New York A.G. launches probe of short-selling

NEW YORK — New York state is launching an investigation into whether some traders used illegal tactics to drive down the stock price of several Wall Street firms.

Attorney General Andrew Cuomo told reporters Thursday his office has received a "significant number" of complaints about short sellers, or investors who hope to profit by placing bets that a financial company's stock will fall.

Short-selling is not illegal. But Cuomo said he will focus on whether short sellers engaged in conspiracy or spread bad information to influence the stock prices of Lehman Brothers Holdings Inc., American International Group Inc., and other firms that have been hammered in the ongoing financial crisis.

"I want the short sellers to know today that I am watching. If it's proper and legal, they have nothing to worry about," Cuomo said. "If there's a conspiracy to spread false information to destabilize these institutions, that may very well be illegal."

Short-selling has been blamed for steep drops in the stock price of several companies, most recently Goldman Sachs Group Inc. and Morgan Stanley.

Short-selling occurs when traders borrow shares of a stock they expect will fall and sell them. If the stock does indeed fall, the traders buy the cheaper shares to cover the borrowed ones and profit from the difference. Naked short-selling occurs when sellers don't actually borrow the shares before selling them.

Britain's Financial Services Authority said Thursday it is temporarily banning short-selling of shares in publicly traded financial companies.

FSA chief executive Hector Sants said his organization still regards short-selling as a legitimate investment technique, but he says "extreme circumstances" have required new rules to protect against further financial turmoil.

Speaking to reporters, Cuomo said he believed the federal government has been "ineffective" in overseeing short sellers and said his office would go after traders found to be illegally using the practice to manipulate markets.