The US Securities and Exchange Commission, seeking to jumpstart a hunt for suspected manipulation of financial stocks, will require hedge fund managers, brokerages and institutional investors to describe under oath their bets on the firms.
Investors with “significant” trades in the companies’ securities or credit default swaps must disclose their positions and provide “certain other information” in written statements, the regulator said yesterday. SEC spokesman John Nester declined to say who would receive the requests.
The SEC issued a series of emergency measures, rules and warnings to hedge funds this past week as lawmakers including Senate Banking Committee Chairman Christopher Dodd and executives such as Morgan Stanley Chief Executive Officer John Mack said traders may be spreading misinformation and using abusive tactics to attack companies. On Sept 17, the agency said it may also force funds to hand over their communications.
“This is the SEC saying it’s going to get tough,” said Barry Barbash, a former attorney at the agency now at Willkie Farr & Gallagher LLP, whose clients include hedge funds. “By emphasising that it’s under oath, they’re trying to say, ‘Don’t think it’s going to blow past us. Don’t try to fast-talk us. We’re taking a close look at what’s going on.’”
Return Date: The regulator, which typically relies on subpoenas to acquire information, has resorted to sworn statements in some of its most prominent probes, such as its initial inquiry into the fraud that toppled WorldCom Inc in 2002. In that case, investigators gave the company five days to describe what led it to restate earnings.
“I’m sure they’ll have a very short return date for those sworn statements,” said Gregory Bruch, a former SEC attorney who is a partner at Willkie Farr & Gallagher LLP in Washington. “It’ll give them a tremendous amount of information quickly.”
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The New York Stock Exchange’s regulatory arm and the Financial Industry Regulatory Authority, which polices almost 5,000 brokerages, will conduct a parallel probe into short sales, including on-site visits to firms, the SEC said. Large declines in brokerage shares this month were often accompanied or preceded by moves in credit default swaps tied to those firms, the Wall Street Journal reported today.
“Abusive short selling, market manipulation and false rumor mongering for profit by any entity cuts to the heart of investor confidence in our markets,” said Linda Thomsen, the SEC’s enforcement chief. “We will root it out, expose it, and subject the guilty parties to the full force of the law.”
‘Go Get Them’: The regulatory efforts are already attracting criticism from investors. James Chanos, president of hedge-fund firm Kynikos Associates Ltd, told CNBC yesterday there is “no shred of evidence in the UK or the US about a conspiracy or manipulation of shares” and that short-sellers aren’t to blame for the week’s declines.
“If you have managers actively engaged in false rumour mongering and naked short selling, I’d say go get them,” said Bill Grayson, president of Falcon Point Capital LLC, a San Francisco-based investment firm. “But a wholesale witch hunt is not going to be met with a lot of smiling faces in the hedge-fund community.”
Among the SEC’s other measures aimed at shoring up investor confidence this week, the regulator said it will force hedge funds and investors managing more than $100 million in securities to disclose their daily short-sale positions.
Yesterday, it temporarily banned short sales in shares of 799 financial companies through Oct 2. Companies on the list include Morgan Stanley, Wachovia Corp, Washington Mutual Inc, Goldman Sachs Group Inc and Warren Buffett’s Berkshire Hathaway Inc.