July 14, 2008 / 12:17 AM / 11 years ago

SEC says expanding rumor crackdown

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.

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 (ADS.N) 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.

Rumors have dogged Lehman Brothers for months. Last Thursday its stock dropped on rumors that some of its key customers had pulled business away from the investment bank. Late in June, its stock fell on rumors that it was going to be bought out at a below market price. Both rumors could not be substantiated. The SEC is investigating whether false information is being spread about Lehman, one source has said.

Rep. Spencer Bachus, a Republican from Alabama who has said the collapse of investment bank Bear Stearns in March raised questions about information spread by short sellers, welcomed the SEC announcement.

Reporting by Rachelle Younglai in Washington with additional reporting by Doris Frankel in Chicago and Sinead Carew in New York; Editing by Tim Dobbyn

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