Did The SEC Overreach in Freezing HNZ Account?

Feb 20th, 2013 | By | Category: Steven Spencer (Steve's) Blogs
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I read an interesting piece on the CNBC website by John Carney regarding the SEC freezing the assets of a Goldman trading account that made a very suspicious trade in HNZ options right before the takeover was announced. John raised the idea that the SEC is overreaching by freezing the assets of the account without any evidence beyond the suspicious trading activity itself to suggest insider trading.

I disagree. The SEC has broad authority with respect to the regulation of US securities markets. In this instance the holder of the account is outside the US so other than freezing the account which has a US custodian the SEC’s options are limited. If the account holder steps forward and demonstrates a legitimate “investment purpose” for the trade the account should be unfrozen and they should reap the windfall profit of the trade ($1.8 million).

If the SEC had not frozen the account in this instance it would have sent a clear message to all non US account holders that so long as they were not subject to US jurisdiction they could engage in market manipulation and insider trading without any negative consequences. As an active participant in US equities markets I am not interested in such a system.

I think most of us cringe at the thought of the government stepping in and interfering with our legitimate business activities but on rare occasions (hopefully extremely rare) the SEC needs to be proactive in maintaining the integrity of our markets. I believe this is one of those times.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is sspencer@smbcap.com.

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