Can the SEC Really 'Quell Rumors'?

Does anyone really think the SEC will be able to stop rumors? Really?

The U.S. Securities and Exchange Commission said Sunday that it and other regulators are firing up new examinations to prevent stock-price manipulation by short sellers and others. The agencies' goal is the "prevention of the intentional spread of false information intended to manipulate securities prices."

Now, who is to say what is "false" vs what is "wrong"? We are now delving into the realm of a person's intent, and when you do that it is a loser's game. On another note, why are we only looking at short sellers?

How about CEOs and CFOs of financials who said "things were ok" only to write down billions months later? Are they not just as guilty?

The SEC is up against it in this one because up until now, the shorts have been right and the firms that have come under attack are poorly managed, over-leveraged and have questionable business models for down times. Read Bear Sterns (BSC) and Lehman (LEH).

If I "think Lehman has questionable loans and think management is not forthcoming enough so things must be worse,"  then am I spreading false rumors or just speculating? Is this going to be a rear-view-mirror test? Are we going to prosecute people after the fact when what they have said proves wrong? Will journalists get into trouble by reporting these rumors?

In an election year like this one, will we investigate Congresspeople who throw bombs about the economy and stocks in an attempt to curry votes? In effect, they are hurting equities and stock prices by making the current situation seemingly worse than it is. Surely we can prove half of what is said there is "less than truthful."

Is a SEC investigation into Sen. Schumer coming? Clearly his letter led to a run on the bank [IndyMac]. Any bad news is bad for Republicans in the election. Was Schumer pushing Indymac over the edge for votes?  If we are going to investigate Bill Ackman and David Einhorn, let's look at Schumer's motives also.

Rumors have and will be around forever. If you have a strong business, they may affect the share price temporarily, but not impair it. If your business is already weak, they may hurt it.

How about the SEC investigates all those newsletters I get in the mail pumping stocks that never go anywhere?

Comments

[Kinabalu:]

When Greg Weston says, right here on Seeking Alpha, that RWT "carries this $150 million dollar debt as a $72 million debt, thus booking a $78 million dollar profit". He is making a statement of fact. Whether he believes it or not is irrelevant. You can ascertain in 10 seconds that the statement is false by looking at the RWT 10Q and seeing the $150 million dollar debt carried at...$150 million, not $72 million.

seekingalpha.com/artic...

If you combine this false statement with his stated position of short RWT common and long RWT puts I think you have a prosecutable offense. The SEC needs to hit some of these liars hard to set some examples.

Your comment above: "the statement you made is not false if you believe it" is ridiculous.

2008 Jul 14 03:17 PM

[QUESTIONABLE:]

I remember a time when any use of the media to make a statement positive or negative about a company was a Felony and the person making the statement faced time in CLub Fed. This has become a major issue that needs addressing. Just because some firm a week ago stated that General Motors in their employees opinion may be looking at bankruptcy the stock fell and fell fast. Would anyone reading this like it if someone got on the news and made a comment about your employer and the next day their stock fell so much you were told you were out of work???? A prime example, under the law a Corporation operates as an individual, it can buy, sell, pay taxes, and be held liable in civil court. You as an individual though you are a real person are to be free from falsehoods, lies and can sue civilly any person who slanders your character, in most States you can file Criminal Charges and have the person arrested. This has been allowed to go on for too long.... but, the same companies that took advantage of this by spreading their own positive rumors to drive their stock prices up are now being the ones getting the negative rumors....... unfortunately Real People and their Families suffer with the job loses.. Wake up America.

2008 Jul 14 03:57 PM

[Just Askin:]

The SEC has long had an institutional bias against the hype that is used for pump and dumps. And now you complain about the SEC attempting to balance that bias by making disparagement leading to distort-and-short manipulation unlawful as well? I suppose those billions and billions of dollars worth of fails-to-deliver trades that are posted every day are just a figment of everyone's imagination too?

2008 Jul 14 05:50 PM

[Mark McHugh:]

What about those who use rumors to manipulate the currency market?

I think it would be so cool if Chris Cox tackled and cuffed Paulson the next time he said, "Strong Dollar."

2008 Jul 14 06:16 PM

[Lil Davy:]

Pelican: what evidence do you have for your claim of:
a deliberate and malicious spreading of false info.

2008 Jul 14 06:57 PM

[dixie:]

Kinabalu is on-target. Weston's subsequent 7/4/08 SA article on CRZ is another good point.

He did not initially come clean and disclose his short positions. Such an article should firstly be viewed as self-serving irrespective of the acuracy of the contents.

Your follow-up comment, "the statement is not false if you believe it" implies that delusional thinking is OK. Really, some things are black and white. Facts don't change just because someone decides to believe otherwise.

2008 Jul 14 07:30 PM

[pelican:]

Mrzin,

What evidence??

Fact: Someone had to start the rumors about LEH that 1) They were going to be acquired by Barclays at $15/share; 2) Firms such as PIMCO either stopped trading or cut back their trading with LEH. In other words, the original source(s) is obviously making statements to damage LEH, knowing that they are baseless, ergo malicious intent. If I subseqently here that rumor and spread it further than that's a different story, which I suppose is what Todd's point it. However, that point is already understood and not germain, in my view, to the seriousness of what has been occurring in the market place and what needs to be addressed. There are dozens of financial institutions who are in worse shape financially than LEH and in large party you don't hear falsehoods being orginated about them. Why not? Because everyone remembers Bear Stearns and, therefore, some people are trying to profit illegally by fabricating rumors such as the ones mentioned above. Everyone knows how critical confidence is for the viability of an investment bank. Please note, I have nothing against short sellers. I short stocks myself. But I'm not going to be intellectually dishonest and rationalize the huge decline in LEH's stock price as being solely due to fundamentals. Investors don't like uncertainty and as the level of fear rises, the further the stock drops. It would be naive to suggest that rumors regarding LEH since the BSC collapse has had little to no impact on share performance.

I don't have a position either way in LEH but it annoys me to hear apologists minimize the gravity of what has been happening (re: spreading false rumors.). In addition, the media has been truly disappointing and there has been a piling on affect, coming from everywhere including this blog. I still read articles which mention the recent rumors but somehow fail to note how they were proven unfounded. You can read sentences like "Lehman is the weakest investment bank" as opposed to just "smallest investment bank", even though the latter is fact while the former could arguably be just opinion. Even the author of this article states "lehman has lied to investors, they should be the ones being investigated", which to me sounds ironic considering his point that there is so much grey area involved. I could argue that LEH actually believed they didn't have to raise capital at the time they made that statement, not fully realizing that the capital markets were really driving the process until they were subsequently left with no choice. Today's comments by David Trone are spot on (see below), in my view, because regardless of what LEH does, bogus rumors are still winning out and keeping fear at a high level.

www.reuters.com/articl...

2008 Jul 14 10:33 PM

[THofler:]

"Pimco is pulling assets from LEH" was broadcast by CNBC as a "rumor." Within 10 min. Bill Gross had left skid marks getting on the air to catagorically assert that no assets had been pulled.

IF the SEC can find the source of that rumor, I could care less what he/she believed. All I care about is the size of his/her short position. A significant short position should result in a perp walk & hard time. I have never owned shares of LEH.

2008 Jul 15 12:26 AM

[glassbox:]

Rumours get aggravated into REAL impact when people are given control of tools that can actually cause damage - even if the event has never actually happened.

Just look at the number of gun accidents that has happened in this country - shoot offs not because anyone is logically at the point but more driven by emotion.

Likewise, allowing short selling is like giving a mad man your gun and letting him run amok shouting that the sky is going to drop. The sky may never drop but bodies will start to drop and there will be blood.

There is something very wrong about this sell down. Its one thing to sell a stock because the company has been badly run, its another thing to think that one can have the tools to run it to the ground. I wonder about news commentaries saying that 'investors are dumping stocks'. Frankly, investors are not dumping stocks, its the shortists who are borrowing the stocks that are dumping the shares. Meanwhile, the real investors are obviously holding on to their stock.

At this point, I am sure that there will be stocks out there that are ripe for privatisation - the public markets have lost its integrity in pricing.

2008 Jul 15 06:28 AM

[glassbox:]

If I may make a wild suggestion: bring back the days of scrip trading and see if the shortists can have their day.

2008 Jul 15 06:30 AM

[of246:]

Kinabalu, in the same article on RWT you mention benefitting from the drop in price and using it to your advantage to buy more at a lesser price. You've sidestepped your way into larger losses as the company continues to underperform. How could you possibly turn around and cry fraud when you've clearly invested thousands in a failing company whose present value is a result of dropping 10 points within a month. Your losses don't add up at this point to the Co's supposed positive 10Q earnings (so you make is seem), so make the comparison. Perhaps you are unable to; considering you say you bought RWT @ 25-26 around 06/27/2008 and it now trades at 22. We have to ask the question of whether it is because you have yet to recover your losses on this investment that you are having trouble with Greg's anaylsis of this company? Considering he wrote the article a month ago and the analysis follows the trend today, I think you ought to reconsider investing in a volatile market that you obviously don't know much about. This is simply a blog and those who don't do their homework and invest it horrible companys should suffer as a result of their blind bets. You can't gamble without knowing the game.

2008 Jul 15 10:34 AM

[QUESTIONABLE:]

Its not unusual for a company to post information on itself to drive it's own stock down to conduct a stock buy back. When that happens and the is evidenced by an actual stock buy back it could indicate that the company is intentionally manipulating the market under "insider trading" ethnical violations because of personal knowledge that in the next year they ae going to release a product that will shoot their stock value through the roof. I don't think that the First Amendment covers this sort of cat and mouse game. As I stated before this is all illegal under the Constitution and Laws of our Government, but who does the enforcing. There is Case Law through the roof on claims of slander, lies, etc being protected under the First Amendment right to an Opinion..... this idea was shot down in each case all the way up to the Supreme Court.

2008 Jul 15 11:29 AM

[glassbox:]

Questionable, what you pointed out is very interesting. Is there anything wrong when a company wants to drive down its own stock price to conduct a stock buy back? Are shareholder's disadvantaged in any way? If not, why should the shareholders care?

In fact, when a short seller (who is not a shareholder and therefore have nothing to do with the company) drives down the stock price, I will definitely think it warrants a second look on manipulation.

2008 Jul 15 11:55 AM

[trader717:]

I guess we might as well throw EVERY SINGLE EQUITY RESEARCH ANALYST IN JAIL FOR SPREADING RUMORS, BECAUSE THEY ARE FALSE LIES. HAS ANYONE EVER FIGURED OUT WHY WALL STREET IS SO RELUNCTANT TO ISSUE SELL RATINGS. Last I've heard, it was something like 80% of ratings were Holds or Buys. It is because so many of these firms do business with the companies they are rating! Does anyone realize how often Equity Research Analysts are wrong? When they come out and say a firm's profit for Qx WILL BE .20 per share, down from .40 per share a year earlier. And then results come out and they are .60 per share. Does that not qualify as a false rumor?

Yes, there are many out their with financial interests in firms who will spread knowingly false rumors to benefit from a drop in the stock price. However, Todd is right in saying these rumors will never seize to exist. I am strongly against those who knowingly spread false rumors, but Todd is also right in saying that those with an opinion who publicly state what they believe and are short should not get penalized for spreading false rumors. An example of what I mean is David Einhorn literally starting with 20+ banks (and shorting a lot of them), and through DUE DILIGENCE, was able to narrow his list down to BSC and LEH and stayed short those. He has publicly come out and stated the problems he has found with Lehman. Is he spreading false rumors? Lehman says they are false. A proper shortseller who does their homework and makes assumptions on companies based on legitimate homework they have done should not be accused of false rumors. If this was the case, as I said earlier, every single Equity Research Analyst who makes assumptions (all of them do) should go to jail for this crime when they are wrong (which they often are). And yes, Analyst ratings, upgrades, and downgrades can significantly affect a stock.

2008 Jul 15 12:52 PM

[Kinabalu:]

Of246 I can't understand why people call Weston's work "analysis". If you aren't "having trouble with Greg's anaylsis" you are a fool.

FYI my average cost in RWT is below 22.

2008 Jul 15 02:36 PM

[QUESTIONABLE:]

THis is why there is now talk and pending legislation to regulate and even restrict short selling. One of the proposals is the seller has to hold documented evedence that the stock he is selling is truly on "Loan" to him by the holder for resale. There will be no Major changes from the Fed, such as full blown audits of transactions prior to enactment of any new laws because this could have a ripple effect that could push the Markets down beyond recovery.... Just like the Fed has overlooked the fact that purchases of energy futures are up 70% since 2000, and the demand for energy since 2000 is up 70%.... but, making purchases on the markets under loans has been the key issue that is seen in short sells,,,, it creates a grande illusion that there are more American Dollars in circulation than are actual, this drives down the value of the dollar on the world market, and increases inflation.... a process that since 2000 saw the lowering of the Fed's Interest rates.... This is NO Different than Federal and State Laws that state that Lottary tickets are not allowed to be purchased on "Credit" cards, and if done the winnings are the property of the lienholder.... So, let's look at this credit or loan purchases of stocks as a whole and not just shorts. Or, re-evaluate how purchases made on credit/loan are listed so that the dollar amount on paper which is hypothetical is tagged/marked/account for so as to ensure that this has no affect on the value of a dollar.

2008 Jul 16 02:48 PM

[QUESTIONABLE:]

I forgot to bring out my point, sorry, as too firms their brokers, if an individual wants someone's opinion on a company, it's worth/value or on it's stock, then let them go to that firm or their broker, behind walls and doors..... It is illegal for an Attorney to use the news media to "give unsolicited legal Advice," and to use the media without limitations. This is no different!!! I have opinions on the interpretation of law, but, I can not directly share them with the public if and when the public has access, the ability, and need to use my opinions. Everyday Attorney's, Licensed and Regulated, give opinions.... behind closed doors...... and companies should only be able to advertise a specific product, not put an accountant on television that talks about how good the company is doing. The Market has become a Profession that can destroy Lives as much as a World War with Nuclear Missiles... It does need to look at the field of Law and the Profession and use it as a basis for regulation of people that are involved with the World's Economy. A purchase or holding performed on a loan/credit is Money that DOES NOT exist except on paper...... Don't tell me this can not affect the Actual Market values of stock and Currency when traded like stock!!!!!!!

2008 Jul 16 02:58 PM

[glassbox:]

Questionable, again very interesting suggestion by you about comments made in the media by some in the profession. Perhaps its time we also regulate what analysts and managers can say in the media. Come to think of it, it is advertisement, isn't it when a manager tells the whole world in the media what he thinks the regulators should or should not do in the current crisis. I'm sure he says that to his clients in private too - all with the intention of getting them to invest more with him.

2008 Jul 16 08:51 PM

[User 227477:]

New York Times reported that hedge fund managers have a new champion in their effort to keep legally dodging the taxes the rest of us pay: none other than New York Senator Charles Schumer. Now you know who is Schumer's friend and why he caused the bank run on Indymac. He truly support hedge fund and private equity because they truly support him.

www.nytimes.com/2007/0...

"Large Investor decided to pay a few bucks to a Senator in New York to force the issue."(Prospect Mortgage Backed By Sterling Fund--Private Equity Acquired The Mortgage Branches from Indymac before FDIC takeover)
www.housingwire.com/20.../

"And do remember that there are many investment bankers located in New York, making them pretty influential constituents of Sen. Schumer."
www.pasadenastarnews.c...

"In a Sunday news conference, he said everything in his letter was already known to the public."
If it was already known to the public, what is the reason for his public letter? It is contradict to what he said previouly :"I just bring private message to the public. Do not kill the messanger." What a great liar from time to time!
www.cnn.com/2008/POLIT...

Same thing he did for FRE and FNM, he forced FRE and FNM to buy $145 billion bad loans last September. So his hedge fund friend could short the stock, then his private equity friend could take huge discount to acquire the properties. So obvious criminal acts, but he is still out law and do whatever to harm the American and benefit himself and his friends.

2008 Jul 17 02:35 AM

[QUESTIONABLE:]

As USER points out. There are many invloved including our Representatives. Bernanke told the Senate and House that there is no single shot in the arm repair.... He was wrong. As I watched him he stumbled through carefully watching what he said.... he knows which Government Officials have been involved in this with many on the committees he was addressing, the Fed has been investigating..he is scared not just nervous.. but he is only human and is choosing his battles wisely.. if he would blantantly come out in one of these telivised meetings and state the truth we citizens and the companies affect by Chineses Imports would back him after all We are his TRUE BOSS and many Government Officials forget we are their TRUE BOSS too.. First of all the birth of NAFTA coincided with this emerging Futures Market under Wendy Graham and within the Bush Senior Administration when she was the head of the CFTC.... China loved this, they starting buying up properies in Central America and building Private Ports, agreed to take over operations of the Panama Canal, and boom, now 95% of all products made in China come across our border tax/tariff/duty free..... If a true accounting were taken, it would be determined that the amount they owe the US in trade would be equal to our debt with them.... The one shot answer to this is FREEZE the Futures/Commodities Markets.... under emineint domain (Threat to National Security) take possession of all market shares there of oil, auction it off, and then tell the holders, welcome to capitalism... this would put all of this future yet to be pumped, artificailly inflated demand, oil back into circulation..... boom, the US Dollar would rebound past the Euro which would be stuck at the mercy of the London Futures/Commondities Market...... Then send Port Authority to our Borders and inspect every Load.... "Made In China" gets refused, Chinese Products get backed up at the border, and we tell "COMMUNIST" China, oops, "WE OWE YOU, YOU OWE ME, LETS BECOME A HAPPY FAMILY," (Barney sing song) and say lets call it even and from now on, if you wan to use the borders instead of the ports start paying! If the intent of these Market are to allow Airlines and the like to buy Oil ahead of the price increases, why are they still affected?????? Because that is the written intent and Story Wendy Graham gave when she created this monster with help from the Bush SR Administration... Belta can buy oil all day long, only 3% of a barrel even comes out as Jet Fuel..... they can't process it, so??? Bernanke stop repeating lies that are told to you!!!! What about the fact Wendy Graham signed this into action her last day as Head of the CFTC, the next day started work as a vice president at Enron and is the ONLY EXCUTIVE OF ENRON, NOT QUESTIONED, NOT CHARGED, AND WHOSE HUSBAND IS CURRENTLY AN ADVISOR TO PRESIDENTIAL CANIDATE MCCAIN???? We need to question why she is a free woman not argue over who said who was a spy in the current Bush administration...... ask why the current Bush Administration's Attorney General's Office has/is shielding Wendy Graham...... Buys on the Futures' Market are up 70% since 2000, Demand for oil since 2000 is up 70%..... SHUT THE MARKET DOWN TODAY!!!!!!!!!!!!!!!!!...

2008 Jul 17 09:56 AM