Traders Using Financial Turmoil to Manipulate Stocks

A raft of investigations has recently been announced by financial regulators into the possibility that some hedge funds are spreading false rumors during the current financial turmoil to push down the prices of securities they have sold short. This kind of market manipulation, if it exists, would be particularly odious as it preys upon the weak and contributes to the crisis. Here are some recent reports:

Iceland to investigate suspected market manipulation (March 31)
Financial regulators in Iceland have “begun investigating whether market players may have deliberately spread rumours about alleged weakness in the island's banks … in order to profit on short selling of the currency and stocks.”

SEC Investigates Trading in Lehman Shares, People Say (March 28)
U.S. regulators are investigating whether traders spread false rumors about Lehman Brothers Holdings Inc.'s financial soundness to profit from a drop in the company's share price

Hunt for £100m rogue trader after attack on HBOS shares (March 21)
“Shares in Halifax Bank of Scotland fell by 17% as traders attempted to make a fortune by betting on the bank's falling stock. Malicious rumours circulated by speculators were blamed for the run …Britain's financial watchdog launched a criminal investigation to hunt down "ruthless" rogue traders …”

Australian Hedge Funds Reject Manipulation Claims (March 20)
“The Australian Securities and Investments Commission … said it was investigating a number of market participants about trading in certain securities.”

SEC Opens Bear Stearns Stock Manipulation Inquiry (March 18)
U.S. regulators are investigating whether traders illegally sought to force Bear Stearns Cos. shares into a tailspin last week by spreading false information about the firm's finances

No news of Canadian regulators investigating hedge-fund fabrications was found.

Comments

[drmalaka]

I could not agree more. BSC's problems were completely caused by short sellers. It had absolutely nothing to do with the fact that they were leveraged over 30-1 with most of their investments being in those super high quality CDOs. We should take all the money away from these short traders and give it to the management of BSC which did such a great job managing their bank!

Yeah right.

[bruin532]

Shorting BSC is not the issue. JPM getting a look at BSC books supposedly to buy their clearence business and then choaking off funding to BSC through their access to the Fed/Capitol. Finally spreading false rumors to the hedge funds that had shorted BSC getting them to pull their money in unison from BSC and causing a run and liquidity drain. That's collusion and thats what the toothless SEC is investigating. Look at the reversal of Lehman when they strengthened their balance sheet and the shorts had to cover and sent Lehamn up $18 now thats a lot of shorting. China dosent allow shorting and here we shouldent allow it to by done by any company or hedge that does business with them and could also adversly affect the outcome by choaking them off from credit, pulling their funds or having insider priviledged information.

[drmalaka]

Bruin, I agree with what you are saying but limiting it to shorts is not correct. These people will do anything to make money, there are no ethics, morals or laws in their world. To think they only do it on the short side is being blind. Do you think that when they find out that some people are taking a big short on a stock that they don't try to cause a short squeeze? The fact is that these bankers share confidential information they have. Cramer has an example in one of his books where he was short a stock and people found out and starting running it up. How did they find out? Was the guy taking his orders sharing that info with other people? Is it legal for him to share information on someone elses positions? In that situation Cramer got hurt by manipulation on the long side.

[phinsuntanning]

when the situation is like this you can
blame anyone, but is your responsibility
to keep your bank solvent.
March 31
Fiscal Year 2007: Capital/Assets
US
Bear Stearns 3,0%
Morgan Stanley 3,0%
Merril Lynch 3,1%
Lehman 3,3%
Goldman Sachs 4,5%
Citigroup 5,2%
JP Morgan 7,9%
Wells Fargo 8,3%
Bank of America 8,6%
Wachovia 10,2%

[jcrash]

They just need to have reporting requirements. Say 1% short of a company's float or more and you have to report your position. Included have to be shorts against the box, so you could easily be reporting both sides long and short. Very much in vogue at the moment to short what you hold long and pound it down while making $$ on options.

[GrapeApe]

I have figured for a while that unknown (unchecked?) insider trading has been taking place, but now I am beginning to believe that it is RAMPANT.

[venividivici]

I am totally opposed to shorting of stocks. It makes the market more of a casino. If you think a stock is going down, get out of it or don't buy it.
Equally, however, there is plenty of manipulation on the long side. How often do you see analysts maintaining "buy" recommendations on stocks while they drop through the floor?

[Ming]

If a stock should be sold, it should be sold. Why does it matter if you own the stock or not before you sell it?