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New York state to track down illegal short-selling practices

Text by AFP

Latest update : 2008-12-10

New York state's attorney general, Andrew Cuomo, launched an inquiry into illegal short-selling practices Thursday, suggesting they may have played a part in damaging investment giants Lehman Brothers and Morgan Stanley.

New York state on Thursday launched a probe into illegal short selling practices that may have hurt finance firms including Lehman Brothers and Morgan Stanley, state attorney general Andrew Cuomo said.

Cuomo said that short selling itself is legal but that "what is illegal is if you are spreading false information, rumors, and you join a conspiracy to purposely drive down the price of a stock, and you are profiting from the decline," he said in an interview with CNN.

Cuomo said the manipulation of the price of a stock with false information is securities fraud.

"Companies like Lehman, companies like Morgan Stanley, companies like Goldman Sachs who are seeing the rapid (share) declines, we have complaints that there are episodes of illegal short selling, and that is what we are investigating."

He declined to name the targets of the investigation.

US stock market regulators announced new rules Tuesday aimed at curbing speculative "naked short" sales that aim to profit from falling share prices.

The Securities and Exchange Commission said the new rules "strengthen investor protections" against this type of sale and will apply to the securities of all public companies, effective Thursday.

Short sales are designed to profit from a declining share price by an investor or broker arranging a sale of a share he does not own but has been "borrowed" on an agreement to return the share at a future date.

The new SEC rule is aimed at "naked short" sales in which the investor has not borrowed the sale but intends to do so.

Most short sales are not illegal but some naked short sales can allow traders to manipulate the market to force down prices, according to the SEC.

Date created : 2008-09-18