Sabby Asks Court to Dismiss Fraud Claims

An investment advisor on Thursday asked a U.S. District Court judge to dismiss part of a suit filed by the Securities and Exchange Commission, accusing it of securities fraud in short sales of stock from 2017 to 2019.

The SEC allegations involved trades unrelated to credit unions.

However, the investment advisor, Sabby Management, and its principal, Hal D. Mintz, has also been an investor in a public company half-owned by Partner Colorado Credit Union.

The Denver-area credit union ($690.1 million in assets, 35,472 members) spun off its CUSO providing financial services to cannabis companies in September 2022 for $185 million as Safe Harbor Financial. Safe Harbor’s stock price fell from $10.31 when the deal closed Sept. 28, 2022 to $1.78 Dec. 30. Last week it dropped from $0.42 Wednesday to $0.38 Thursday and a new low of $0.37 as of Friday.

The credit union’s initial gains from the sale were wiped out by losses in the first half of this year.

There have been no allegations of wrong-doing connected with trades of Safe Harbor Financial stock.

The SEC filed suit June 12 in the U.S. District Court in Newark, N.J., alleging Sabby Management and Minsk generated more than $2 million in illegal profits through a long-running scheme involving misrepresentations and violations of rules for short selling, order making and other trading rules. The SEC’s complaint also alleged Sabby and Mintz occasionally used their naked short selling to artificially deflate the price of securities, allowing them to obtain more shares at a cheaper price.

In the partial motion to dismiss, New York lawyer Michael Van Riper said many of the allegations are beyond the statute of limitations, and others lack the required specificity to stand up in court.

The motion said Sabby Management sometimes participated in secondary offerings by public companies, which frequently included common stock, convertible securities or warrants. Sabby could then exercise the warrants in exchange for common stock.

“Despite the Complaint’s repeated references to ‘naked short selling,’ in every instance, prior to executing the trades at issue, Sabby held an irrevocable right to obtain common stock from the relevant issuers and made efforts to deliver the shares in a timely manner,” Van Riper wrote.

“Accordingly, despite the impression the complaint is designed to give, this is simply not a case in which Defendants recklessly sold stock short without any ability or effort to cover their trades,” he wrote.

The SEC described Sabby Management as “recidivist,” saying, “Sabby has previously been sanctioned by the Commission in connection with improper short sales. On October 14, 2015, the Commissioned instituted a settled cease-and-desist proceeding finding that Sabby violated Rule 105 of Regulation M of the Exchange Act on two occasions. The Commission imposed a cease-and-desist order, disgorgement of $184,747.10 plus prejudgment interest, and a civil penalty of $91,669.95.”

The motion said the SEC “falsely characterizes Sabby as a ‘recidivist’ violator of securities laws in its effort to cast defendants in a surreal, rather than factual, light.”

U.S. Circuit Judge Kevin McNulty gave the SEC until Sept. 21 to respond and Sabby Management until Oct. 12 to respond to the response.

In Sabby Management’s involvement with Safe Harbor Financial, it emerged as the largest “private investment in public equity” investor through its Sabby Volatility Warrant Master Fund, Ltd.

An Oct. 7, 2022 SEC filing showed the fund owned 4.25 million common shares, or 4.99% of the company’s stock. An April 2023 proxy listed the stake as four million shares, or 9.36% of the voting shares, based on common stock issued from Dec. 11, 2022 to Feb. 6, 2023.

The SEC lists Sabby Management’s headquarters in Spicewood, Texas, 35 miles northeast of Austin, and Mintz as Miami Beach, Fla.

The SEC said Sabby Warrants is a master private equity fund set up in 2011 in the Cayman Islands and managed by Sabby. It has three feeder funds: Two in the Cayman Islands and one onshore. Its assets have grown from about $60 million in 2017 to about $182 million “in its most recent public disclosure,” which also showed it has 73 owners.