Emergency order will try to protect struggling firms against 'naked shorting'
By Alistair Barr, MarketWatch
Last update: 6:17 p.m. EDT July 15, 2008
SAN FRANCISCO (MarketWatch) -- The Securities and Exchange Commission said Tuesday that it will try to limit so-called "naked" short selling of shares in Fannie Mae, Freddie Mac and big brokerage firms.
The SEC will issue an emergency order stating that all short sales of shares in these companies will be subject to a "pre-borrow" requirement, said Christopher Cox, chairman of the SEC. This will last for 30 days, he said. The SEC is also planning more rule-making focused on short selling in the broader market, Cox said.
In a typical short sale, traders sell borrowed shares, hoping to buy them back at a lower price and return them to the lender. The difference is kept as profit. In naked shorting, a trader shorts a stock without first making necessary arrangements to borrow shares. That sometimes means the seller fails to deliver the stock to the buyer and the trade can't be settled, running afoul of securities laws.
Imposing a "pre-borrow" requirement on short sales of some shares will force traders to make sure they have located securities before putting on negative bets. That may limit the pressure on the stocks included in the emergency order.
In addition to Fannie (FNM: and Freddie (FRE:, shares of primary dealers including Lehman Brothers (LEH: , Merrill Lynch (MER: , Morgan Stanley (MS: and Goldman Sachs (GS: ) will be covered by the SEC order, Cox said.
Fannie and Freddie shares have slumped roughly 70% in the past month as investors worried they may need to raise more capital to cover losses from their huge mortgage exposures. The government stepped in over the weekend, proposing a bigger line of credit for the companies and possible equity investments.
Lehman has also been hit hard by the mortgage-fueled credit crisis. Shares of the brokerage firm have slumped more than 45% in the past month.
Lehman shares rebounded 6.6% to close at $13.22 on Tuesday.
However, Fannie and Freddie stock continued to plunge, losing 27% and 26%, respectively, despite the SEC's plans to limit naked shorting. The Dow Jones Industrial Average closed below 11,000 points for the first time in two years.
As the credit crunch has deepened and financial-services stocks slumped more and more, the SEC has been under pressure to crack down on rumors and speculation that may have contributed to the carnage.
In recent days, the regulator's enforcement division has subpoenaed more than 50 hedge fund firms, including Citadel Investment Group, run by Ken Griffin, and SAC Capital Advisors, headed by Steven Cohen, The Wall Street Journal reported on Tuesday.
The SEC is trying to find out whether hedge funds and other traders knowingly spread false information about Bear Stearns and Lehman to manipulate shares of the struggling brokerage firms, the newspaper explained, citing an unidentified person familiar with the situation.
A Citadel spokesperson declined to comment, as did SEC spokesman John Heine. A spokesman for SAC didn't immediately return a phone call seeking comment on Tuesday afternoon.
On Sunday, the SEC said it would immediately start examinations in conjunction with other regulators to try to stop the intentional spread of false information to manipulate securities prices. The announcement was made on the same day the U.S. Treasury and the Federal Reserve unveiled plans to support Fannie and Freddie.
Broker dealers and investment advisers are supposed to have internal controls and procedures to spot and prevent market manipulation, the SEC said in a statement on Sunday.
The examinations will help the SEC "double-check that broker dealers and investment advisers have appropriate training for their employees and sturdy controls in place to prevent intentionally false information from harming investors," Cox said.
Alistair Barr is a reporter for MarketWatch in San Francisco.
Met dank aan een lezer.
Dit leeft, want wat er nu allemaal gebeurd?
Daar zijn geen woorden voor.