In the UK, a number of hedge funds are about to sue the Financial Services Authority claiming that it did not have the proper authority to curb short-selling, which cost the funds million of pounds. The FSA is a first cousin of the SEC and performs a similar role.
According to The Telegraph, "Lawyers are being galvanised on behalf of a raft of hedge funds which claim the financial watchdog has illegitimately extended its powers and caused 'wide-spread capital destruction.'"
Whether or not their argument has legal merit, it does have a certain amount of fairness on its side.
Naked shorting, a practice in which investors bet a stock will go down without properly borrowing shares to cover the trade, has always been illegal. The act of shorting itself has for decades been a legitimate enterprise. It acts as a check-and-balance system so that stocks do not rise relentlessly without those who believe they should fail having a stake in the matter.
The SEC has not only done financial harm to a number of hedge funds, it also has taken all of the teeth out of a process that has given trading in stocks an economic and market legitimacy.
If hedge funds sue, they are in the right and ought to prevail.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
9-21-2008 @ 8:06AM
James said...
You and all the other hedge funds are only interested in one thing.Greed,you are not doing anything but profitting on others misfortune.May you all suffer what innocent employees,are suffering with the loss of there jobs.You people dont give a shit about anybody.What about the guy who makes your lunch he or she might be out of work.Assholes
9-21-2008 @ 9:08AM
JERRY said...
BETTING ON STOCKS STOCKS TO GO DOWN AND/OR BORROWING STOCKS SHOULD BE OUTLAWED. THE STOCK MARKET "IS NOT" A LAS VAGAS CASINO !
9-21-2008 @ 9:18AM
steve said...
I disagree! Hedge Funds and short sellers have NO right to reclaim any losses,any more than I do if I lose money investing. They have no legal right to sell something they don't own and no legal right to borrow my stocks without my knowledge and approval which happens when Brokers holding stock in the street name lend the shares to short sellers. What kind of Country allows people to take a risk and then sue when they get no reward? the US of A evidently does as evidenced by the bailouts and bankruptcy of so many entities. SORRY, but I hope the cases get thrown out of Court!
9-21-2008 @ 9:27AM
Colin said...
Profiting on others misfortunes? With that argument, then those that go long are just profiting on others fortunes.
I see no reason why market forces shouldn't be allowed to drive the price of a stock in any direction they please.
9-21-2008 @ 9:46AM
Kent said...
Grounds for litigation against SEC is limited unless the question of why trading troubled stocks was not suspended for 10 days by the SEC? Caution in retrospect would have been the better part of valor had Chairman Christopher Cox acted more decisively.
9-21-2008 @ 9:59AM
Jerry said...
Everyone should be suing the Hedge Fund and Credit Rating Agencies. We should also sue our legislators for removing the legislation which had kept this from happening for 70 years.
9-21-2008 @ 11:50AM
John said...
OBVIOUSLY, no one here knows what a hedge fund does.
There are companies out there that lie about how they are doing to STEAL investors money. They use accounting tricks, purchase other companies, don't do their job, but.. cover it up to raise the share price a profit by lying to YOU, the investor.
Hedgefunds... identify these companies. And say hey they are crooks, their stock should not be worth it is. So, they decide to make an investment shorting the company.
The government wants us to not lose confidence in the banking system. Which the truth is.. the banks were GREEDY because they were profiting and gambling on subprime housing loans. But, the finger was pointed at shorting and hedgefunds instead of the REAL problem.
9-21-2008 @ 12:30PM
hugh said...
They won't sue the SEC because if they do a backlash could develop and end up with stricter regulation in the long run that seriously harms their industry. Most average Americans think Hedge Funds are crooked market manipulators.
9-21-2008 @ 4:15PM
william lindblad said...
These type of fund are necessary, but you can't have a re-emergence of Jay Gould types either. If every action taken by a fund can be proven ligit - they have a case. I doubt that this will be the case as they all probably could not resist temptation all the time.
Besides, the mess is much too large and many scapegoats will be required.