Securities Law

Did a Short-Selling Conspiracy Spark the Stock Market Debacle?

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Short-selling of a bank’s stock isn’t illegal. But when investors who are betting that a company’s share price will fall fuel the stock’s downslide with false rumors about the company, that can be a different story.

So the New York’s attorney general announced today that he is launching an investigation to see whether an illegal short-selling scheme helped eliminate much of the value of the stock of some of the country’s biggest Wall Street names within the last few weeks, reports the Associated Press.

Meanwhile, the Financial Services Authority, which regulates the stock markets in the United Kingdom, has banned short-selling there after the country’s biggest mortgage lender lost 37 percent of its value in three days, reports Bloomberg.

“This is the most interventionist action in the U.K. economy that we’ve seen for quite some time,” says former FSA official Chris Brennan, who is now an associate attorney at London-based Barlow Lyde & Gilbert. “It’s surreal.”

In New York, attorney general Andrew Cuomo “will focus on whether short-sellers engaged in conspiracy or spread bad information to influence the stock prices of Lehman Brothers Holdings, American International Group and other firms that have been hammered in the ongoing financial crisis,” writes AP.

He says he has received a significant number of complaints about short-selling.

Earlier coverage:

Guardian: “Global meltdown continues”

London Times: “Crisis hits home to threaten the Halifax”

ABAJournal.com: “Wachtell Lipton Client Memo Urges SEC to Target Rumor-Mongers”

ABAJournal.com: “False Rumors Hit U.K. Bank’s Stock Hard; Officials Pursue ‘Market Abuse’”

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