SEC bans naked short selling of financial stocks

The US Securities and Exchange Commission will ban naked shorting of the major banks and mortgage companies from next week, in a bid to counteract the rumours that have surrounded banks such as Lehman Brothers in recent days.

In an announcement last night, the SEC said "false rumours have continued to threaten significant market disruption", and blamed the collapse of Bear Stearns earlier this year on the spread of rumours about the bank's liquidity problems.

The ban will last a week, starting from Monday July 21, but it could be extended up to a month, the SEC said. Citing "unusual and extraordinary circumstances", the SEC has ordered any short sellers in major financial stocks to borrow or arrange to borrow the shares in advance; the rule would "eliminate any possibility that naked short selling may contribute to the disruption of markets in these securities", it said.

Market rumours around Lehman in the past few weeks have included unfounded suggestions that it has sought emergency loans from the Fed and that bond fund Pimco has refused to use it as a counterparty - both of which affected the bank's stock price. Rumours of a takeover have also surrounded Wachovia.

On July 13, the SEC, with the New York Stock Exchange regulator and the Financial Industry Regulatory Authority, announced that it would investigate "intentional spread of false information intended to manipulate securities prices", and it has reportedly subpoenaed trading records and emails from several US banks as part of its investigation of possible manipulation of Lehman Brothers and Bear Stearns stock.

Lehman Brothers shares were up 4% at $13.75 in morning trading in New York today, after a week of sharp falls from $18.

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