2001 and May 24, 2002, Colonial purchased stock in secondary offerings of ISIL and CRTK respectively. Colonial reported these trades to BAS electronically either through an Excel spreadsheet uploaded through BAS’s trade blotter application or by entering the trades directly into trade blotter. See Tr. 80,345; Salis Decl. ¶ 16 100. The data Colonial submitted to BAS indicated that the ISIL and CRTK shares were not allocation shares and that they should be used to cover short positions. Lewis Decl. ¶¶ 16-17. Colonial marked these trades “R” — meaning “regulation commission” — rather than “S”— meaning “syndicate position,” a denotation that should be used for stock purchased in a secondary offering. Id. ¶¶ 15-17. Colonial also marked the trades that corresponded to the offering allocations “CS”— meaning “cover short” — rather than “BY” — meaning “purchase.” The “CS” denotation indicated that these shares should be used to cover Colonial’s short position in ISIL and CRTK. Id. ¶ 14. 101. The data regarding these trades were submitted by Colonial. Lewis Decl. ¶ 11. There is no credible evidence that that trading data submitted to BAS by Colonial on those dates was altered by BAS. Colonial traders testified they were not aware of any instance in which BAS had made a change to the order type. Tr. 399-400. There is no evidence that those trades resulted in any trade breaks and, if they did, any such trade breaks would have been resolved prior to the trades settling or clearing. See Lewis Deck ¶ 33; Tr. 399-400. 102. Data concerning the ISIL and CRTK trades were transferred to BAS as a strea