UPDATE 1-Ex-hedge fund manager settles trading violation

Fri Jul 8, 2011 4:46pm EDT

* Forrest Fontana to pay nearly $1 million

* Resolves claims he violated Rule 105 of Regulation M (Adds detail on initial allegation)

BOSTON, July 8 (Reuters) - Former hedge fund manager Forrest Fontana, who once worked for industry titan Steven A. Cohen's SAC Capital Advisors, will pay nearly $1 million to resolve claims he violated a short-selling rule, the Securities and Exchange Commission said on Friday.

Financial regulators charged that Fontana Capital LLC, which traded mostly in financial stocks, earned about $816,184 on trades involving three financial stocks.

Fontana violated Rule 105 of Regulation M, the U.S. Securities and Exchange Commission said in an order imposing sanctions and a cease and desist order. The rule prohibits investors from participating in public offerings after having shorted the same securities.

According to the government, Fontana broke the rule on three occasions between July 2008 through November 2008, with trades on XL Group Plc (XL.N), Merrill Lynch and Wells Fargo & Co (WFC.N), the SEC said.

He will now pay a disgorgement of $816,184, prejudgment interest of $3,606 and a civil penalty of $165,000 to the United States Treasury, the SEC said.

The SEC filed the administrative order against Fontana six months ago, alleging the firm earned unlawful profits of about $1,101,000.

Fontana's lawyer did not return a call seeking comment.

The SEC has brought a number of these cases and only last week settled a similar matter with hedge fund Level Global, which has been embroiled in the government's insider trading case.

Fontana, who worked at mutual fund powerhouses Fidelity and Putnam before moving to SAC, launched his own business in Boston in 2005 with $50 million in start-up capital from his former SAC boss, Cohen, and quickly generated buzz in the local investment community.

But by 2010, he was effectively out of business, managing no funds for clients and concentrating on his work as one of five selectmen who help govern the town of Winchester, north of Boston. (Reporting by Svea Herbst-Bayliss; editing by Andre Grenon)

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