U.S. Representative Barney Frank Calls on SEC to Widen Investigation of Improper Trading Rumors Surrounding Bear Stearns’s Stock

U.S. Representative Barney Frank, the chairman of the House Financial Services Committee, is calling on the Securities and Exchange Commission to expand its probe into whether any improper trading in investment banks’ shares has recently taken place. He wants the SEC to determine whether the rumors of misconduct are being circulated to drive certain investment banks, such as Bear Stearns, out of business.

In a letter addressed to SEC Chairman Christopher Cox, Frank noted that there had been an “unusually high level of short-selling activity” in Bear Stearns stock right before the company fell apart. He also noted that similar trading in the stocks of other large investment banks has occurred.

Frank cited concerns that some of this trading may be orchestrated by market participants that are trying to bring the share prices down. Frank is calling on the SEC to investigate trading activity of stocks in all the big investment banks.

Other companies that have been heavily shorted recently include Citigroup, Washington Mutual, Wachovia, Wells Fargo, CIT Group, and Countrywide.

Bear Stearns executives say that short-sellers are part of the reason the firm collapsed. They also blame circulated false rumors as a reason that customers abandoned the investment bank, which resulted in its liquidity crisis.

Short-sellers borrow shares and sell them in the hopes that the stock will fall. They can then purchase the shares at a lower price, return them to the lender, and keep the difference. To increase the speed of short-selling, traders are allowed to find someone who will say they have the shares to lend them out. This allows traders to lie and say they have the trade.

A few weeks ago, the Financial Industry Regulatory Authority (FINRA) issued a warning to broker-dealers and others under its supervision, stating that it would not tolerate the intentional spreading of false rumors or the “engaging in collusive activity to impact the financial condition of an issuer.”

Our stockbroker fraud lawyers at Shepherd Smith and Edwards represent clients throughout the United States that are the victims of investor fraud. Contact Shepherd Smith and Edwards today and ask for your free consultation.