September 25, 2008 / 8:31 PM / 11 years ago

Expanded U.S.short-selling ban list raises eyebrows

NEW YORK, Sept 25 (Reuters) - The temporary short-selling ban aimed at protecting financial companies from ruinous stock freefalls has expanded to include some less than obvious candidates — such as your local drugstore.

The original list of companies protected from the investing strategy that only pays off when shares go down was dominated by banks, insurance companies and financial services firms.

On Thursday, CVS Caremark Corp (CVS.N), the pharmacy chain that sells medicine in the back, cigarettes up front and virtually everything else in between, turned up on the list of companies that are not permitted to be shorted.

The addition to the ever-lengthening short list has left some scratching their heads over why CVS and other non-financial companies would need or deserve such protection.

“This whole thing looks like it was put together at the last moment,” said Richard Gates, portfolio manager of TFS Capital’s TFS Market Neutral Fund, a long/short mutual fund.

“They’re adding a lot of companies that are outside the financial services industry and it seems to be getting to be a bit silly from our perspective.”

How CVS, whose shares hit a year low this week, qualified for the short ban lies not with its drugstores but with the Caremark pharmacy benefit manager (PBM) business, which includes a minuscule insurance component involving Medicare part D coverage plans, the company explained.

Rival PBMs Medco Health Solutions Inc MHS.N and Express Scripts Inc ESRX.O, which have similarly insignificant insurance components, also were afforded the protection against short selling.

“We didn’t request it. It just happened,” Express Scripts spokesman Steve Littlejohn said of the company’s inclusion on list of NASDAQ companies gaining the temporary protection.

Littlejohn described Express’ insurance business as “very tiny, highly specialized,” involving a few thousand of the company’s tens of millions of clients.

But CVS and Medco had to seek inclusion.

New York Stock Exchange spokesman Scott Peterson said its companies were notified of U.S. Securities and Exchange Commission criteria for the short-selling ban and told they could apply for inclusion.

“Companies have to certify to us that they believe they qualify under one or more of the seven categories laid out by the SEC and justify it in writing to us and then we’ll put them on the list,” Peterson said.

Medco spokeswoman Ann Smith said its move was prompted out of a sense of fairness after several investors asked why Express Scripts was on the list and not Medco, as well as for “relief from excessive short selling during this volatile time.”

Diamond Hill Investment Group (DHIL.O), a company traded on Nasdaq that was on the original SEC list of 799 companies that could not be shorted, actually asked to be removed from the list.

“Maybe Diamond Hill had a better understanding about short sellers and their important role in the markets than the CFO of a company like CVS,” Gates said.

But if you don’t have a bank on your balance sheet and you want to keep the short sellers at bay, insurance — no matter how insignificant to the health of your business — may be just the insurance you need. (Additional reporting by Kristina Cooke; editing by Carol Bisihopric) (Reporting by Bill Berkrot)

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