Tactics of Wall St. traders scrutinized
NEW YORK — New York State is launching an investigation into whether some traders used illegal tactics to drive down the stock price of several Wall Street firms.
Attorney General Andrew Cuomo told reporters Thursday his office has received a “significant number” of complaints about short sellers, or investors who hope to profit by placing bets that a financial company’s stock will fall.
Short-selling is not illegal. But Cuomo said he will focus on whether short sellers engaged in conspiracy or spread rumors and bad information to influence the stock prices of Lehman Brothers Holdings, American International Group, Goldman Sachs Group, Morgan Stanley and other firms that have been hammered in the ongoing financial crisis.
“I want the short sellers to know today that I am watching. If it’s proper and legal, they have nothing to worry about,” Cuomo said. “It is illegal, however, when such shorting is combined with the spread of false information in order to bring a company down.”
Short-selling occurs when traders borrow shares of a stock they expect will fall and sell them. If the stock does indeed fall, the traders buy the cheaper shares to cover the borrowed ones and profit from the difference.
Naked short-selling occurs when sellers don’t actually borrow the shares before selling them. It’s a practice some say is partially responsible for the huge drop in the shares of investment banks like Lehman, Merrill Lynch and Bear Stearns Cos., which JPMorgan Chase & Co. bought earlier this year.
Cuomo said he believes the federal government has been “ineffective” in dealing with short sellers and said his office would go after traders found to be illegally using the practice to manipulate markets.
“The markets need to be stabilized, and one way to help bring about such stability is to root out and deter short-selling that is based on the spread of false information,” Cuomo said.
Cuomo said the probe would employ the state’s powerful Martin Act, which provides criminal and civil enforcement powers for publicly traded companies.
On Wednesday, the Securities and Exchange Commission adopted rules it said would provide protections against abusive “naked” short-selling.
The SEC this summer issued a temporary emergency ban on naked short-selling in the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks, but the new rules apply to trading in the broader market.
Meanwhile, state Comptroller Thomas P. DiNapoli on Thursday said short-sellers will no longer be able to borrow stocks owned by the state pension fund for their activities.
The state Common Retirement Fund will remove the shares of 19 bank and brokerage firms — including Goldman Sachs Group and Morgan Stanley — from those available in its Securities Lending Program.
The 19 firms were identified by SEC in its July 15 emergency order. Under DiNapoli’s order, more than 105 milion shares wil be temporarily removed from the pool of securities that are available for borrowing. That represents less than 10 percent of the $29.5 billion program.
The action is not permanent, but no end date was set.
News Business Reporter Jonathan Epstein contributed to this report.
