The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from the shady stock dealings that caused that catastrophe. But the Wall Street Journal reports that the SEC has now become the epitome of the very thing that it's supposed to prevent.

That's thanks to a temporary rule it created last Tuesday that blocks the short selling of the stock of 19 big banks and financial institutions unless the short sellers can borrow those shares. (As Barron's [subscription required] points out -- it's interesting that the SEC has announced it is enforcing this so-called naked short rule since the practice is already illegal).

I can only imagine the profit opportunities available to those who had early access to this list of 19 -- which according to my calculations have risen an average of 27.5% since Tuesday. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- whose CEO made $20 million last year, according to AP -- are the biggest winners -- up 90% and 74.5% respectively since then. Meanwhile, all the other companies that the SEC did not protect are wondering why they were not on the list.

The New York Times reports that the Securities and Exchange Commission (SEC) is going to begin examining "rumor-spreading intended to manipulate stock prices." Rather than protecting investors against false statements from financial advisers, as happened in the case of the $330 billion now-frozen Auction Rate Securities (ARS) market, the SEC is out to protect executives of companies they run into the ground.

What does the SEC's new policy entail? The Times says that the SEC will start today by focusing on "what policies brokerage firms have in place to prevent the passing of false information. The intent is to stop malicious rumors without hampering the natural exchange of information in the marketplace." I am not a lawyer but it sounds like the SEC will have a tough time monitoring all the exchanges of information among those on Wall Street unless it plans to record every cell phone, land-line, e-mail, IM, and Blackberry exchange all around the world.

Meanwhile, it seems that the government has strained to distinguish between fact and fiction when it makes big policy decisions. For instance, last year Hank Paulson and Ben Bernanke were saying that the subprime problem was "contained." Would the SEC indict Paulson and Bernanke for spreading false rumors intended to manipulate stock prices? After all, their statements -- which are clearly false -- may have had the effect of causing investors to buy stock in non-subprime mortgage lenders. Could they get off the SEC's hook by proving they had no intent to manipulate stock prices?

Yesterday, Palm (NASDAQ: PALM) had to add $25 million to its losses for last quarter due to a write down in the value of auction-rate securities. Public companies are likely to have to do more of that as they report their first-quarter numbers. A number of individuals will also get brokerage statements that will show that each dollar they have in the instruments is now worth as little as 80 cents.

The bonds produced by the auction-rate market have been considered the equivalent of cash since the market began in 1985. The auctions were run frequently by big banks, so getting money in and out of the paper was easy. But, late last year and early this year, the banks that made the market in the instruments effectively shut the system down. Part of their role was to take excess securities in each auction and hold them until the next set of trading They could sell them then. But, in a tight credit market, banks did not want to hold the paper on their balance sheets.

Now the SEC and Financial Industry Regulatory Authority want to know if brokerage firms and banks marketed the auction-rate securities as cash equivalents while knowing that they were not. According to The Wall Street Journal: "Brokers had pitched auction-rate securities as liquid, super-safe investments with interest rates slightly superior to those of conventional money-market funds. Now investors are asking why they weren't warned about the possibility of failed auctions."

The entire value of auction-rate investments now in the market is nearly $360 billion. Most of those securities are not trading now, so companies and individuals cannot get their money out. That may make for one, very large class action suit or a series of smaller ones by investors who want their "cash."

Douglas A. McIntyre is an editor at 247wallst.com.