New York Attorney General launches Criminal Probe of “short-selling” in Stock Market

NEW YORK – New York’s attorney general says he’s 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 company’s stock will fall.

Short-selling is not illegal. But Cuomo says he will focus on whether short sellers engaged in conspiracy or spread bad information to influence the stock prices of Lehman Brothers Holdings Inc., American International Group Inc. and other firms that have been hammered in the ongoing financial crisis.

http://news.yahoo.com/s/ap/20080918/ap_on_bi_ge/cuomo_short_selling

UPDATE:

  • SEPTEMBER 18, 2008, 3:39 P.M. ET
  • Cuomo Plans Short-Selling Probe

    New York Attorney General Andrew Cuomo has started a “wide-ranging investigation into short selling in the financial market” related to companies under pressure over the past week, such as Lehman Brothers Holdings Inc., American International Group, Morgan Stanley and Goldman Sachs Group Inc.

    In a conference call with reporters, Mr. Cuomo said that in the past few days his office has received complaints about false rumors spread by short sellers. “Short selling is not illegal, but when combined with the spread of wrong information, that is illegal,” he said.

    Mr. Cuomo said a recent decision by the Securities and Exchange Commission to require more disclosure of investors’ short positions didn’t go far enough. “I believe the SEC should freeze short selling of financial stocks on a temporary basis,” Mr. Cuomo said. 

    The SEC is also investigating rumor mongering and has sent subpoenas to more than 50 hedge funds. An SEC spokesman couldn’t be reached for comment.

    Morgan Stanley Chief Executive John Mack has been aggressively trying to limit the downward moves in his company’s stock. Company executives have said they believe short sellers are spreading false rumors about the company’s prospects. The company’s stock slid sharply this week because of fears about customer defections, even though the company released better than expected earnings for the quarter ended Aug. 31 and underscored that its balance sheet is more sound than other investment banks that ran into trouble recently.

    Mr. Mack also spoke with numerous federal government officials as well as Goldman Sachs Chief Executive Lloyd Blankfein five or six times in the past few days, to discuss how to reduce the influence of short-sellers, a person familiar with the matter said.

    Also former Morgan Stanley Chairman and CEO Philip Purcell, in a rare public comment about his old company, urged the SEC to pass tougher rules to rein in short sellers. “At a minimum, the SEC must follow the FSA and ban short selling of financial stocks,” he said Thursday afternoon. referring to the U.K.’s Financial Services Authority. In an unusual move, the FSA, U.K.’s market regulator, on Thursday banned short selling in financial stocks until January.

    Mr. Purcell added that the SEC “should also reinstitute the uptick rule and evaluate calling in the outstanding shorts on financial stocks to get true cash-price discovery at this critical time.”

    Write to Aaron Lucchetti at aaron.lucchetti@wsj.com, Amir Efrati at amir.efrati@wsj.com and Kara Scannell at kara.scannell@wsj.com

    http://online.wsj.com/article/SB122176389889653245.html

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