A Bermuda-based asset manager says his investment company will “vigorously defend itself” after being accused in a complaint by US regulators that it made more than $1.3 million in allegedly illegal short-selling share trading.

Christopher Kuchanny and his investment management company Revelation Capital Management Ltd were named in the civil complaint, brought by the US Securities and Exchange Commission (SEC) in the US District Court in the Southern District of New York.

The SEC writ stated: “Unless permanently restrained and enjoined, defendants will again engage in the acts, practices, transactions and courses of business set forth in this complaint and in acts, practices, transactions and courses of business of similar type and object.

“In addition to injunctive relief, the Commission seeks a final judgment ordering disgorgement of ill-gotten gains plus pre-judgement interest, civil money penalties and such equitable and other relief as the court deems appropriate, just or necessary.” Mr Kuchanny, 37, and his Island firm Revelation Capital, based in Waterloo Lane, Pembroke, are both named in the complaint, which alleges that both broke a rule designed to prevent potentially manipulative short selling prior to the pricing of follow-on and secondary offerings.

“Revelation intends to vigorously defend itself and its shareholders from this unjust action,” Mr Kuchanny said last night.

A short sale is the sale of any security that the seller does not own or any sale that is “consummated by the delivery of a security borrowed by, or on the account of, the seller”, the SEC complaint stated.

The US Rule 105 bans anyone who makes a short sale of securities — irrespective of intent — during a defined restricted period prior to the pricing of an offering purchasing the same securities in that offering.

The rule is aimed at short selling which can artificially depress a security’s market price, which can lead to lower than anticipated offering prices for secondary and follow-on offerings, potentially causing reduced offering proceeds for the issuer.

“Therefore Rule 105 is intended to foster secondary and follow-on offerings prices that are determined by independent market dynamics and not by potentially manipulative market activity.”

Mr Kuchanny last night described the matter as “a technical disagreement with the SEC regarding Rule 105” and added that Revelation had maintained an unblemished regulatory record since inception in 2005.

“The SEC is taking a prophylactic approach, and ignoring the intent of the rule, which is to protect investors from dilutive offerings. Rule 105 serves no purpose in this case, as both the issuer and existing investors actually benefited from Revelation’s participation in this offering, which was accretive and not dilutive.

“Revelation firmly believes its trading activity not only did not, but could not have breached either the technicality, or the intent of Rule 105. Exemptions exist for so called ‘best efforts’ offerings, such as the offering in question. Similarly priced ETF offerings are also exempt from the rule. Regulatory and industry experts have confirmed that Revelation’s involvement in the offering simply did not breach Rule 105.”

The SEC complaint said: “Revelation Capital and Kuchanny violated Rule 105 in connection with Central Fund of Canada Ltd’s (CEF) November 2009 offering by short selling Central Fund Securities during the restricted period and then purchasing the same securities in Central Fund’s offering.”

Central Fund of Canada invests mostly in long-term holdings of gold and silver bullion and is listed on both the New York and London Stock Exchanges.

The case was put before the Southern District court in New York because Revelation is said to have conducted a number of the securities transactions through New York-based MF Global broker and dealer — whose parent company has since filed for reorganisation under the US bankruptcy code.

The complaint said that on November 10, 2009 Kuchanny, on behalf of his firm, bought more than 4.1 million shares of Central Fund stock at $13.56 a share in a publicly-marketed firm commitment follow-on offering.

During the Rule 105 restricted period relating to this offering, five business days before the pricing, which happened before the market opened on November 10, Revelation Capital sold short a total of 1,363,485 shares of CEF at an average price of $14.07 per share.

The SEC complaint added: “The firm also sold short 49,300 of CEF/A (which trades in Canadian dollars) at prices between $13.98 and $14.18 per share.

“Kuchanny placed 751 of revelation Capital’s 919 short sale trades in Central Fund shares.”

Revelation last night forwarded an opinion on the complaint from Howard Schiffman, a partner in the Washington DC office of Schulte Roth & Zabel, who specialises in securities litigation and regulatory developments.

“Rule 105 falls under civil law,” Mr Schiffman said. “The SEC is seeking to disgorge legitimate profits from Revelation’s investors, by relying on a hyper-technical interpretation of Rule 105 that is simply not correct.

“The rule was not designed to cover, nor should it cover, share offerings based on the price of secondary securities, in this case gold and silver. The SEC is seeking to expand the reach of Rule 105 beyond its intended purpose. The rule is limited to firm commitment offerings and does not apply to exempted, best efforts offerings, such as the Central Fund offering in question.”

Mr Kuchanny, a Briton, and his Revelation Capital — which changed its name in 2011 from Osmium Capital Management — made a name for itself as an innovator in assets management in January 2009 after it announced it would allow investors in its Osmium Special Situations Fund to denominate their holdings in gold.