NAKED IN THE HEDGE By RODDY BOYD

http://www.nypost.com/seven/11012006/business/naked_in_the_hedge_business_roddy_boyd.htm 

November 1, 2006 -- The Securities and Exchange Commission is ready to bring charges claiming a major New York hedge fund and several of its principals violated key short-selling rules, The Post has learned. Sandell Asset Management, a $7 billion hedge fund in the midst of another excellent year, was informed on Oct. 19 that the Wall Street watchdog "intends to recommend the commencement of proceedings" against it. The charges stem from allegations of "naked short-selling," which violates Regulation SHO, the SEC's rule governing short sales. In a legitimate short sale, the trader gets approval to borrow and then sell a stock with the agreement that he will repurchase it at a later date. In a naked short sale, a trader simply shorts the stock without having borrowed any shares, which can threaten an orderly market. Sandell, in a letter to shareholders that was obtained by The Post, said its troubles resulted from its trading in the stock of Hibernia Corp. on Aug. 31 and Sept. 2 of last year. Hibernia, a Louisiana-based banking company, has since been acquired by Capital One. The names of the Sandell fund's senior executives caught in the SEC's cross hairs were not disclosed, although several sources familiar with the situation told The Post that Thomas Sandell, the founder and general partner, was one of the targets. A fund-of-funds manager who said he was familiar with the matter told The Post that Sandell's portfolio managers allegedly shorted the Hibernia stock after Hurricane Katrina. Another rival manager said the fund planned to cover its short position using newly issued stock from Hibernia's merger with Capital One. "We dispute several of the commission's assertions," the West 57th-based Sandell wrote to investors. "But we are continuing to work with the staff to resolve this matter." A Sandell spokeswoman declined to comment. The legal woes occur as Sandell's flagship Castlerigg portfolios are up between 14.24 percent and 16.58 percent so far this year. In addition to having been a Bear Stearns big shot, the Swedish-born Sandell boasts on a Web site of having been "Sweden's No. 2 badminton player."