SEC “Sweeps” the BuySide as Examinations Commence

by StockJockey

Monday, July 28, 2008 - 1:54 pm

The regulators undeclared war on short-selling and rumor mongering is moving into the discovery stage. The subpoenas are looking for specific keywords, which happen to be among the most popular topics on Wall Street over the last few months:

In subpoenas recently sent to dozens of hedge funds and others, the SEC asks the investment funds for transcripts of phone calls, messages and payroll documents that mention or include the Federal Reserve's lending facility, Barclays PLC, hedge fund SAC Capital Advisors and bond-fund house Pacific Investment Management Co., or Pimco, according to people familiar with the matter. The investigation is in its early stages. WSJ

There must be a Sith Lord somewhere...

The SEC is attempting to trace the allegedly false rumors to the original source, a person familiar with the matter says. The next steps will be taking testimony of any traders or brokers involved in the exchanges to determine whether people were spreading false rumors and trading to make a profit.

If there is one takeaway from today's trading action it is this.....Hedgistan is thumbing its nose at the regulators.

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“Chris Cox is no Joe Kennedy”

Herbert Lehman (1878-1963)
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Regulators are zeroing in on a number of dates and themes, including the “takeunder” rumors on Lehman Brothers that were floating around on the last trading day of the second quarter, which historically is the craziest trading day of the year as the Russell 2000 rebalances, markups and markdowns collide and fund managers join the melee attempting to profit and rebalance heading into the second half of the year.

The rumors that have attracted the SEC’s attention stem from early June. On June 3, Lehman stock fell as much as 14% amid rumors that the firm had borrowed money from the Federal Reserve, a signal it needed to go to the lender of last resort to raise money and shore up its financials. Lehman publicly denied the rumor.

Then, on June 30, Lehman’s stock fell more than 10% on a rumor that Barclays was making a bid for the investment bank for about $15 a share, below its trading price at the time. The rumor didn’t pan out.

Of course, regulators might want to look at their own pronouncements over the past few months. Conflicting signals from Treasury, the FDIC and SEC have left market participants jittery at best. The the primary dealer credit facility end in mid-September? Will the new shorting regulations be extended?

There is a lot of confusion out there, much of which stems from the regulator’s half-baked trial balloons. Bernanke and Paulson lost respect, and control of this tape a long time ago, assuming they ever held it for more than brief moments, and they are in they are getting their heads handed to them, bazooka or not.

Nobody is bigger than the market. How much ammo do they have left?
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The SEC’s Paul Atkins, who leans libertarian, spoke with FBN this morning about the extension of the short-selling rule. Read his body language and tell me if he likes this. Paul will leaving the SEC shortly, unfortunately.

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Agency Subpoenas Focus on 4 Rumors That Hit Lehman
WSJ

Previously
Dirty Vile Gossip Closes Out Lehman’s Second Quarter from Hell
1440 Wall Street
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