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Hedgeweek Comment: Steer clear of rumours

Troubled times bring waves of rumours and speculation. But sometimes this goes too far, especially if it leads to something more serious, even illegal. like insider trading or wilful market manipulation.

The Securities and Exchange Commission announced on Sunday that it and other US securities regulators would begin examining rumour-spreading intended to manipulate market prices. The announcement, made before Monday's market opening in Asia, was designed to warn off broker-dealers, hedge funds and investment advisors from any deliberate rumour-mongering before the start of trading.

The turbulence in the markets last week, with rumours adding to public concerns about the fundamental soundness of some financial institutions and especially the US government-sponsored mortgage lenders, Fannie Mae and Freddie Mac, hastened the decision to begin the enquiry and to make it public.

'Traders know there is false information in the market,' says Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations. 'It's important that firms be aware of their supervisory and compliance obligations to prevent violations of the securities law.'

The probe will focus on what policies firms have in place to prevent the passing of false information and is aimed at stopping malicious rumours without hampering the natural exchange of information in the marketplace.

Short sellers such as hedge funds, who have been accused of spreading bad news about target companies in order to boost their gains, deny that they plant false information. The reason Wall Street is vulnerable, they say, is because financial services firms have failed to come clean about the extent of their losses on risky bets and fragile business models.

Bad times increase risks, and they are also prone to herald new waves of regulation and litigation. This week industry members may be somewhat more cautious about what they gossip about and with whom.

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