NEW YORK - New York state is launching an investigation into whether some traders used illegal tactics to drive down the stock prices of several Wall Street firms.
Attorney General Andrew Cuomo told reporters Thursday that his office had received a "significant number" of complaints about short sellers -- investors who hope to profit by placing bets that a 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 rumors and bogus information to influence the stock prices of Lehman Brothers Holdings Inc., American International Group Inc., Goldman Sachs Group Inc., Morgan Stanley 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. "It is illegal, however, when such shorting is combined with the spread of false information in order to bring a company down."
Short-selling occurs when traders borrow shares of a stock they expect will fall, then sell the shares. If the stock price does indeed fall, the traders buy cheaper shares to cover the borrowed ones and profit from the difference.
Naked short-selling occurs when sellers don't borrow shares before selling them. It's a practice some say was partially responsible for huge drops in the shares of investment banks like Lehman, Merrill Lynch and Bear Stearns Companies, which J.P. Morgan Chase & Co. bought earlier this year.
Cuomo said he believes the federal government has been "ineffective" in dealing with short sellers and said his office would go after traders found to be illegally using the practice to manipulate markets.
"The markets need to be stabilized, and one way to help bring about such stability is to root out and deter short-selling that is based on the spread of false information," Cuomo said.
