SEC says expanding rumor crackdown

By Rachelle Younglai

WASHINGTON (Reuters) - U.S. securities regulators are boosting efforts to stop the spread of false rumors that threaten financial institutions, after a week that saw steep slides in the shares of Fannie Mae (FNM.N), Freddie Mac (FRE.N) and Lehman Brothers LEH.N.

In an unusual weekend statement, the U.S. Securities and Exchange Commission warned on Sunday that regulators would immediately examine whether broker-dealers and investment advisers have controls in place to prevent market manipulation.

Examiners from the SEC, New York Stock Exchange Regulation and the broker-dealer watchdog, the Financial Industry Regulatory Authority, will see if the controls are designed to prevent the intentional creation or spreading of false information.

Securities officials said the timing of the announcement was aimed at getting word of the crackdown out before Asian markets open on Monday, the first to trade globally.

"It's to prevent rumors that threaten commercial banks, investment banks and government-sponsored enterprises (Fannie Mae, Freddie Mac)" said one securities official on condition he was not named.

Later on Sunday, the U.S. Treasury Department and Federal Reserve unveiled sweeping measures to support Fannie Mae and Freddie Mac, offering loans and possible equity purchases.

The SEC said the rumor policy reviews are in addition to enforcement investigations already underway into alleged intentional manipulation of securities prices through rumor-mongering and abusive short selling.

The examinations "are aimed at ensuring that investors continue to get reliable, accurate information about public companies in the marketplace," SEC Chairman Christopher Cox said in a statement.

The Securities Industry and Financial Markets Association applauded the move and said it supports the "vigorous enforcement of existing regulation to ensure the integrity of our markets."

Jay Brown, a business professor at Sturm College of Law, said the SEC announcement was a way of saying to issuers: "We feel your pain and here is how we are going to handle it."

There has been increasing criticism of rumors, speculators and short sellers in recent months as share prices have declined and commodity prices, particularly oil, have soared.

Short sellers borrow shares they consider overvalued and sell them. If the price drops, they repurchase the shares, return them and pocket the difference.

While short sellers are often criticized by companies whose stocks they target and by investors betting the same shares will rise, short sellers say they are essential to the market by preventing stocks from being overvalued.

However, spreading false rumors in connection with either the purchase or sale of a security is illegal.

"The timing of the announcement seems to suggest that regulators have specific evidence that misinformation was making the rounds about Fannie, Freddie, and or Lehman Brothers last week," said options strategist Frederic Ruffy with WhatsTrading.com.