Pressure on SEC to Look Into Manipulative Short Selling
With short-selling volumes hitting record highs at the major exchanges and with volatile financial markets, many are wondering whether a flurry of manipulation cases will be coming out of the U.S. Securities and Exchange Commission in the near future.
Last week, SEC Chairman Christopher Cox told a Senate panel that the agency was not ignoring speculation that traders colluded to bring down Bear Stearns (nyse: BSC - news - people ) in a swift short-selling raid in mid-March. Without saying the SEC was investigating unusual trading patterns in Bear Stearns stock, Cox said, "The SEC takes seriously its responsibility to investigate allegations of this nature."
Some want any investigation to be broader. Trading in shares of Lehman Brothers (nyse: LEH - news - people ) has also been unusually active, with the number of shares sold short at the New York Stock Exchange climbing 21% from mid-March to the end of March, to 56.7 million shares, or 10% of its shares outstanding
Last month, on the Monday after Bear Stearns' collapse, the SEC proposed a new "naked short-selling anti-fraud rule" that is supposed to rein in manipulative trading by preventing short-sellers from misrepresenting to a broker that they have properly located stock to borrow to sell short.
The proposed rule has attracted more than 250 comments so far, overwhelmingly from investors who are angry that the current rules aren't being enforced, allowing manipulative naked short-selling to go on under the noses of various regulators. This new anti-fraud rule, they contend, would potentially make it easier for broker dealers to get off the hook.
Part of the problem, according to those who are fighting for stricter short-selling rules, is that brokerages and their stock loan desks aid in naked short-selling by looking the other way or by purposefully misrepresenting the availability of stock to borrow, reaping fees for services they haven't actually provided.
Another problem, of course, is the elimination of the "up-tick" rule, a controversial SEC rule change last July (well-timed to the beginning of the credit market meltdown) that removed the rule that short-selling could only be done when a stock was rising. Now it can be done when a stock is going up, down or flat.
The up-tick elimination is being blamed for extreme market volatility and for the precipitous fall of Bear Stearns. Traders simply couldn't have piled on the stock with such effect without it, the reasoning goes.
Lawmakers are at least putting pressure on the SEC to look into it. "Manipulative or collusive short-selling threatens the markets’ integrity," Rep. Frank said in his letter to the SEC. "Depending on what the Commission finds, this may lead to a broader inquiry into short-selling by the SEC and Congress."
forbes.com
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