Bloomberg article shorters will need to be careful regulation is...

Bloomberg article shorters will need to be careful regulation is on the way and this IMHO cannot come quick enough !!!!

Bloomberg
SEC May Require Hedge Funds to Reveal Short Positions (Update2)

By Jesse Westbrook

Sept. 17 (Bloomberg) -- The U.S. Securities and Exchange Commission, responding to a market rout this week, may require hedge funds to disclose their short-sale positions and plans to subpoena the funds for their communication records.

Hedge funds and investors managing more than $100 million in securities would be ``required to promptly begin public reporting of their daily short positions,'' Chairman Christopher Cox said in a statement today. The enforcement division will obtain ``disclosure from significant hedge funds'' regarding ``past trading positions in specific securities,'' Cox said.

Lawmakers including U.S. Senate Banking Committee Chairman Christopher Dodd and regulators say short sellers may have contributed to a market crisis by spreading false information and using abusive tactics to attack companies. Hedge funds and other investors argue that poor business strategies are to blame, not short sellers.

``A lot of hedge funds don't like being forced to disclose their long portfolios, so they're really not going to like this,'' said Sean O'Malley, a former SEC lawyer and now a partner at Goodwin Procter LLP in New York. ``There is going to be some push back from hedge funds, but they may not get any sympathy in the current market environment.''

The five SEC commissioners must approve the rule, which would be adopted on an emergency basis, for it to become binding. Hedge funds, which are private pools of capital whose managers participate substantially from any profits on invested money, prefer to keep their positions secret to prevent other traders from stealing their strategies.

Subpoenas

The SEC didn't say whether the rule would apply only to common shares or whether it would effect options and other securities holdings. SEC spokesman John Nester didn't return an e-mail seeking comment.

The agency's plan to subpoena communication records will mark the second time the regulator has sent information requests to hedge funds in three months. In July, the SEC subpoenaed hedge-fund managers and Wall Street's biggest firms seeking evidence they were manipulating shares of financial companies.

The U.S. Financial Services Authority in June required hedge funds and other speculators to reveal short positions equaling 0.25 percent or more of a company's shares during a rights offering.

Short sellers try to profit by betting stock prices will fall. In a traditional short sale, a trader borrows shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

Tougher Rules

Earlier today, the SEC stiffened rules against so-called naked shorting by adopting two regulations that pressure traders and brokers to actually deliver borrowed shares to buyers. A third rule makes it a securities fraud when sellers deceive brokers about delivering borrowed shares to buyers.

The SEC acted amid concern that investors are using abusive tactics to flood markets with sell orders and drive down stock prices.

Morgan Stanley, the second largest U.S. securities firm, tumbled the most ever today after a government rescue of American International Group Inc. failed to ease the credit crisis. In a memo to employees, Chief Executive Officer John Mack said the management committee is ``taking every step possible to stop this irresponsible action in the market.''

Morgan Stanley

``There is no rational basis for the movements in our stock,'' wrote Mack, who added that he was in contact with Cox and Treasury Secretary Henry Paulson. ``We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down.''

Morgan Stanley and Goldman Sachs Group Inc., both based in New York, are seeking to avoid runs on their shares that triggered emergency sales of Merrill Lynch & Co. and Bear Stearns Cos., and the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Democratic New York Senators Hillary Clinton and Charles Schumer urged the SEC today to impose a temporary ban on short- selling of all financial stocks, saying it would ``help restore a measure of stability to our financial markets.''

In July, the SEC instituted an ``emergency'' order that restricted short-selling in Lehman, Fannie Mae, Freddie Mac and 16 securities firms. The order, which expired last month, required investors betting on a decline in stock prices to arrange to borrow shares before completing a short sale.

To contact the reporter on this story: Jesse Westbrook in Washington at [email protected].