UPDATE: NY AG Begins 'Wide-Ranging' Probe Into Short Selling
Last update: 9/18/2008 3:26:42 PM
(Adds additional information from Cuomo call, details of SEC actions on short selling and moves by New York comptroller, US Attorney offices' comments, beginning in sixth paragraph.)
By Chad Bray
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--New York Attorney General Andrew Cuomo said Thursday he's launching a "wide-ranging" investigation into short-selling on Wall Street, particularly in financial stocks, amid an unprecedented upheaval in the U.S. markets.
On a conference call with reporters, Cuomo said he intends to use New York's Martin Act to prosecute short sellers who spread false rumors and engage in other improper conduct. The attorney general said he's looking into short selling in the stocks of a number of financial firms, including Lehman Brothers Holdings Inc., American International Group (AIG), Goldman Sachs Group (GS) and Morgan Stanley Inc. (MS).
Cuomo also called upon the U.S. Securities and Exchange Commission to temporarily suspend all short-selling on financial stocks, preferably for 30 days.
"The markets need to be stabilized," Cuomo said. "One way is to root out short sellers who spread false information."
In a short-sale transaction, the seller essentially borrows stock and sells it, on the bet the shares will decline in value and then can be repurchased at a profit. Naked short selling is engaging in short selling without having located shares to borrow for delivery at settlement, three days after a trade takes place.
Cuomo's announcement comes during a period of extreme uncertainty for many financial companies, brought on by a crisis in the credit markets.
Lehman, the 158-year-old investment bank, sought bankruptcy protection on Monday and insurance giant AIG is essentially being taken over by the U.S. government in an $85 billion bailout.
Merrill Lynch & Co. (MER) agreed to sell itself to Bank of America Corp. (BAC) and investment banks Morgan Stanley and Goldman Sachs have seen their stocks severely pressured in recent days.
Morgan Stanley is reportedly in merger talks with Wachovia Corp. (WB).
On Wednesday, the SEC announced measures designed to make it harder to engage in abusive short selling. Under the new rules, short sellers and brokers must deliver securities borrowed for short sales on the trade settlement date or face penalties.
The SEC also eliminated an exception from the close-out requirements for option market makers and approved a new anti-fraud rule that targets short sellers who lie about the ability to deliver borrowed shares.
SEC Chairman Christopher Cox also is seeking commission approval for an emergency rule requiring hedge funds and other large investors to disclose their short positions daily.
The SEC has reportedly subpoenaed more than 50 hedge funds as it looks into market manipulation of financial stocks.
The US Attorney's offices in Manhattan and Brooklyn, which would likely investigate any improper activities related to short selling of financial stocks, declined comment on whether a criminal investigation is ongoing.
Cuomo said he would like to see more action by the SEC and other federal regulators, including the temporary freeze on shorting financial stocks.
Cuomo said he believes the federal government has been "ineffective" in regulating the financial markets and said much of the troubles in the markets today are tied to mortgage fraud and problems in subprime lending.
"The federal regulatory structure has failed this country," Cuomo said.
Cuomo stressed that short selling is legal, but said he will pursue civil and possibly criminal charges against those who engage in improper behavior.
"You can't spread false information," Cuomo said. "You can't conspire to spread false information to manipulate the price of a stock."
Meanwhile, New York State Comptroller Thomas P. DiNapoli said Thursday that the New York Common Retirement Fund will remove the shares of 19 bank and brokerage firms, including Goldman Sachs and Morgan Stanley, from those available in its Securities Lending Program. As a result, more than 105 million shares will be temporarily removed from the pool of available securities for lending, which help short sellers engage in transactions.
"The financial-services industry has experienced declines in public equity values that in some cases are unconnected to the long-term financial health of the industry," DiNapoli said in a statement. "This speculative selling has put downward pressure on the entire stock market and threatens to drive our national economy deeper into decline. By removing some of the fuel that is feeding this speculative fire, my action is intended to bring stability and rationality back to our equity markets."
-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
