SEC Subpoenas Hedge Funds’ Records

The Securities and Exchange Commission has subpoenaed records from 50 hedge funds in an investigation into stock price manipulation. This should put the fear of God into some of the money managers because of the number of funds involved. If the SEC uncovers evidence of shady trading in the stocks of Bear Stearns, Lehman Brothers, Fannie Mae and/or Freddy Mac, the next Congress will slap severe restraints on the hedge fund industry.

The decline in the price of the stocks in these companies came in part because of naked short selling. Bloomberg explained, “In traditional short selling, traders borrow stock through a broker and aim to profit by selling shares at a higher price and later buying them back at lower prices to repay the loan. Naked short sellers do the same thing, with one difference: They don't borrow shares, which means they can drive down prices by flooding the market with orders to sell shares they don't have.” The SEC has temporarily banned the practice.

The SEC’s press release on the investigation stated, “the SEC and other securities regulators will immediately conduct examinations aimed at the prevention of the intentional spread of false information intended to manipulate securities prices. The examinations will be conducted by the SEC's Office of Compliance Inspections and Examinations, as well as the Financial Industry Regulatory Authority and New York Stock Exchange Regulation, Inc.”

The release added, “The securities laws require that broker-dealers and investment advisers have supervisory and compliance controls to prevent violations of the securities laws, including market manipulation. Examiners will focus on these controls and whether they are reasonably designed to prevent the intentional creation or spreading of false information intended to affect securities prices, or other potentially manipulative conduct.”

In other words, the SEC is pretty sure someone spread false rumors about the attacked firms. The agency probably knows who, and it will probably do something along the lines of criminal prosecution when this is over. Yet, the more significant fact is the examination of whether the controls in existence are adequate to protect the market. Clearly, they aren’t, or Bear Stearns would still be operating as an independent business. If they aren't adequate, they will be tightened.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Kensington Review Home