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SEC to probe over 24 hedge funds movement: Report

Source: PTI
Last updated on: September 25, 2008 14:42 IST
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The US regulator Securities and Exchange Commission has ordered more than two dozen hedge funds to hand over trading information, in a bid to crack down on rumour mongering and abusive short selling, a media report says.

Quoting people familiar with the matter the Wall Street Journal said: "The Securities and Exchange Commission ordered more than two dozen hedge funds to turn over trading information as it ramps up its investigation into whether traders were spreading rumours to manipulate shares."

Hedge funds maximise absolute returns using a broad range of strategies, including unconventional and liquid investments.

In an order dated September 22, SEC said, six financial institutions -- American International Group Inc, Goldman Sachs Group Inc, Lehman Brothers Holdings Inc, Morgan Stanley, Washington Mutual Inc and Merrill Lynch & Co --may have been subject to such manipulation, WSJ said.

The broad investigation is part of an effort to crack down on rumour mongering and abusive short selling, which some believe contributed to the collapse of Bear Stearns.

Earlier this year, the SEC sent orders to more than 50 hedge funds to see whether they were spreading rumours about Lehman Brothers, including apparently false information about takeover talks and the possibility of government financing.     

In a regular short sale, a trader sells borrowed stock anticipating that it would drop and then can be bought at a lower price.

The order requires information to be handed over with a statement attesting to its accuracy and seeks a wide range of trading data and email communications over a period of three weeks. 

The order requested detailed and extensive information about transactions conducted between September 1 -19, when certain financial markets came close to freezing up, threatening the broader economy.

The requests include details of funds' positions in stocks, derivatives, swaps and other financial instruments, as well as when trades were initiated and settled and whom they involved.

Concerns about abusive short sales increased leading up to Lehman Brothers' bankruptcy filing and moves by other financial companies to seek cash infusions or merger partners, the report added.

Last month, SEC temporarily banned short selling in stocks of financial companies and at the same time it announced an investigation into credit-default swaps, complex instruments akin to insurance contracts.

The SEC is trying to determine whether any traders were involved in abusive short selling, in which numerous short positions were placed at once and the stocks were never borrowed and the position never covered, which can have the effect of putting extra selling pressure on stock prices, the report said.

The SEC is also seeking detailed information about rumours or other information received by the funds and how it was communicated. Hedge funds also have to turn over information if they forwarded a message to anyone, it added.

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