Financial Markets

As the global securities markets become more electronic, information flows faster and can be acted upon very quickly. Many traders/investors know that false rumours are often used to influence the direction of stock price movements. However, all means of communication e.g instant messaging, e-mail, telephone calls etc,  are recorded digitally and can/will be used by the SEC and other regulatory agencies to ensure orderly, honest and credible markets.  

The SEC’s reasonably fast action here is illustrative of what is store for the future. SEC Chairman Christopher Cox, while on CNBC, said that many other investigations are continuing especially related to the demise of Bear Stearns and Co.(BSC) and shortly after that, the run on Merrill Lynch & Co.(MER).

SEC Charges Wall Street Short-Seller With Spreading False Rumors

FOR IMMEDIATE RELEASE
2008-64

Washington, D.C., April 24, 2008 – The Securities and Exchange Commission today charged Paul S. Berliner, a Wall Street trader formerly associated with Schottenfeld Group LLC, with securities fraud and market manipulation for intentionally spreading false rumors about The Blackstone Group’s acquisition of Alliance Data Systems (ADS) while selling ADS short.

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Additional Materials

• Litigation Release No. 20506
• SEC Complaint

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The SEC alleges that five months ago, Berliner disseminated the false rumor through instant messages to numerous individuals, including traders at brokerage firms and hedge funds. The false rumor also was picked up by the media.

Heavy trading in ADS stock ensued, and within 30 minutes the false rumor had caused the price of ADS stock, trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share – a 17 percent decline. In response to the unusual trading activity, the New York Stock Exchange temporarily halted trading in ADS stock. Later in the day, ADS issued a press release announcing that the rumor was false. By the close of trading, the price of ADS stock recovered to its pre-rumor price of approximately $77 per share. Berliner profited by short selling ADS stock during its precipitous decline.

 The full release can be found here.