SEC says boosting 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, Freddie Mac and Lehman Brothers.

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, 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.

The SEC said the 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.

There has been increasing criticism of rumors, speculators and short sellers 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.

In April, the SEC settled with a Wall Street trader accused of intentionally spreading false rumors about a new lower price of a deal to buy Alliance Data Systems Corp while selling the stock short. The deal was never consummated.

The SEC accused Paul Berliner, formerly associated with Schottenfeld Group LLC, of using instant messages to 31 traders at brokerage firms and hedge funds to spread the rumors.

Berliner neither admitted or denied the SEC's accusations in agreeing to pay $156,000 to settle the case.

Fears that mortgage finance companies Fannie Mae and Freddie Mac might have trouble borrowing and may not have sufficient capital to cover rising mortgage delinquencies have pummeled their stocks.