SEC may put temporary ban on short selling

The Securities and Exchange Commission is expected to announce some kind of temporary ban on short selling, a person familiar with the matter said. The agency late Thursday was said to be considering a number of options, including a ban on shorting all stocks or limiting the ban to financial stocks.

A marketwide ban would be an extremely bold step and would almost certainly spark outcries that the SEC was undermining the integrity of the free market.

Securities regulators in London on Thursday may have set the scene for the SEC with a surprise announcement banning short selling in major British financial shares for the rest of the year.

In a short sale, a trader borrows stock and sells it, expecting the market price to decline. If the bet is correct, the trader can repurchase shares later at a lower price, repay the loan and pocket the difference between the sale price and the repurchase price.

Although short selling is legal as long as traders follow well-known rules, the strategy in recent months has come under withering attack by regulators and politicians who believe that some short sellers have acted illicitly to crush shares of many financial firms.

On Thursday, New York Atty. Gen. Andrew Cuomo said he was launching a probe of short sellers' activities in shares of Lehman Bros. Holdings Inc., American International Group Inc. and other battered financial stocks.

If the shorts are "spreading rumors" about stocks to drive them down, he said, "that may very well be illegal."

Short sellers also came under attack by Republican presidential candidate John McCain.

Speaking in Cedar Rapids, Iowa, McCain accused the SEC of fostering "trading rules that let speculators and hedge funds turn our markets into a casino." He said that SEC Chairman Christopher Cox had "betrayed the public's trust" and that he would fire Cox "if I were president today."

Cox later released a statement saying that "now is not the time for those of us in the trenches to be distracted by the ebb and flow of the current election campaign."

Cox on Wednesday had announced new rules to curb "naked" short selling -- selling shares without actually borrowing them -- and proposed requiring big investors to publicly disclose their short positions in stocks.