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[sludgehound]

In Lehman's last days, Merrill Lynch may have allowed illegal bets against firm

By Steve Goldstein , MarketWatch
It looks like former Lehman Brothers CEO Dick Fuld is at least partly right -- that at least one Wall Street bank illegally allowed short sales against the now-bankrupt firm in its waning days.
That's derived from a Securities and Exchange Commission suit against Merrill Lynch released Monday, and an analysis by Eric Hunsader , the founder of trading analysis firm Nanex.
The SEC order against Merrill Lynch, now owned by Bank of America (BAC), describes how the firm allowed short sales even when there wasn't available stock to be lent out.
One particular paragraph in the SEC order has drawn attention: "On September 8, 2008 , during the heart of the financial crisis, Merrill lending-desk traders determined that a security could no longer reasonably be considered [easy to borrow] and placed the stock in question on the Watch List. Midday, Merrill traders recognized with respect to that security, 'Up to this point banks and brokers still aren't willing to lend any stock.' Nevertheless, Merrill's execution platforms executed short sales totaling 1,358,036 shares of the security, absent reasonable grounds to do so, in reliance on the ... list."
Hunsader says the stock fits the description of Lehman, which dropped 14% that day on heavy volume of 109 million shares.
A week later, Lehman declared bankruptcy.
Fuld has frequently taken aim at illegal short sellers. "History has already shown how wrong and ill-advised it is to allow naked short selling," he said at a 2008 hearing.
Minus the illegal short sales -- and had Lehman been granted the lifeline of a Federal Reserve banking license that Goldman Sachs and Morgan Stanley received -- the firm could well be alive, Fuld has argued.
Also read:Dick Fuld still can't fess up to his role in Lehman's demise (http://www.marketwatch.com/story/dick-fuld-still-cant-fess-up-to-his-part-in-lehmans-collapse-2015-06-02)
That's not to discount Fuld's own role, however, in levering up Lehman, aggressively securitizing subprime mortgages, keeping mortgage-backed paper on the company's books and performing dubious accounting maneuvers.
Merrill Lynch admitted the short-selling violations and agreed to pay an $11 million fine. Press officials at Merrill didn't return a message about whether the stock in question was Lehman.
- Steve Goldstein ; 415-439-6400; [e-mail]
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(END) Dow Jones Newswires
06-02-15 1353ET