Looks like the authorities will start to nail down on short selling and possibly put more restrictions to it?
Now I'm beginning to think why short selling is not allowed in PSE. There's probably a good reason for it...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQeq1yaXSHzQ&refer=home
Short-Selling Crackdown Extends to New York, London (Update2)
By Michael Tsang
Sept. 18 (Bloomberg) -- Financial regulators in the U.S. and U.K., attorneys general in New York, Texas and Connecticut, and the three largest U.S. pension funds are cracking down on short sellers in the wake of the collapse of Lehman Brothers Holdings Inc. and American International Group Inc.
Hedge funds and investors who profit from share declines are being scrutinized after a crisis of confidence in the financial industry erased more than $3 trillion from stocks globally this week. Goldman Sachs Group Inc. and Morgan Stanley, the only remaining independent securities firms on Wall Street, suffered the worst-ever declines yesterday. Morgan Stanley's chief executive officer, John Mack, said short sellers may be spreading false information and using abusive tactics to attack companies.
``You have to enforce the rules with regards to short selling,'' said Mario Gabelli, who oversees about $28 billion as chairman and chief executive officer of Gamco Investors Inc. in Rye, New York. ``Shorts were running amok.''
The U.S. Securities and Exchange Commission said it may require hedge funds to disclose short-sale positions and plans to subpoena their communications, while the Financial Services Authority in the U.K. banned short selling financial shares for the rest of the year.
New York Attorney General Andrew Cuomo began an investigation into whether bears illegally drove down stock prices of financial firms. The California Public Employees' Retirement System and the New York State Common Retirement Fund decided to stop lending shares for short sales, after a similar move by the California State Teachers' Retirement System.
Stocks Rally
U.S. stocks rallied the most in six years today, with the Dow Jones Industrial Average jumping more than 400 points, on the initiatives and prospects the government is formulating a ``permanent'' plan to shore up financial markets.
Hedge funds and investors managing more than $100 million in securities would be ``required to promptly begin public reporting of their daily short positions,'' Chairman Christopher Cox said in a statement yesterday.
Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference. In a practice called naked short selling, traders never borrow the shares, raising concerns that investors are flooding markets with sell orders to drive down prices.
Market Disinfectant
Additional SEC rules took effect today to halt manipulative trading. They extend to the options market rules governing the prompt delivery of borrowed shares, impose penalties on brokers if their clients haven't delivered shares to buyers three days after a short sale, and make it a fraud for investors to lie to their broker about locating shares to be sold short.
``It's a reflection of the view that disclosure is the best disinfectant,'' said Barry Barbash, a partner at Willkie Farr & Gallagher LLP in Washington, who previously headed the SEC division that oversees investment funds. ``If a person needs to disclose an abusive practice, it's likely the person is going to stop engaging in the practice.''
Cuomo said he'll use the state securities-fraud law, the Martin Act, to pursue investors for illegal sales. The law permits criminal and civil actions.
Watching Short Sellers
``The federal government has been ineffective when it comes to regulating these markets,'' he said. ``I want the short sellers to know today that I am watching.''
In Connecticut, Attorney General Richard Blumenthal said he has been investigating allegations of false information being spread about financial companies. He declined to identify them.
Texas Attorney General Greg Abbott said in a telephone interview he issued letters to the states' two largest public employee pension plans -- the Teachers Retirement System of Texas and the Employees Retirement System of Texas -- asking that they halt the lending of their shares for short selling.
In a memo to employees, Morgan Stanley's Mack, 63, lambasted short sellers for allegedly pushing his firm's shares lower and said the management committee is ``taking every step possible to stop this irresponsible action in the market.''
``There is no rational basis for the movements in our stock,'' wrote Mack, who contacted Cox and Treasury Secretary Henry Paulson. ``We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down.''
Shares of Morgan Stanley sold short reached 45 million at the end of August, 25 percent more than at the end of the second quarter and almost triple the amount a year ago.
Chanos's Response
James Chanos, president at Kynikos Associates Ltd., the $7 billion hedge fund based in New York that specializes in short selling, opposes the SEC's decision and said poor business strategies are to blame for the decline in company share prices.
Hedge funds, private pools of capital whose managers participate substantially from any profits on invested money, prefer to keep their positions secret to prevent other traders from stealing their strategies.
``We seem to have capitalism on the upside, and socialism on the downside,'' Chanos, one of the first to raise questions about Enron Corp.'s accounting, said on Bloomberg Television. ``That's a pretty heady brew for country that holds itself out as a free market paragon.'' Chanos said his firm isn't shorting any of Wall Street's largest securities firms.
Funds that specialize in shorting stocks have returned 9.4 percent this year, the biggest gain among strategies tracked by Hedge Fund Research Inc. in Chicago. The Standard & Poor's 500 Index declined 17 percent, including dividends.
Morgan Stanley, Goldman Sachs
Morgan Stanley shares advanced for the first time in eight days today, gaining 3.7 percent to $22.55 after earlier falling as much as 46 percent. Goldman slid for an eighth day, dropping 5.7 percent to $108 after losing 25 percent at midday.
The stocks declined more than a third over the eight-day stretch after the Lehman filed for bankruptcy protection, the government took control of AIG in a $85 billion seizure and Merrill Lynch & Co. sold itself to Bank of America Corp.
Wachovia Corp., which is discussing a combination with Morgan Stanley, surged more than 50 percent after U.K. regulators banned short sales on banks and brokers. Wachovia rose as much as 64 percent, leading gains in the KBW Bank Index. Nineteen other financial firms in the index, including Regions Financial Corp. and National City Corp., gained more than 10 percent.
The FSA introduced its measure after U.K. politicians and some investors blamed short-sellers for HBOS Plc's plunge before it agreed to a 10.4 billion-pound ($18.9 billion) takeover by Lloyds TSB Group Plc. The London-based regulator will also require daily disclosure of existing short positions in financial companies of more than 0.25 percent, it said in a statement today. The rules will remain in effect until Jan. 16.
``Government regulators are stepping in and saying, `This needs to come to a stop and this is how we're going to fix it,''' said Kelli Hill, a money manager at Ashfield Capital Partners in San Francisco, which oversees $4 billion. ``This is the thing the market needed.''
